Contact Energy Limited (CEN) Earnings Call Transcript & Summary

Good morning, and welcome to the Contact Energy Annual Results for FY '22. Joining us today, we've got Mike Fuge, our CEO; and Dorian Devers, our CFO. Hand over to you, Mike.

Okay. And [Foreign Language] welcome to the full year results presentation and a couple of announcements, which we're very proud of as a company today. So without further ado, let's kick off. Go to the next slide. Sorry, that's me. The usual disclaimers and important information, which I presume everyone has read, if we acknowledge that and just move quickly to the way we're going to play it today. I'll go through the FY '22 highlights and market update. Dorian will then kick in with a detailed review of the financial results. And that's not quite -- both Dorian and I will do the strategy update and then there's a fair chunk of supporting materials there, which we hope gives some color and detail to the results we're announcing today. So look, another strong performance despite a volatile market conditions, and we're ramping up our investment. It was a year of 2 halves, I think, which a number of analysts have pointed out from very, very good hydrology in the first half of the year to very dry and now back to very strong hydrology, all of which has led to another year of very solid results, which are close to the maximum that Contact has delivered without any new generation. There are volatile conditions, as you can see now in the market, but we continue to generate well and gas field declines and high coal prices have obviously played into how the market has evolved. We've responded. Obviously, we have increased renewable generation output and we continue to develop our thermal strategy and we're down by about NZD 16 million compared to FY '22. But again, as I would emphasize a very strong, robust result. We set this out, strategy out 18 months ago. And hopefully, what you see today is us actually delivering on it in a very short space of time, growing demand, growing renewable development, decarbonizing our portfolio and creating those outstanding customer experiences, all of them underpinned by being true to our ESG commitments, the operational excellence, which you see in to end-to-end across the business and the generational arm right through to retail and the transform ways of working, attracting talented New Zealanders to come and work for us is absolute key to the go forward on this plan. 18 months is a bit of a scorecard. You'll see the green there and grow demand. Southern Green Hydrogen, the team have completed some great work and we expect that to be finalized over the coming 12 months. We've had some very positive engagements with several parties about electrification and Lake Parime data center is underway. Look, the lock in major user electrification, probably gone a bit slower than we thought, but we see some -- what's on the plus side, there's been some great creativity. As Rio signaled a couple of weeks ago, those negotiations are underway and there is goodwill on both sides. And look, we have supported around 50 megawatts of new-to-market lower South Island electricity demand. It's not just about Lake Parime, but there are other projects in there. Renewable development, Tauhara is underway. It's over 50% complete. Te Huka 3, we've announced today, you got to remember that project didn't exist 12 months ago. Very proud of what the team created. We'll talk a bit about that later. It's got some very, very nice attributes. The solar partnership with BP Lightsource, the wind team with Roaring40s, we've got a wind mask up, we're hoping for more. And we have completed the assessment of the grid scale battery. Obviously, lithium prices have put that on hold, but when it's right, we'll be able to build a battery. Decarbonizing our portfolio. We announced the closure of Te Rapa in 2023, which will lease around 200,000 tons of carbon per annum and renewed our commitment to -- on TCC to 2024. We're on target to meet our -- both our medium- and long-term carbon reduction commitments. And I would call out that you remember this is a journey that we've been on for over a decade now. With the closure of New Plymouth, Otahuhu, Te Rapa, the reduction has been significant. Thermal review is ongoing and the swaption that we announced with Meridian in many ways, is a template for how the industry could organize itself for insurance products as we go through the decarbonization transition. The outstanding customer experiences, look, we grew by 50,000 connections in the last 12 months, split roughly 50-50 between electricity and broadband with the difference made up by gas. We launched that time of use offer with Good Night, which we look to extend into an EV product offer. The wireless broadband with piloted, it's really to go live in the next few months and we're looking for new brands and products. So obviously, we're very proud of what the team have achieved. They have won awards. They have grown market share. They have been innovative and the broadband still remains an incredibly part of our proud recent history. Tauhara, look, it's not an easy environment out there, but the team aren't going to die wondering. They have responded to both the supply chain, the COVID issues and unbelievable construction industry inflationary pressures. They've been agile, they've been creative. It remains an absolute cracking project. 168 megawatts, Remember, that is equivalent to a wind farm 2.5x to 3x that size in terms of output. Its plant capacity factor is second only to a nuclear power plant in many respects. And its carbon is remarkably low. That number there translates to 50 grams per kilowatt hour manipulating around your exponential multiplier. And we have secured subsurface production potential. In fact, the team have gone over and beyond which forms the basis of the other announcement today for Te Huka remembering that as part of the Tauhara field. So delighted about that. Demand, obviously, as we come out of COVID and with economic uncertainty, the closure of Marsden Point refinery. Norske Skog, demand dropped slightly in the year, but we see reasonable green shoots in the longer -- medium to longer term around that. We are seeing with the -- it's a wet year, as everyone knows, particularly up north. But we expect, on average, net demand growth to start growing in the future. Hydrology, bang on average for us. Improved hydro inflows compared to FY '21, and the storage is reasonably healthy. We're also seeing positive signs on Maui and Pohokura in terms of gas and the go forward, so a good result. Note this graph, we've been presenting for 3 years now about the various items which affect long-term electricity prices. There are some international effects, there are some local effects. Just wondering around the circle there, aluminum remains very high. It's come off its peak a bit. Methanol prices remain high. Gas prices and carbon prices remain high. Demand is in line with the expectation. Coal prices have gone through the roof with the Ukraine conflict and hydrology is reasonably strong, all of which leads to the graph on the right, which shows an increase in sustained prices, which, quite frankly, and I think a number of analysts have pointed to the price of firmed reliable electricity is probably a bit higher than what people anticipated 3 or 4 years ago as opposed to intermittent wind and solar. Retail competition, I'm very proud of what the team has achieved here. It remains intense. We were delighted with the growth that the team were able to deliver. Obviously, it's not a market that's slow. There's a lot of dynamic in there. The acquisition by Mercury of Trustpower, everyone, it's an intensely competitive market. I think it's a market that we can all as Kiwis to be proud of, particularly the turbulence you see going on overseas in Australia and the U.K. and Europe at the moment. The competition is delivering for customers. Climate change and regulation. Look, I do want to talk a little bit about that because I think particularly in the turbulence we see overseas, we do see bipartisan support for the regulatory framework for the market we have. And the commitment to addressing climate change is bipartisan, which is great for this country, allows investment confidence in the road ahead. So, you see the first emissions reduction plan. You see the very significant increases in the GIDI fund. In terms of renewable generation, the resource consenting reform, obviously, climate change will be a key part of that and the emissions trading scheme, which is under review, but there is a strong commitment as that being a key driver of decarbonization in this country. There is a wholesale market review in New Zealand battery project and transmission pricing methodology, which is now implemented. And it's worth just spending a little bit of time on that about how we are responding. So look, wholesale market volatility. A couple of things in there. Prices have spiked higher pretty high in the ASX if you look forward, is showing a significant increase. So, we've responded. We've announced another 0.43 terawatt hours of investment today, which again is the equivalent of 120 megawatt to 150 megawatt wind farm. We have announced our investment in wind and solar development and we are very committed to responding to that core. The investment signals are there. And so responding to those as a key indication that the market is working. We've worked very hard with our customers, look, given this volatility in prices, particularly large C&I customers is moving them to long-term PPA type contracts. I think that works for both parties. It works well. It has now enabled us to commit to more renewable projects. It enables industry to have certainty around their input energy prices and the go forward and to renew their commitment to help out on decarbonization in the country. And obviously, we continue our engagement with the EA. Climate change, we absolutely support the target of 50% total energy consumption being renewable by 2035. We'll continue to develop and assess the opportunities in our pipeline for that. We continue to get alongside the government in this space. We work with others in the industry, obviously, for thought leadership around how we deal with the challenges in front of the industry at the moment, whether it's dry year risk, whether it's into seasonal variability, how we as an industry, while maintaining an intensely competitive market, which we have today can actually find the right settings and investment and ensure the right outcome for consumers. And our carbon commitment, we have definitely covered our position there and investment in [ Meridian's] carbon has been a key part of that. The New Zealand battery project. Look, it's not so much the solution as asking the right question. That is a question to be how do we cover intra-seasonal and dry year risk. Onslow hogs a lot of the attention. I think there are other solutions out there that need equal consideration. And as I always have maintained, it's not going to be A, B or C, it's potentially D, all of the above. But all we ask for is that each option is assessed fairly and the market is allowed to throw up the innovation and most economically efficient solutions. And given the creativity of Kiwis, I have no doubt that this will be very much a feature of the go-forward solution. And for the transition, look, whatever solution there is, it's going to take a wee while to come into place. It's important that there is an orderly transition. Security of supply, reliable electricity supply, having electricity supply when the wind isn't blowing or the sun isn't shining, is absolutely critical to ensure that we keep Kiwis engaged and enthusiastic about the transition. Energy hardship. We're playing our role here. Obviously, through ERANZ, we've done -- that entity has done a lot of hard work. Typical, we don't see pre-pay as a product, we see it simply as a means of paying for the range of products and services we have. It may take us a little bit more effort and cost in terms of the way customers engage with us, but that is a key principle. And obviously, the work with ERANZ around energy poverty and making sure that we, as an industry, address that and address that well, and the go forward is critically important. Right. Dorian?

Thank you, Mike, and hello, everyone. So as usual, I just wanted to start off by talking about some of the key topics that came up in FY '22. So, the first is our mean of hydro year EBITDAF has continued to progress upwards. A few years ago, we talked about it being NZD 480 million. We guided to NZD 520 million for FY '22. We continue to see a sort of positive thematic going forward, market-linked channels from a price perspective, we think that's going to -- they're going to remain high, linked to the high and escalating thermal fuel and carbon costs and the longer-term channels, which, like retail, which to date haven't really repriced, we're expecting more escalation in those going forward, linked to the increase if it's about CPI. So, all of that sort of comes together in a guided mean year EBITDAF for FY '23 of NZD 550 million. Second point, which Mike sort of talked about a little bit was we've seen the firm long run marginal cost of building renewables in New Zealand increased and that's important because that sets the long-term electricity price. It's increased from historic levels of about NZD 85 per megawatt hour to we believe somewhere now between NZD 100 million to NZD 110 per megawatt hour, and that's a real number. And the reason why this is important because it demonstrates there is some inflation protection in industry income streams as inflation goes up, WAC goes up, our marginal costs go up and electricity prices go up. Next topic, we're a capital-intensive industry, but no one actually reports return on invested capital apart from the major energy user group and they've got a relatively unique way of defining it. So, we're going to start reporting this now going forward. We think it's -- now it's definitely the right time because we're deploying a lot of growth capital into the market, it's important that investors consider the returns that we're making on that. We're going to do it on a rolling 4 yearly average because that irons out the annual volatility that you get in hydrology. Our starting position at the end of FY '22 was 5.6%, which we do recognize is below our WACC. So, there's an opportunity for us there to improve. But I can assure you that all the growth capital that we're deploying at the moment is going to deliver returns significantly higher than that. Mike talked a little bit about the demand environment. It's continuing to firm going forward. We've got that 50 megawatts of new market demand that we're seeing in the lower South Island based on opportunities signed up. We've got the aluminum smelter, which is very profitable, and we're expecting that to continue into the longer term because when you look at the supply and demand dynamics of aluminum, it favors the producers, in particular, if you've got a green smelter like the one we've got in New Zealand. You've got hydrogen export opportunities that we're looking at, but some really interesting hydrogen domestic opportunities as well, and you've got the data center opportunities coming through. And then the GIDI fund, as Mike said, has been increased in size ten-fold. So, it's now over NZD 600 million. Remember, that's the fund that's set up to support industries getting off fossil fuel onto renewable energy sources. And then actually, quite importantly, for the dairy industry, it now covers the subsidy on grid connections, which we know has always been a bit of an issue for them around converting to electric -- electric boilers. We talked at the half year, we sold half the volume of Tauhara and we've sold it to counterparties with relatively strong balance sheets. And that's important not just from a credit perspective, but it also leads the players that could have contracted with independent power thesis. We think it's good in terms of carbon emissions that they didn't because obviously, that's generally solar, which has got a very low capacity factor, which means thermal generation has to stay around for longer, far better you contract with a new geothermal plant, which is at 95% capacity factor. And then the last point, which Mike actually mentioned is around the Te Rapa announcement and the closure from the 1st of July. 2023. So, that takes 200,000 tons of carbon out of the atmosphere when it gets displaced whilst building more geothermals. That's important that we continue to demonstrate that visible leadership across the industry around decarbonizing not just our own portfolio but the industry's portfolio. Remember, we're asking other industries to invest in their own decarbonization and consumers with things like EVs, so it's important that we are also decarbonizing our own backyard as well. Te Rapa was actually a relatively efficient baseload thermal plant. So, it does demonstrate what we've been saying for a while as it's not economically viable to run baseload thermal generation anymore. In particular, if you take the market price of carbon natural gas and coal and put it for any model, you'll end up with a short-run marginal cost, which is a lot higher than any of the netbacks you can get through selling electricity. On to the financial performance. Profit, NZD 182 million was down by NZD 5 million. Within that, EBITDAF is down by NZD 16 million, and I'll just sort of talk you through that. So, our renewables were up by [ 111 gigs ] and that allowed us to displace thermal generation and acquired generation and save NZD 41 million of cost, and you can see the benefits of that coming through in our Scope 1 emissions. However, even though we had more renewable generation, we actually saw our sales volumes drop by 301 gigs, including that increased merchant lengths. And that reflects the fact that our thermal generation was down by 547 gigs, which was actually more than our renewables was up. So we -- and the reason for that is we acquired less gas year-on-year, about 4.5 PJs less gas, and we're only comfortable taking our gas storage down to 4.7 PJs because we always want to retain some residual gas there for future fuel risk. The other topic is with the wholesale pricing dropping year-on-year because of better hydrology nationally in FY '22 relative to FY '21, less opportunities to get merchant length by acquiring generation like the swaption, so that also impacted our sales volumes. So, that was a NZD 6 million impact. With Contact being sort of 80% renewable, you'd expect us always to be in a situation where the cost inflation on our thermal assets and acquired generation is higher than our price -- is lower than our price increases. And unfortunately, this wasn't the case in FY '22. We had an unusual situation that in FY '21, we had good hydro inflows in autumn going into winter. And at times when other people's catchments were relatively dry, so we got some very good length at some very good pricing, which hasn't obviously repeated and that's about a NZD 2 million headwind associated with that. We've also got the full year impact of the transitional [ TY ] contract flowing through, and we'll talk about it in a bit, but we had relatively modest increases in terms of prices with our retail business and that reflects the focus on the consumer and also regulatory risks associated with that channel. So overall, that left us in a position where our pricing was actually down by NZD 10 million, even though we saw NZD 26 million of cost inflation on acquired generation and thermal fuel. Location losses were up by NZD 9 million, and that's a function of more South Island generation, with the hydro, but also less North Island generation with less thermal and acquired generation and then other income and expenses and fixed costs were up by NZD 6 million. So, that's EBITDAF. In terms of the better net profit, depreciation was higher by NZD 13 million as we go through our S/4HANA project, we're identifying components with the legacy SAP system that won't be needed in the new one and accelerating the depreciation on that. But going the other way, we had interest costs were NZD 14 million lower. So, our underlying interest is lower year-on-year because we've got the full year benefit of that equity raise that we did in February 2021 flowing through. So, that's worth NZD 3 million, but then you've got NZD 11 million more capitalized interest associated with Tauhara as that project gets closer to completion. So, we had capital work in progress on average for FY '22 with about NZD 200 million higher than FY '21 for that particular project. Tax expense is lower, linked to the -- by NZD 3 million linked to lower profits. And then we've had a favorable movement of NZD 7 million in our fair value of financial instruments. And for the technical people out there that's because we've had a big increase in interest rates that everyone be familiar with and the impact that has on our interest rate swaps. In terms of the performance across our 3 segments, the wholesale business up by NZD 21 million from an EBITDAF perspective, but retail was down by NZD 39 million and that reflects -- we have an arm's length market-driven transfer price into the retail business. But as I said earlier, it hasn't been able to recover that from customers. And that's on a Contact topic. I mean that's the same across the industry, I'd expect. And then corporate costs are down by a couple of million dollars year-on-year. We now get into the wholesale business. So generation costs are down by NZD 42 million year-on-year. That's a function of the higher renewables, but also, like I mentioned, having access to less natural gas so that meant our thermal generation was down by 33% and our acquired generation was down by 30%. We are getting a lot of cost inflation coming through here though and we expect that to continue into the future with higher thermal fuel and carbon costs. So, 14% increase in the marginal cost of running our thermal generation, which is up at NZD 109 a megawatt hour now and then a 22% increase in our acquired generation costs, which is up at NZD 142 per megawatt hour now with that sort of indexing to what's going on with international coal prices, which Mike mentioned earlier. The other topic to call out is our gas and electricity transmission costs dropped by NZD 6 million year-on-year. There was more constraints on the grid in FY '22 than was in FY '21. So, our transmission rental rebate was NZD 3 million higher. And if you also remember, we contributed NZD 2 million to Transpower in FY '21 to get into and hurry up and start the lower South Island transmission upgrade. That's obviously nonrecurring. And just to add there, I mean, that was a fantastic investment for us because we're already seeing the benefits of that with the downpours of water that we've seen in the last month or so with prices in the lower South Island connected to prices in the rest of the South Island and the ability to export more water. And obviously, it's good from a TY mitigation perspective because now our exposure to TYX isn't just our South Island -- lower South Island generation market share. It's the South Island market share, which is a lot lower. So in terms of generation, geothermal very good performance, 3.3 terawatt hours, all the assets performing very well. Hydro, a mean year. It makes it sound quite simple, 3.9. But as Mike said, very volatile. We had a huge swing between halves, 850 gigs less water in the second half than in the first half. And because the replacement fuel costs keep escalating each year, that volatility costs more and more money. So, that's worth about NZD 100 billion if you price that on a fuel replacement basis. Also linked to the lower hydrology in the second half of the year. Unfortunately, we had some challenges with our thermal assets. So, we were actually without both peakers from March through to May. And we've got a crack on the radix of TCC, which is limiting the operating hours that we can use that for. And so in order to conserve hours for the winter, we actually took TCC out of action in April as well. That actually meant, April, we had no thermal assets available apart from Taranaki, which, as you'd expect, coincided with a very low EBITDAF that month, although we were 100% renewable. The -- and just on the assets, TCC, we're expecting to have available for the winter and then we'll take it down repair the radix. We're expecting the second peak to be back in September. And I would say about TCC is once the radix is fixed, the condition of the assets are good. We've got to contract gas and the market conditions going forward around the ASX are conducive to us keeping TCC up and running till September '24, and we don't expect any CapEx to enable that and that's obviously good from an industry perspective because it continues to displace coal. In terms of wholesale contracted revenue, I just wanted to talk a little bit about the market. When you look at what analysts are predicting in terms of industry EBITDAF growth like-for-like, I think it's up about NZD 150 million. And you can get to that number. There were some big one-timers -- adverse one-timers in the prior year results and thinking about Genesis dispute on carbon with Beach. And then Mercury had the issue with Cowell and writing off that out, the money position with Norske SKUs. That's worth about NZD 60 million, I reckon. And then in terms of fuel, lower fuel costs in FY '22, you've got 1.4 terawatt hours more hydro and you've also got [ Tara Te ] coming to market as well. So, you've got about NZD 140 million in lower fuel costs. So, it's about NZD 200 million increase in EBITDAF for that. And then going the other way, you've got the full year impact of the transitional TY deal, which takes you down to NZD 150 million. So, you notice I didn't mention anything about channel pricing in that. And it basically means that any price increases that the industry have got have just offset cost inflation. And then when most of the cost inflation being linked to thermal assets, which only make up 20% of the generation, you're probably scratching your heads going, how can that be. And that does highlight the issue is that it's about 60% of volume isn't repricing, it's either TY or it's mass market. So, I'll get to that point in a bit. If you look at Contact and the channels, our repricing, C&I is up at 115%, and our CFD is now up at 139%. Our strategic fixed price channel, which is TY, and it also includes all our long-term contracts that we've signed, we've got inflation protection. That's sort of price reduction, but that's linked to the transitional TY deal. And then if you look at the transfer price into the retail business, and that's arms market-driven up by NZD 13 a megawatt hour, but you'll see in the retail side, issues that's not being recovered from the market. So, I made that point right at the start not to sort of downplay the sector, but it does highlight the opportunity around repricing of TY, but it also highlights that our mass market channel for us is the lowest netback of all of our channels with the exception of TY. In terms of our wholesale trading and merchant revenue, a big drop here of NZD 87 million. This reflects what I talked about earlier. We did have some -- we're able to get length in FY '21 into some very good pricing because we had favorable hydrology when others didn't. And you can see the impact of that in terms of falling wholesale prices that we're getting there on our length. And also just with wholesale prices dropping, less opportunity to run thermal kit and acquire generation. And therefore, our merchant length went down from a volume perspective to. In terms of location losses, already talked about those, sales were up by NZD 9 million year-on-year. In terms of our retail business, the -- I said at the half year, there have been some quite big changes with the external environment. I'm thinking TY staying beyond 2024, which we have always been pretty positive about and TY now positive about as well based on their announcements. We've seen some significant increases in inflation. So, we were going to look at the settings regarding retailing of electricity. And before we get into the performance, I just want to give you 3 sort of conclusions on that. So, with retail netbacks now so heavily discounted from other channels, we don't see value in increasing our retail loan from where it is at the moment. However, we do see value in continuing to bundle and non-energy products with our existing customer base and leveraging fixed costs and building on the success that we've had around broadband. Also, with price changes for this channel more linked to CPI because it is a consumer-facing channel and a longer-term channel, in our view, we do see more price escalation going forward linked to the high levels of CPI, which we think will start balancing this channel back to others and closing the gap. In terms of the overall performance, so you can see that disconnect between the market and consumer prices coming through in the retail electricity gross margin, which is down by NZD 43 million. with tariffs only up by NZD 5 or 2%, but we saw earlier that the transfer of price into this business was up by NZD 13 per megawatt hour. We have been very successful around connection growth and we've got consumers telling us they really want to decarbonize, but they don't have the tools and the Good Nights product that Mike mentioned is exactly the type of tool they are after. It incentivizes them to shift their load off peak from peak times to off-peak, which decarbonizes the overall electricity portfolio. So, that's fantastic. Connections were up 25,000 as a result of that. If you look at gas, gas markets are down by NZD 5 million. Whilst we put tariffs up a lot, there's 3 levels of inflation coming through now. [ Com Com ] has signed off an accelerated capital recovery for the gas infrastructure owners. So, we're seeing 13% increases in gas transmission on a like-for-like volume basis this year and then it's going to continue to go up 10% every year thereafter. So, that has to be recovered. You've also got higher carbon costs coming through and you've got the higher fuel costs coming through. So unfortunately, remember this a traded product for us, we'll need to continue to look at our tariffs to recover those 3 lots of escalations that are coming through. Broadband is performing really well, NZD 7 million of EBITDAF and even when you overlay the OpEx associated with that, that's still NZD 5 million of -- sorry, EBITDAF, NZD 7 million of gross margin. In terms of cost to serve for this business, it continues to perform very well, down by NZD 1 million year-on-year, even though we have 51,000 more connections, and that talks to all the work that's happening around digitalization. We've actually got to the point now where our call center staffs can actually handle twice the number of connections that they could in the previous year, which obviously all flow through as productivity, which is fantastic. In terms of greenhouse gas reporting, as I said earlier, as you'd expect, that's down, Scope 1 emissions are down by 258,000 tons linked to the increased renewables and Scope 3 emissions are down due to the lower use of the swaption. We do report the swaption as a Scope 3 emission even though it is a financial product. I think I said this last time, if we didn't call it, Genesis wouldn't run the ranking and the emissions wouldn't go into the atmosphere. So, that's just us being genuine. Within Scope 3, though, we see -- within that, you see a little tick up, and that relates to the construction associated with Tauhara. Sustainable construction is something we take very seriously. And in particular, with the increased renewable development we're doing, we're looking at opportunities around that. In terms of our OpEx, I think we said previously that we'd taken NZD 13 million of metering costs out of OpEx and disclosed that as gross margin. And that's to align us better at what others within the industry are doing. We've restated the prior year to be aligned to that. OpEx is up by NZD 12 million, 6%. And the slide sort of explains the key movement. We've got a bit of full year impact of our acquisitions that we've done flowing through there. There were some one-timers, a number of one-timers in the prior year and this year, which sort of nets to NZD 1 million increase. We're seeing bonus costs for staff lower because we had a very strong performance in FY '21. And then you get to the underlying performance, where the OpEx is up by NZD 5 million, which is 2.5%. I'm actually quite happy with that because you've got some quite high underlying inflation within that. Insurance is 7%, sort of underlying general inflation is about 6% and we've invested NZD 3 million more in our brand. And we've been able to keep a cap on OpEx because of the productivity, not just the digitalization, but the good work the procurement team are doing around where we're rolling over contracts with suppliers, making sure the escalation in those is well below the level of underlying inflation. And then we've got more OpEx being invested in growth. So, this is the money that's going towards the Southern Green Hydrogen project, building our wind portfolio and the additional connections we have within our retail business. Just coming back to that brand. We don't take investing a further NZD 3 million in our brand and advertising lightly. We're actually quite proud that we've underinvested in it relative to others within the marketplace historically because it allows us to offer more competitive pricing. But with the value of the brand sort of transcending both the upstream part of the business and the downstream part of the business and our strategy around leading the decarbonization of New Zealand and building a lot more renewables, we do think now is the right time to have a strong brand within the marketplace. Our cash flow. So remember at Contact, we talked a lot about cash conversion, which is how much -- what percentage of our EBITDAF actually converts into operating free cash flow. Remember, it was quite low at the half year of 41%, but we did predict that it would improve and get to 60% by the end of the year, which is exactly where it's ended. It's still slightly higher than -- lower than the 67% we achieved in the prior year. And some of the reasons for that, we've seen a NZD 17 million investment in trade working capital, which is obviously negative from a cash flow perspective. There's a few topics driving that, but one in particular, the staff bonus accrual was lower at the end of FY '22 than it was at the end of FY '21. Obviously, the bonus costs are low for the reasons I've already mentioned, but we've also shifted our remuneration structure. So, anyone below Senior Manager has now had all of their at-risk short-term pay bought out and gets paid out in their monthly salary, which is obviously negative from a cash flow perspective. We're seeing CapEx higher at NZD 75 million, but this has been guided. This is the sort of NZD 100 million of additional stay-in-business CapEx that we talked about spending cumulatively over the next 4 years to support S/4HANA and some projects which increased the resilience of our renewable assets and get a few extra gigawatt hours out in terms of [indiscernible]. And that's important to do that at a time when prices are relatively high. So, all of that gives an operating free cash flow of NZD 0.418 per share; dividend, $0.35 a share. So there's some retention there, which go towards building high-quality renewable development. And then you can see on the top right, our new KPI, return on invested capital. In the appendices, there's a lot of workings, actually explain exactly how that's created. But you can see it's on an upward trajectory up to 5.6%. One of the reasons why it is a little bit depressed at the moment is to align to our Contact26 strategy. We are accelerating the depreciation on a number of assets based on where we see the asset portfolio being in a number of years' time. In terms of balance sheet and interest, so the half year, our interest expense was relatively high at 5.7%. It's dropped back down to 5.3% and that reflects us better adjusting for the money from the equity raise. So, we've got the percentage of variable interest back up to 29% now. I remember the variable tends to be cheaper for us than fixed. However, year-on-year interest have stayed roughly the same. It's up from 5.2% to 5.3%. And whilst we've now got a bigger percentage of variable interest. We've seen obviously variable rates go up quite considerably on average in FY '21. They were 30 basis points. On average, for us in FY '22, they were 152 basis points. And by the time you got to the end of the financial year, they were up at 300 basis points, but I think everyone here is familiar with the rapid rise in interest rates. In terms of balance sheet capacity, our net debt-to-EBITDAF at 1.5. So, relative to our sort of 3 ceiling, we got S&P credit rating. We've got NZD 825 million of capacity there. So, that will support us with our Te Huka 3 project plus other projects that we're looking to do and we've got about NZD 390 million of go-forward spend on Tauhara asset at the end of FY '22 as well. If we do need more capital for whatever reason, we've got about NZD 400 million of capital bonds that we could do and get the NZD 200 million equity credit on it. We're going to continue with our undiscounted dividend DRP, but we could shift that to a discounted while we get a higher take-up which others in the industry have already done. In terms of the dividend, we guided that the dividend for FY '22 was going to be NZD 0.35 per share, which is exactly where it's going to be. So, we're announcing or NZD 0.21 per share dividend, final dividend, 90% imputed. That takes the overall dividend paid and declared for FY '22 to 84% of the operating free cash flow, the average of the previous 4 years. So, within our guided range of 80% to 100%. We are continuing with our undiscounted DRP for shareholders as well. And we're guiding to a dividend for FY '23 at NZD 0.35 as well, keeping it at the same level as FY '22. That does reflect -- we're still in a build phase. And it also reflects, obviously, that there hasn't been an agreed new long-term contract with in place with TY yet. And then this is just a bit more workings around our mean hydro year EBITDAF for NZD 550 million. Just to highlight a couple of things. So, pricing is going up linked to repricing of C&I, but also mass market going up linked to higher CPI levels. We've got some quite big increases around transmission and storage linked to inflation and a number of regulatory changes feeding into there, like TPM, like the accelerated recovery of gas transmission for the capital recovery for the owners. [ ACORT ] is no longer available, all those types of things. And OpEx is higher as well year-on-year, reflecting inflation. We've got 5% wage and salary inflation feeding through here. We've got some more money on growth and ESG type topics. And we have got some one-timers. Unfortunately, we had a big favorable one-timer in terms of the Holiday Act provision release. And then we've got some one-time costs during FY '23 as well. So, it's quite a big swing associated with that. But then this provides all the detail, which you can use for your models. In terms of the risks for that, obviously, hydrology is a risk. We have been relatively modest about the amount of gas that we're assuming that we'll consume of our thermal assets. But if we get more gas available and the market pricing is conducive, we can obviously run our thermal assets harder and make a bit more money through those. And in terms of market price risk, you can see from the doughnut charts, we're relatively well contracted at about 40% of CFDs and 30% of C&I volume that is contracted yet.

Right. And I'll just return you to the strategy, and we'll talk a little bit about the Te Huka investment. Just mindful that this project, as I said, didn't exist a year ago. We thought we were going to do to Tauhara and then get on with GeoFutures, which is next down the track in terms of the Wairakei replacement. But the team, the subsurface and the drilling campaign that we did for Tauhara has been remarkably successful. And you see right on the bottom right there, we've already secured the resource in terms of wells drilled, which is a great outcome. There was good capacity and there was consent available. So, what that added up to was an opportunity to put in what is effectively the equivalent of a 120 megawatt, 150 megawatt wind farm slotted into the development pipeline, it fits very neatly between the Tauhara project and the GeoFutures or Wairakei replacement in terms of resource utilization. The construction costs, look, it's fair to say that the whole industry is experiencing construction cost inflation. Our market intelligence out of Australia is that they're seeing pressure on wind farm developments and solar developments in the order of 30% from what the numbers that people were experiencing 2, 3, 4 years ago. And the cost is in line when you're taking account of the inflators from roughly in line with what we put into market around 2017, 2018. So, we are confident in the number. It does allow us to take advantage of both of the retirement of Te Rapa, but also the fact that at the moment, you see firmed prices for reliable firmed electricity and the go-forward ASX. And so the simple answer is get on with it and I do want to pay credit to the team who pulled it together in such a short space of time. We have been conservative on the estimate. We have a good EPC contract in place underpinning it. And the balance of plant, we have got market and -- for those, so we're confident of that cost, much more confident in that cost estimate and the go forward. It reflects that the market conditions we see today and the added bonus there as we have the resources currently working on Tauhara that'll swing across, we very much expect them to swing across and work on this project. If we go to the next slide, this is we've obviously got Tauhara there and with the capacity upgrade that we announced in February, you've got the Te Huka, which we're taking FID on today. And then with the GeoFutures project, just through increased efficiency of new plant, we expect to another 0.4 terawatt hours here. Behind that, there is still around [ 0.78 ] of consented offtake for Tauhara which would eventually lead to another plant appropriately placed and sized on the field, which leads to for the geothermal business alone and almost doubling an output over the next 5, 6 years. And for our overall renewable pipeline, if you remember, mean hydrology year we put out about 3.9 terawatt hours of hydro takes us very close to that 9 terawatt to 10 terawatt hours of renewable generation output from the company. You can see on the right there, the time line as we see it playing out, you see the announcement today, the commitment on Te Huka, which goes for the commitment and the capacity increases we've previously announced on Tauhara and we look forward over the coming years to the maturation of the GeoFutures project announcements around that second half calendar '23. Go to the next slide. Dorian, you can talk to this slide.

Yes. This is obviously the money side. With Tauhara and Te Huka, we are spending a significant amount of capital. So NZD 1.1 billion that we're deploying to increasing renewable development. That is going to increase our contact renewable generation by 25%. That's a pretty significant number. It brings 1.825 terawatt hours of energy per year to the market. So, what we want to do is sort of give a little bit of guidance as to where that's going to take our EBITDAF. So, we've already talked about our mean year hydro EBITDAF for FY '23 being NZD 550 million. So, of that new energy that's coming to market, 875 gig split will just be a fuel replacement, so it will displace Te Rapa and TCC. So, that just naturally happens. 700 gigs of it will just service the PPAs, the long-term PPAs we signed up with Merc and Genesis, which will just happen. Remember, they've got inflation built into them as well. And then you've got a smaller amount, 250 gigs, which is a merchant strip, and we've shown it there linked to the pricing in calendar year 2025 when it comes to market. So, you look at those things and you go assuming we execute, which we're passionate that we will be, then the only real risk there is around the [ 250 ] that's got a merchant strip price linked to it. You then got a bit of extra fixed cost, and that reflects that the fixed cost for and Tauhara and Te Huka 3 at slightly higher than the TCC costs and the Te Rapa costs that are coming out. And that's some of that's because we've got the carbon cost for geothermal in there as well. So overall, that leaves us with -- for calendar year 2025, NZD 720 million. Remember, the other thing we haven't done there is we haven't shown any repricing of our channels. We're just keeping that at the FY '23 level. We'd expect channels to obviously reprice between 2023 and 2025, in particular, retail. And then the other positive thing about this, you look at the Scope 1 and 2 carbon emissions, they dropped from 800 -- from 787,000 tons, down to just [ 350,000 tons ], which gets us well on the way to our targets that we've set ourselves. And I think Mike said right at the beginning, this is also great for regulatory risk for the industry. Prices have been high now for a while. So, that is telling us we need to build more generation, more renewable generation. And this is the first, I guess, a serious announcement that has happened since Harapaki back in February 2021. Remember, this project will happen. It will be online in the next couple of years. We don't have to worry about EPCs or financing, this will get built.

And so look, the theme of today is very much about the execution and delivery as well as commitment and promises. And so I did want to finish saying you've seen what we've done in the last 12 months. And I think you'll agree, it's been pretty busy and those key pillars of the strategy, we've actually executed on very substantial decisions in that, which is very much capped off by what you see today. And so what you expect in the coming months and year ahead, you'll see a decision on hydrogen, both export and domestic. You will see the commitment on data centers in the industry and you'll see some pretty chunky announcements around border electrification. Somehow, we've got Western Energy up and demand growth that probably belongs with renewable, but we're delighted with the acquisition of Western and what you're going to see over the coming 12 months, the Board have already committed to investment in our new coil tubing drilling, which allows us to re-life some of the 300 penetrations we already have in the Wairakei and Tauhara fields. And we see that as a real opportunity for taking down the cost of reservoir management and the drilling campaigns. In terms of the renewable, continued progress on Tauhara, you'll see Te Huka 3 well underway. You'll see the consent for the Wairakei replacement project. You'll see us get underway on solar and wind consenting, some announcements on that. You'll see progress on the Roxburgh runner replacement, and you'll see us re-lifing the transformers of our critical Roxburgh and Hydro schemes. In terms of decarbonization, you'll see progress -- continued progress on the thermal review that we're undertaking. We continue to develop the thinking around that. We'll be preparing for the end of the current allowance we have on TCC life, and you will see the actual closure of Te Rapa and handing the boiler over to Fonterra. And in terms of the outstanding customer experiences, we've talked to that to the success we've had to date in the last year. And again, I do pay tribute to the team because they've done a remarkable job in turning around a decade of otherwise decline in that business. You will see the launch of an EV product. You'll see the launch of additional products. And you'll see, hopefully, not continued growth of just straight out connections, but continued growth in the high value that we can bring to ordinary Kiwi homes in terms of multi-products enabling ordinary Kiwi homes to decarbonize their business. And so we started with that decarbonized journey -- decarbonization journey at the very beginning of this presentation at a macro level and we're finishing that journey today in this presentation in every Kiwi time. And with that, we're happy to take questions.

Thank you, Mike. On the line -- we'll go to the line first for questions. And the first question comes from Grant Swanepoel from Jarden.

First of all, thanks so much for the calendar '25 NZD 720 million expectation also. Just thinking about gentailers being a defense against inflation, with your dividend remaining at NZD 0.35, can you put some color around calendar '25 and beyond on where you think the dividend can get to and that your free cash flow per share could potentially rise from NZD 0.42 to NZD 0.58, NZD 0.60. And with an NZD 0.80 to NZD 0.90 payout, that's somewhere between NZD 0.46 and NZD 0.52 dividend. Does that make sense? And should we be helping investors to think about that?

Absolutely. Dorian?

Yes. I mean we can't obviously go into specific numbers, Grant, we don't normally guide out that far. The intention is, as we've said all along, as we have increased EBITDAF and operating free cash flow is due to projects coming online. We increased the dividend accordingly. Obviously, we've got -- we've got Tauhara coming online first towards the end of 2023. So, that should be positive from a dividend perspective. The other topic is we are pretty low in the range, which we've said reflects the fact that there's not a TY, long-term TY contract in place. So, that's the other determinant of what happens with the dividend. I think it's fair to say the Board will be more comfortable holding a dividend level that's more within the middle of the range once a long-term deal on the TY contract has been done as well. So, I hope that helps. But I can't give any sort of specifics around the numbers that you sort of talked to because, obviously, we don't do that type of guidance.

Can we go to the next question?

Yes, sure.

It's around Te Huka, so this 20% cost increase relative to Tauhara, it's not -- are geothermals getting the same sort of cost pressures from the Ukrainian war that wind is getting? I wouldn't have thought so. And then can you link that into your long-run marginal cost expectations in that NZD 100 to NZD 110. Does that mean that you expect to wind post this Ukrainian crisis to start jumping in terms of where those long-run marginal costs were landing? And finally, on the Te Huka side, you had indicated that you probably weren't going to pull Te Huka to the other PPA against it. How are you developing on those DC PPAs that you were talking about in the past?

Yes. So, let's just unpack that a little bit. So yes, the cost, we've been very conservative on the cost estimate for Te Huka. It reflects in part we don't get the scale that we've certainly got on the Tauhara plant. Remember, Tauhara is over 3x the size of Te Huka and it had an EPC -- it's got an EPC contract in there that was effectively done in a completely different economic conditions. We are seeing and we were somewhat surprised by the market intelligence coming out of Australia that when projects they are already seeing those cost pressures, particularly on -- coming out of steel at around 30%, and that was recently recent. And you're right, we're not as exposed to that because we -- the subsurface effectively for Te Huka is locked in, it's drilled. The steamers behind the well here and ready to go. There is some exposure there. For those who visited the site last year, and we hope to get you back next year, there's a lot of steel and concrete, both of which have experienced those cost escalations. But I think you're right, we're not as exposed as wind and solar.

Just on -- I mean, we were very mindful of the increase in CapEx on a dollar per megawatt basis. And we could have waited with this project and done it 6 months later and that would have led to a lower dollar per megawatt. However, we do have to work through how this fits with our GeoFutures project around replacing Wairakei. And if we delayed it, it would start to impact the schedule around that. So the timing was useful around integrating with that project. But the other point is the market that these electrons are coming into -- with the pricing being relatively high at the moment. It's going to you can do the math. I mean, it's going to fall off about NZD 60 million of EBITDAF in the first year. So every month, you delay it sort of draws the higher capital costs that you're going to have through announcing at the current moment in time. So as Mike said, I mean we've been impacted by global commodity prices. One of the bigger impacts, though, is New Zealand prices in terms of construction costs and sourcing finished goods in New Zealand. Although commodity prices are -- have come back down, again, they're still quite a bit higher than they were. But finished goods that you purchased in New Zealand haven't actually started to really come back down again yet, they sort of lag commodity prices. So again, we are being impacted by that by the timing of the project, but we'd expect that to drop for future projects. And as Mike says, this is a relatively small project for us. So, all the prefit work you do around design, consenting and development is relatively -- is a similar amount of money regardless of the size of the project, and this is only a 51.4 megawatt project as opposed to 170 megawatt project like some are the other ones that we've been -- that we are doing and are talking about doing. So, that's all flowing through. We do expect future projects to be lower. I think we're sort of talking about 5.2 to 5.5, reflecting a continued drop in commodity prices and starting to see some of the finished goods cost in New Zealand flowing through. But we do think it's going to -- I mean, the cost structure of geothermal and building is a bit different from wind and solar, and we analyze that quite a bit. But we do see all forms of generation being sort of relatively impacted in the same way by what's going on internationally. I think it flows through in different areas but we see it leading to roughly the same answers.

Last part of this question, Grant, you asked about PPAs. And I think the approach to this is that this project is incredibly economic with its merchant exposure. And where we're going with PPAs is we take them at a portfolio level. And obviously, with TY and the ongoing discussions with Rio, once we get that landed, then that sort of will set the tone for how much of the portfolio that's in the go forward we can track and remembering that portfolio is going to grow significantly over the next 4 to 5 years.

And on the long-run marginal cost expectation?

Well, that's what -- our firmed long-run marginal cost expectation is NZD 100 to NZD 110 per megawatt hour Grant, and that's real.

My last more technical question. Just on your strategic fixed prices jumping by 450 gigawatt hours based on the start of last year. Is this taking into account half of the CFD with MEL and the swaption? And can you give us a bit more color on the CFD and the swaption pricing?

I don't know.

I don't -- Meridian, if we are going to...

Strategic fixed price sales, I guess, it's probably a new classification Grant. I don't think it's jumping that much. It will just be a full year of our sort of TY...

I think the pricing should be dropping year-on-year and it see full year impact with the transitional TY deal, Grant.

Yes, there's -- look forward to see if CFDs [indiscernible].

[indiscernible].

We'll go to the room now for any questions. Andrew?

Let's follow-on actually, first just around to your copper and OpEx is 20 bps at Tauhara, can you sort of talk about that? Is that all economies of scale?

No, it's a different type of plant. Obviously, it's a different type of plant. And there's probably used to call -- [indiscernible] is a bit more complex and there is the economy of scale. So, that's probably where your expectation is.

And I just have a few questions just around volatility and again a sense of sort of a normal hydro number of, which is great. I guess the question I've got is even going back when you had 480, do you think the earnings volatility has increased, so the potential upside potential downside is range is greater than it was and can you sort of talk to that?

The volatility increased, but I don't think there any earnings range here. I think what you've seen is a shift. Dorian, you might want to elaborate?

Yes. I mean the -- it's how it's sort of -- what's the normalized curve looked like because we have reduced our fixed price loans well, which reduces downside risk that provides more upside opportunities as well. I think the point around the volatility in this -- what I made in the -- when I was talking about it is because the fuel replacement costs are escalating so much at the moment, that means volatility costs you a lot more money and that's the same across the industry. But I think we are -- we benefited from the fact that we have reduced our fixed price variable volume load regarding that. And obviously, we've got access to a range of mitigation which support us as well.

Andrew, we're endeavoring to aim within the same earnings at risk amount on an absolute basis because we believe we sit at the right risk return trade-off. We've got some of our mitigations falling off, including swaption at the end of the year. So, we have continued to reduce our fixed price sales position. But yes, earnings will be more volatile, but not to the downside.

And the other thing is our cash operating free cash flow is relatively stable as well because in times when there is a lot of water, we tend to inject more gas. And when there isn't, we're using the gas that sort of evens out the volatility from a cash flow perspective as well.

And then just in terms of swaption, a couple of quick queries, I guess, on that one. In terms of the swaption piece, are you able to tell us what the megawatt capacity of [indiscernible]?

It's 50 megawatts for the swaptions.

And in terms of the CFD, is that just through the winter months as well as...

I think it's 8 months actually, CFD. March to October.

And last question I just had was just around the batteries. So, you've done all the work on that side. I guess I'm interested to understand how far away you are at the moment? And I guess the other piece is just given, I guess, [indiscernible] piece on the battery economics has been improving. That clearly offset.