Mercury NZ Limited (MCY) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Mercury announcement. [Operator Instructions] I would now like to hand the conference over to Mr. Vince Hawksworth, Chief Executive. Please go ahead.

Thank you, Marie, and everybody. I'm joined by William Meek, our CFO. So this morning, we announced the decision to go ahead with Kaiwera Downs wind farm just south of Gore. We're going ahead with the first stage of the wind farm, which is a 43-megawatt build, 10 machines, about $115 million, excluding capitalized interest. So we see this as a sensible next step in terms of our growth towards being a major player in the decarbonization of New Zealand. It establishes the wind farm at Gore, Kaiwera Downs, and gives us the optionality on the further build that could take the wind farm up to 240 megawatts. Look, we acknowledge that there is uncertainty in the marketplace, but we also think that if New Zealand doesn't start this construction phase, we won't reach net zero. And I think it's important to show that the players in the market are able to bring projects to market and deliver them. The great thing about Kaiwera Downs is it's an excellent project. It's been a long time in the making from the original resource consent gained by Trustpower. It was then in the Tilt book that Mercury gained with the transaction to acquire New Zealand Tilt Renewables' assets and pipeline. It's an excellent project from a point of view of performance. We will be using the best possible technology with 10 4.3-megawatt machines. And we are partnering with Vestas, ElectroNet, PowerNet and Higgins to deliver the project. And there are sort of collective set of contracts that will be coordinated by Mercury. So that's the project. We're pretty excited about it. We expect to kick off within weeks. So we expect to see mobilization occur and see the project under construction in October. We would expect to see machines being erected around about the middle of next year, and the project completes well within the calendar year. So a bit of work to do, comes on the back of our Turitea project, which we are now still expecting to have complete around the middle of next year and is part of our strategy to ensure New Zealand meets its decarbonization targets. William, anything you want to add? Or should we open for questions?

We should have some questions.

Yes, we'll open for questions.

[Operator Instructions] Your first question today comes from Andrew Harvey-Green with Forsyth Barr.

Not a big surprise from my perspective, I guess, that this has been announced. A couple of questions from me. First of all, just -- I mean cost is obviously a key consideration at the moment. Are you able to say how much of that $115 million, I guess, you would describe to being fixed versus there might be some variability and is dependent on sort of future pricing?

Fixed. I mean largely fixed. I mean there are always contract risks associated with things not happening as you would think they would. But in terms of the deal investors, that's -- for the actual kit, that's fixed. And the deals with the other contractors, they are fixed around the design scope. So yes, we're not expecting big variations to that.

Yes. Okay. And next question just around the cost is, are you able to say roughly how much is going to be in FY '23 versus FY '24?

A lot of it's going to fall in FY '23 given the phasing.

Yes. Next question I just had was just in terms of, I understand that the consents were expiring on Kaiwera Downs and that was, I guess, a key consideration. To what extent, if the consents were not expiring, would you have actually gone ahead at this point in time on this wind farm?

I think -- look, the consents could easily have been renewed. I don't think -- we could have renewed the consents. I think the reality is it's a really neat opportunity to secure that site at a level which is relatively small, retains the ability to scale because all of this power will be going into the PowerNet network. So it has a lot of sort of attractive features in order to still have all of the optionality of the large-scale project. So -- I mean -- I think consent's just a small part of an overall feature. And I think we can't have our cake and eat it in this world. And if we believe that we need to decarbonize it, we can sit on our hands and wait for every piece of certainty, then I suspect the next time it's really dry, we will then be asking ourselves why the market hasn't responded to prices. And forward prices are still relatively firm as well. So if we don't step up, roll our sleeves up and do the work, we should expect someone else to do it for us.

Yes, yes. And just last question from me was just in terms of the choice of Vestas and, I guess, given some of the difficulties at Turitea, we sort of take it as a pretty good sign that the relationship there is pretty sound and, obviously, very happy to continue working with them.

Look, I think you have to be grownups in this world. And there are always going to be project problems and relationships that are difficult. The reality is that we want to use the best technologies for the sites we have available. And I have no doubt that Vestas are strongly committed to doing a great job on their part of this project and delivering a great solution. We -- yes, I think it's fair to say that the light at the end of the tunnel appears at Turitea. We're all able to think about how we can do better in the future, and there are plenty of lessons that we've learned out of that.

Your next question comes from Stephen Hudson with Macquarie Securities.

Congratulations on the announcement. Just 2 questions from me. Just around stage 2. Firstly, can you give us a feel for what the cost per megawatt might look like for stage 2? And secondly, just around PPAs. Have you had any discussions on PPAs to back the project and where do those discussions sit at the moment?

Yes. So stage 2 -- so a couple of things with stage 2. We will probably use very similar technology if and when we decide to go ahead. I think it's absolutely the case that costs have increased. If we imported costs, let's put it that way, have increased and may still have a little way to go, and we'll monitor that quite carefully. Of course, the decision on stage 2 is completely independent of this decision. It will have to connect into the grid. So we have the benefit of a totally independent decision that we can again pick the timing on. We still think stage 2 is probably the best yield in wind projects that's got a consent at the moment and probably better than many that haven't got a consent. So it's a good project. From the point of view of your second question, look, we are in discussions with many parties at the moment who are looking for long-term energy arrangements that are associated with new renewables. And we're not at the point of signing any deals, but we are actively in a number of processes. And obviously, we'll make those public as and when we get somewhere and we can within the framework of NDAs and all of those good things that we're involved in. But look, we are active in that space, and we've got some good projects that can back -- so if there's anybody out there looking for a PPA, we've got some good projects that can back some PPAs. This doesn't need to be the only one that people talk to us about.

Your next question comes from Nevill Gluyas with Jarden.

Question around -- firstly, around obtaining turbines and whether or not that was difficult. I'm not sure how you might answer that. Perhaps one way to ask the question is we've heard from many others that it's difficult to even get manufacturers to close. It seems to be that you've come up with quite a fast time line for getting these 10 turbines. If you decide to proceed to stage 2, how do you anticipate -- let's imagine that was middle of next year, hypothetically, how long do you think it would take to negotiate to procure the remaining turbines for the site?

That's an interesting question. I guess we -- to the first half of your question, I think what happens in this part of the cycle is that OEMs talk to people who have a track record of executing. So they get lots of people come and say, "I've got this project. Can you give me a price?" And that costs some money to do that. And they're less likely to want to spend that money to do it if they think the chance of the project actually being committed to is low. So I think Mercury has a reasonable reputation with OEMs of following through on projects it discusses, providing, of course, everything stacks up. So I don't think there is a range of -- buyers are viewed through different lenses by sellers is the first thing I'd say. And the second thing is with respect to stage 2, look, if we -- middle of next year sounds pretty quick to me. But look, if we had some reasons we want to move that fast, I think the major OEMs would want to talk to Mercury about those. We would always think about the timing relative to any offtake agreements that we might have and relative to -- yes, relative to where we are in the cycle, I don't think the price increase cycle in this sort of technology has reached its top yet, and we don't want to be the buyers [ at the top of the market ].

Okay. That's helpful. And I guess the construction time for this between FID to completion seems pretty quick. Should we expect similar timing, assuming you could procure turbines between FID and stage 2?

Stage 2 would take a bit longer. It's kind of -- what is it, 3, 3.5x bigger. So you just got more work to do. It's also got a good connection to get done as well, which -- so there's a whole bunch of probably increased complexities. So I don't want to give our project teams a heart attack by saying something that is way off-kilter. But look, it will take longer and, as many projects will, this is just a relatively simple execution.

Great. That's good color. One specific question. Can you give any guidance -- so you've got a 30-year agreement for maintenance with Vestas. Can you give me guidance as to, in real terms, kind of what we should think of as average lifetime O&M on that dollar millions per annum?

No, I can't, no. I haven't looked at what the average for the 30 years is.

Okay. No, that's fine. And last question, Vince.

Thanks again for that one, Nevill.

Yeah. Useful just to get some guide. I mean I guess we've been working for some recent projects in sort of that $11 or $12 per megawatt hour range sort of indicative. And it's just whether or not that number has crept up along with all the other costs.

Definitely. And it's definitely higher than that. And you've got -- and you've got a payment for the use of the transmission line because we're not going to own that. That's going to be owned by the line company. So you effectively got -- instead of paying the cost, you're paying effectively an annuity.

No, that's useful color. Last question then, Kaiwaikawe. Any connection at all between this decision and how we should think about whether or not Kaiwaikawe could be delayed or not, or are they completely independent as I would expect?

Look, we're working hard on Kaiwaikawe. We've got a customer who we want to be able to present the project back to and we're very conscious of that. It is taking longer than we hoped. But I guess we've said before, one of the -- we would be a lot further advanced if it wasn't -- hadn't been so hard to get a resource consent. But we are working towards that project. And we are talking with all the people that you need to bring together to get a firm position to go to FID. So that's OEM providers and issues around connection and civils and all of those things are being advanced. So I can't give you an exact timing at the moment and I wouldn't, anyway, it's just the nature of it. I think the first people we'll talk to, as we bring this together, are Genesis who are the customer.

[Operator Instructions] There are no further questions at this time. I'll now hand back to Mr. Hawksworth for any closing remarks.

Thank you. Well, thanks, everyone. Thanks for dialing in. You know how to find us if there are things that you want to talk about outside of the call. And we look forward to getting this project built and added into the Mercury portfolio. Cheers.

That does conclude our conference for today. Thank you for participating. You may now disconnect.