Mercury NZ Limited (MCY) Earnings Call Transcript & Summary

Good morning, everybody. Stew Hamilton here, the Chief Executive for Mercury. It's great to be here to present Mercury's interim results for the first half of FY '25. It's my first opportunity to present results for Mercury. I'm sitting here with William Meek, Chief Financial Officer, and it's William's last opportunity to present Mercury's financial results and actually his 24th in total over his tenure with Mercury. I'll cover off a bit of an overview of the financial results and the key strategic drivers. I'll then hand over to William to talk to the financial outcomes and drivers of that. I'll then be handed back to give an overview of some industry context, talk to some of our strategic activity, before finally handing back to William to talk about funding and guidance. First of all, if we look at the first half of FY '25, it was a half of 2 halves. Certainly some challenging conditions. First part of the half-year saw very dry conditions flowing through to the second part which saw very wet conditions throughout New Zealand and saw contrasting prices in the wholesale electricity market. Despite those challenging conditions, Mercury has put in a robust performance with careful portfolio management mitigating the impact of that drought. That has seen our EBITDAF for the first half at NZD 418 million on a generation of 4.2 terawatt-hours. That's down on the prior comparable period by NZD 16 million and 0.3 terawatt-hours. Despite the challenging conditions, we're still investing heavily. In fact, about 46% of our first half earnings have been invested back into renewable new renewable projects and our existing assets. We're investing at the moment NZD 1 billion into 3 significant projects which [ cover ] from the bottom of the South at Kaiwera Downs to the top of the North in Kaiwaikawe. Those 3 projects when generating will be delivering just over 1 terawatt-hour per annum. Those projects are constructing on time and to budget and become some of the biggest levers we have for moderating the long-term power prices in New Zealand. We continue to focus on customer connections. That's growing at the rate of 33,000 compared to the prior comparable period, mainly through cross-sell focus, especially increasing telco and mobile customers. We're also glad to announce last week the signing of a 10-year contract with Fonterra that supports the electrification of 2 sites, and we look forward to seeing that progress. The construction of the Kaiwaikawe wind farm started in the first half of last year. We're now into the civils phase of that project that will see 12 turbines bringing in a capacity of 77 megawatts. That's expected to see first generation towards the middle of 2026. The strong market response from a number of sector participants, including Mercury, helped to maintain energy security over the last part of 2024, first half of FY '25. Going forward we see there's a significant number of actions required that will enhance the governance and market arrangements in place. And we certainly see the laser focus on security supply being a key area for us to look at in the next part of this year. And finally, if we look at EBITDAF guidance for FY '25 that is unchanged at NZD 820 million. William will talk a bit more to that soon. And the interim dividend cleared at NZD 0.096 per share, 3% higher than the first half of 2024. Guidance for the full year '25 is maintained at NZD 0.24 cents, which will see a 17th year of consecutive dividend growth. So we continue to make really good progress on our strategic objectives in the first half of FY '25. These are key things I just wanted to call out here. The first is in terms of delivering more reliable and renewable energy. We have a resource consent application lodged for Whakamaru battery, looking for that consent to be granted in the next part of this year. And we continue to focus heavily on geothermal resilience with Forced Outage Factor now below 2%. In terms of accelerating the shift to a low carbon future, we were pleased to see the Energy Transition Framework being signed by sector participants in the last part of last year. And as I mentioned, in addition to the Fonterra electrification contract, Tiwai now also becomes our largest customer. We are supplying now 50 megawatts to the site. That will grow to 75 megawatts as the project at Kaiwera Downs 2 comes to completion. In terms of creating success with others, very proud to say that over the last 6 months we have had 0 bad credit disconnections as part of our very strong customer care program that supports customers that are vulnerable. And we continue to establish new iwi relationships related to our pipeline, which, as I mentioned before, extends from the bottom of the South of New Zealand to the top of the North of New Zealand. At the core of our performance are our people. We continue to have a strong focus on health, safety, and wellbeing. Throughout the first part of FY '25, we've had no fatalities and our high severity incidents have also been at 0. And we continue to focus on a strong culture process to drive that performance. From an employee perspective. We have a diversity, equity, inclusion, and belonging strategy in place, which will continue to make us stronger and help to deliver our business performance. I'll now hand over to William to talk to you some of our financial results.

Thanks Stew and kia ora to those on today's call and welcome again to our interim '25 results presentation. So I'm now on Slide 6, talking to some of our key financial metrics. Trading margin, so essentially revenue less COGS across power, gas, and telco, at NZD 605 million versus pcp at NZD 618 million. OpEx up 16 against pcp to NZD 207 million, EBITDAF down NZD 16 million to NZD 418 million from NZD 434 million. Again I'll come back to the bridges, but yes, generation lower by almost 300 gigawatt-hours across mostly hydro but also lower geothermal performance and less wind across the fleet. NPAT was a net loss of NZD 67 million. I think the first for Mercury. Certainly the effect is driven by accounting, so very large negative fair value movement in unhedged financial instruments. So on segment note you can see that for this half year it was negative [ NZD 290 million ] which is leading to that net loss at the [ corporate ] level. Operating cash flow down 20% or NZD 56 million to NZD 227 million, mostly driven by higher provisional tax payments of almost NZD 50 million. Stay-in-business CapEx slightly higher, driven by increased activity in drilling and in rehabs. Growth almost double the pcp at almost NZD 140 million up from NZD 70 million in the prior period and then dividend again, as Stew said, up 3% which is good. Turning to Page 7. Just the EBITDAF, which really just explains what's the key drivers of this. So we on the pcp had NZD 434 million. Generation volume across the 3 fuels was an adverse movement of NZD 45 million. We've seen higher yields particularly in C&I, so those have been positive, lifting earnings by NZD 27 million. Mass market yields also up NZD 20 million. Gas performance worse than last year, so high gas costs offset slightly by better gas pricing. We saw a slightly worse trading performance so NZD 12 million for the half positive, I think, versus NZD 14 million in the prior period. Also, noting, I think, our original guidance at NZD 820 million had trading profits at nil. Small impact from spot prices. And then OpEx, as already mentioned, down NZD 16 million, giving us that bridge to NZD 418 million for the half. Let's deeper dive into operating expenditures lifting to NZD 207 million from NZD 191 million, so up NZD 16 million. Variety of drivers there, mostly in our generation business. Amount of generation maintenance activity increased some significant turnaround costs. Turnarounds are essentially major outages on our plants, typically geothermal. So Nga Tamariki and Rotokawa had major turnarounds where the plants were off for several weeks doing maintenance which occurs infrequently. The brand refresh, you've probably seen our ads on the telly. We saw some additional spending there into that brand and brand refresh. So explaining that NZD 16 million. Stew's already talked to how cash has been allocated from our earnings with 46% of our earnings for the half being reinvested back into growth renewables. Dividends at NZD 163 million were paid for the final dividend tax at NZD 140 million, interest at NZD 60 million bridging to the change in net debt. Now turning to stay-in-business CapEx, was up NZD 13 million from last -- from the pcp and as mentioned, NZD 7 million of that due to geothermal drilling. So we've been drilling at both Rotokawa and [ Kawerau ]. There'll be a tail end at Nga Tamariki, so we just finished a well at Nga Tamariki and moving on to a second bore there. That drilling's been very successful over this financial year so far. Hydro rehabs, it's great to see the second unit of 3 at Karapiro completing, and so again we're looking at about a 5 to 6 megawatt increase in megawatts there from that unit and about a 4% to 5% increase in efficiency. So that's also positive. And we continue to undertake some remediation on the existing Taupo gates both down and slightly upstream of those gates. So we can see the high-level breakdown of that NZD 73 million of CapEx across geothermal drilling, rehabs, whole plethora of other generation CapEx in the gates and then enterprises predominantly in our technology area. We're pleased to see a migration off SAP onto Workday for our financial systems, and we are currently in the go-live for transitioning onto our new [ Elcom ] billing platform, which is necessary for us to see and close down our legacy SAP financials and billing customer platforms. Talking to hydrology, it has been certainly has been dry in the North Island. So I think for the first half this year, we ran 15th percentile inflows that followed on from dry sequence. As we came into this financial year, on a year-to-date basis we're running 6th percentile. So it's continued to be dry. We're seeing I think, 0 percentile, so the worst inflow sequence since November for the almost 4 months from [ them ] in the Waikato catchment. We're also seeing very dry sequences appearing in the South Island. So they are also running, I think, 0 percentile for the last 2 months. So as Stew said it was a game of 2 halves in the half. So that's a quarter. High prices at the start of the year on the back of tight conditions, relieved by some demand response from industrials, gas trades, and an epic rain into the South Island in Q2, seeing some of the lowest spot prices we'd seen. So bouncing from prices in the NZD 300s up to the NZD 800s and then back down to, I think, just over NZD 40 for the second quarter of this financial year. So that did enable us, despite dry conditions, to bring the lake back up to nearly full. So that has put us in an okay position as we head into winter. That being said, this extended dry is causing conservative generation out of the Waikato as we conserve again with an eye to this winter and security. This slide has got a whole lot of charts really, I think it's quite interesting just from a snapshot about what was happening over the last calendar year. You can see the first demand growth, I should say, demand reduction largely as a consequence of demand response to demand response contracts and in response to high spot prices, particularly through that July-August period. And so, you're seeing the demand down. Gas production, we know the challenges there in terms of gas supply to New Zealand gas users. So we're still on burn in terms of daily deliverable gas. We're hopeful that gas exploration undertaken by some upstream owners will be fruitful. But at the moment, certainly, the gas market remains challenging with significant declines over the calendar year. Unsurprisingly, we saw a large increase in thermal generation through the high-priced months, particularly in winter. And we're seeing quite a lot of thermal commitment now even this early. And obviously, the announcement from today from Meridian to trigger further demand response from NZAS. We've talked to national hydrology. Yes, it was certainly very high by the end of the year, but again, we've regressed back below average at today's date. Gas prices were monstrous, and essentially gas reflected the elevated spot prices, so peaking in August. And then those electricity prices also reaching on a rolling 28 -- or 4-week basis over NZD 500 and then crashing back into the NZD 40s. Turning now to energy security for this winter. This is a chart from system operator Transpower. It's quite detailed. The shaded dark blue area shows the 10th to 90th percentile national storage range in terms of history. We can see last year, lake levels tracking downwards, but still well above the 1% emergency level. So actually it was called by the generators, the likelihood of actually running out of power last year was extremely low, and certainly, those high inflow events shot lake levels back up to nearly full levels for the country. We have seen a pretty substantial decline. But still those risk curves, as we look forward to winter '25 are slightly better, better than what we had last year. And the industry is continuing to take actions to further shore up security, which is important for keeping the lights on and certainly for lowering energy prices to consumers. We're quite happy around the Mercury's response around HFO. We are taking a structurally longer net portfolio position also. And certainly, we're leaning in very hard around wider industry initiatives to support security of the electricity system. I'll hand back to Stew.

Thanks, William. So talk to context from the ecosystem that is the electricity system in New Zealand. Firstly, I appreciate that many people, households and businesses have been [ doing it ] tough over the last while. Despite that, New Zealand has an electricity system that still ranks in the top 10 globally against the trilemma of sustainability, security and affordability. That means we've got great foundations to make it even better. The current high wholesale price signals supply risk and hence, the laser-focused desire to be on security of supply. There's 5 core areas, which we continue to support and discuss with all stakeholders. There are 2 important regulatory reviews underway at the moment, the first being the ministerial review and the second being an Energy Competition Taskforce, in which we continue to talk about our laser focus on security supply, encouraging more flexibility and transparency of the risk management options being very important, and improving governance and increasing certainty over policy. The Energy Transition Framework that I spoke to at the beginning in the summary will be an important mechanism to help consolidate the sector-wide knowledge and the key transition actions, and then finally, enabling consenting arrangements will be crucial to ensure we can continue to build the sustainability of the grid. So as New Zealand's grid continues to be more renewable, we're trending towards 90% sustainability, as energy security challenges become real. New Zealand has a strong track record in energy security, but as we saw through winter 2024, it experiences some challenges as we get to a higher renewal percentage, and you combine that with the sudden deterioration and availability of gas and the strong reliance on hydro in New Zealand, it means that the dry years do create an energy shortage. And this means that we need to seek a range of solutions because there is no silver bullet to support that security. So with that, we're leaning into New Zealand's dry year energy security challenge. You would have seen recently that market participants have entered into a heads of agreement to support the ongoing operation of Huntly for the next decade or so. But that's just one of the solutions in place. There are several potential solutions that are being looked at across the sector. We're really looking to find a number of levers to close what we believe is a gap of about 2 to 4 terawatt-hours in those dry years. And that will include a modest renewable overbuild. It will include demand response. It will include contingent storage. And if you look at the range of options to supplement that, there's no doubt that thermal fuels will be required in the near term to provide that flexibility, hence the reason why we've entered into the heads of agreement to explore those options to support the operation of Huntly for the next decade. With that, LNG, we believe, could be part of the solution, but in the short term has a low likelihood of being economic because of the high upfront investment and ongoing costs. However, we're pleased to see Genesis look at the operations' potential for biomass to be feasible over time. So following on from the build of Turitea and Kaiwera Downs #1 throughout the FY '22 to FY '25 period, we continue to invest. And you can see in the slide here over the next few years, we'll see up to 1.1 terawatt-hours of renewables come through. Just to put that into context, that's the equivalent power to provide 142,000 homes. It increases Mercury's portfolio by just over 12% and actually contributes to increasing New Zealand's generation by 2.5%. There are 3 further projects which we are investigating at the moment. The first is Puketoi in Manawatu with a final investment decision anticipated in FY '27. The second, Mahinerangi 2, just west of Dunedin that is looking for an FID anticipated in the early part of FY '27. And the third being Waikokowai, which is at a location just west of Huntly, looking for a final investment decision in FY '28. All 3 of those wind farms projects are listed in the government's Fast Track Approvals Bill, and we look forward to providing updates soon. This slide just takes a bit more of a dive into the high-quality generation pipeline that we have spoken to the Waikokowai wind, Mahinerangi, and Puketoi, also mentioned the Whakamaru battery energy storage solution, and in addition to that, we have a number of prospects in our pipeline, which we continue to develop and look forward to sharing those details soon. Just want to briefly touch on the 3 generation development projects that are underway and talk to 2 other major capital investments to give you some insight and color to those projects. This first slide talks to our OEC5 unit expansion at the Nga Tamariki geothermal reservoir. It's on track, both from a budget and time line perspective. We're anticipating first generation late this year. You can see in the photo on the top left-hand side there, the bottom part, you can see the construction of the Ormat unit coming along. And so, very proud to say that project is progressing well. Second project I'll touch on is the Kaiwera Downs Stage 2 wind farm construction down in Southland. That project is proceeding as scheduled. We had some very wet months through spring, which meant that the civils were a little bit delayed, but that project has been progressing very well. The long lead time equipment deliveries are aligned with the schedule, and that's progressing to plan. The third project to round out our generation development, and we've gone from the bottom of New Zealand to the top of New Zealand. So Kaiwaikawe was approved late last year and construction started in January. Again, the first generation is also expected in mid-2026. That wind farm development is expected to involve up to 100 jobs during construction, clearly supporting employment opportunities in the Northland region and negotiations are nearing conclusion with Genesis for offtake arrangements. Finally, 2 more projects I wanted to talk to just to give some color. First is the geothermal drilling program, where we are drilling 8 wells. That program continues. As William mentioned, it's looking at sustaining capacity for the Kawerau sites, Nga Tamariki and Rotokawa fields. We've taken advantage of a second domestic drilling contractor now, and we have been drilling 2 new wells for Nga Tamariki OEC5, which will support that project come online. And as of February 2025, we've completed 5 of those wells, which has resulted in NZD 113 million worth of investment and a further NZD 62 million investment required in the 3 remaining wells that will lead to the sustained operation of our geothermal fleet. And finally, if you look at our rehabilitation program for our hydro assets, that too is progressing really well. So far, the Karapiro station capacity has already increased by 10 megawatts. The third and final unit was removed from service late last year. That's due to be returned back to service in August with the next station rehab program for 3 stations at Maraetai, Atiamuri, and Ohakuri. They are progressing, and we're looking to award the key contracts during this calendar year. The primary focus of ours continues to be on telco, particularly in the telco cross-sell opportunities post integration with Trustpower. Our scaled retail business has increased now in terms of connections, 33,000 connections higher compared to the last comparable period, mainly from the cross-sell focus, especially in the mobile and telco area. As I mentioned before, Tiwai is now our largest single customer, and we have progressed really well through the electrification of New Zealand in terms of supporting Fonterra to electrify Edgecumbe and Waitoa operations. That contract commences from August 25 for Waitoa and Edgecumbe in 2026, represents a significant demand of 260 gigawatt-hour per year. Our journey to becoming a leading multiproduct retailer is progressing well. Also, Mercury was named the 2024 Energy Retailer of the Year. We're very proud of all the work that's gone on from people across Mercury to support our customers to win that award, and particularly pleased that we can say that over the last 6 months, we have had 0 disconnections due to bad credit as a part of the significant work we're putting in to support customers. We do recognize that current price increases for residential customers will be tough. If you look at the slides on the left-hand side there, it shows the total residential electricity price has actually tracked lower than inflation over the last decade. This April, Mercury's overall electricity bill increase for residential customers will be approximately 9.7% on average. This includes larger increases in lines and transmission charges that's required due to the significant investment in infrastructure for lines and transmission to support the renewable transition. I'll now hand back to William to talk about funding.

Thanks, Yes Stew. We're in the home straight. We're looking at a chart showing the debt maturities for Mercury's funding. Certainly a diversified portfolio from 90-day commercial paper right through to 30-year capital bonds. We had a successful issue for the MCY070 in early July to refinance the NZD 300 million MCY020s, which were maturing with NZD 350 million bonds. So that was good. And we are actively considering a new debt capital markets transaction shortly. So watch the space. Next slide. The balance sheet is very well positioned to fund our current [ GND ] program and beyond. We're sitting at 2.3x debt to EBITDA. So lower end of that BBB+ range. S&P Global confirmed our rating as BBB+ stable back in December, and we do have active DRP with a 2% discount. Last slide for me onto guidance. So a couple of reflections here. So this is for the full year. Guidance is unchanged from our original guidance back in August, but the makeup of that guidance is quite different. I would summarize the performance given what's happened as a robust performance while high and dry. I'll come back to that. It's a oft repeated meme in the markets that gentailers profit from high spot prices. That is not universally true. I think we're seeing that across the board in the sector. Certainly, you can see the impacts of low rainfall, low wind do impact generators' earnings. We certainly can see that here between decreases in hydro generation and our wind and geothermal performance were down almost -- well, down NZD 100 million. Hydro is down 13% on a normalized basis, so 530 gigawatt-hours. And that's assuming that we get median inflows from today to the end of the year. So still quite a wide potential outcome there in terms of whether it rains or doesn't. Even the thermal operators in our sector have found it quite challenging as the thermal fuel prices have risen on the back of [indiscernible] into dry events in terms of coal and gas. So yes, I think it's just important to call out that the view that high spot prices lead to higher profits for all generators. And there's good reasons why prices are high. I think the market performed admirably. The high spot prices did lead to significant responses on both the generation fuel dispatch and demand side, which is what a well-functioning market does. The vast majority of consumers are hedged. There's no mass market customer face the price rise as a consequence of the high spot prices that took place earlier this financial year. Unfortunately, there were some commercial customers that were facing spot prices for decisions of their own who aren't with us today, and that's unfortunate for New Zealand. So just quickly on the bridge itself, we've called out the changes to generation. We did have a stronger portfolio outcome, of which trading is in there. We're expecting trading gains for the full year of around NZD 25 million. We've got a better gas performance. We've had 2 gas price increases this year. We're a purchaser of gas. We don't make gas ourselves. So our pricing to our customers needs to reflect the costs of acquiring that. That being said, gas prices were quite soft through Q2, and we have had some success in contracting longer-term gas which is positive. We have seen stronger yield growth, particularly in the C&I segment. OpEx is up NZD 25 million. We saw an increase of NZD 16 million at the half year. We've brought forward a repair on well at Kawerau with NZD 9 million, which takes that full year variance to NZD 25 million. So quite a different makeup, but guidance held at NZD 820 million, reflecting that lower expected generation across the fleet. We've provided guidance. And so on a normalized basis, that's normalizing for average hydrology, average wind, and geo performance, taking into account of scheduled outages, that net '25 we'd expect to be NZD 900 million had we had an average generation year. Dividend guidance remains unchanged at 3% and stay-in-business CapEx at NZD 150 million for FY '25. With that, I'll hand over to Stew for concluding remarks.

Thanks, William. So as you can see, first half of FY '25 has been managed extremely well by the Mercury team. The focus now turns to the next 6 to 9 months, especially our role in security supply, delivering operational efficiency and focused on generation development. We think we have the best diversified portfolio, and we continue to invest in that significantly. We're very privileged to service the largest customer retail base, looking for new innovations to support customer options and electrification, and look forward to sharing that as we go. Thank you very much, and we'll hand over to Paul.

Q&A time. I'm Paul Ruedige, Head of Business Performance and Investor Relations, helping to manage the Q&A. Just raise your hands if you have a question. I'll bring you on, and you'll just need to unmute to ask your question. First up, we've got Andrew Harvey-Green. You can unmute your microphone, Andrew.

Hopefully you can hear me okay.

Yes, we can, thank you.

A couple of questions from me. First one, actually, I guess there's a couple in there as well, just revolving around the OpEx number. Are you able to give us an indication, I guess, of in guidance what you were assuming for the first half? Reading through the FY '25 guidance, it sounds like you're expecting roughly flat OpEx. And I guess the second question, just looking back to first time FY '25 guidance, you're indicating OpEx coming down and some of those retail integration benefits coming through. But at the high level, we're not really seeing that. If you're able to talk to what's happening in that space.

Yes, happy to start on that question. Yes, we were expecting our generation. The amount of work required in our generation fleet was higher than we expected. We've got some stuff happening with retail integration finishing, the [ Elcom ] project kicking off, you're seeing some costs turn up in our generation business. If you look at our segment note, the retail business has got a lower OpEx. So I think it's NZD 9 million down on the prior comparable period, which is positive. But yes, there's just been a plethora of activity happening in our gen fleet. It's something we're watching, and we've got some initiatives underway to manage that. I think the sector, we're still seeing just crazy inflation, particularly around anything with foreign or labor procurement attached to it. So it's quite -- market is still quite tight. So yes, the guidance of NZD 820 million at the moment has got OpEx of NZD 395 million built into it, of which NZD 9 million of that is for the well at Kawerau. I don't know Stew, if you've got anything else to add.

Yes. So from a synergy perspective, we're still expecting to see the results of the synergy come through, slightly delayed from the project related to [ Elcom ], but those benefits will start to flow through because we're going live with that project last week and this week. So slightly delayed, but we're still expecting those synergies will flow through as we've guided previously.

And second question for me was just around -- I was interested in some of your comments on Slide 15 in terms of, I guess, managing the supply-demand balance going forward and the need for being, I guess, moderately oversupplied by renewable energy. Are you able to give us an indication of how much oversupplied you're thinking that the market should be?

Yes. So the work we've done to [ dimension ], this is particularly in relation to dry years in particular, and the work we've done to [ dimension ] the size of that issue indicates somewhere around 2 terawatt-hours gap. And then if you have a couple of dry years back to back, it probably grows up to close to 4 terawatt-hours. When we look at the stack of solutions that's likely to close that gap. As I mentioned, thermal definitely becomes a key part of that. The numbers were typically looked at from an oversupply is somewhere in that 0.3 terawatt-hour region. And if you compare that with the other solutions, it's part of the solution, but not the -- clearly, there's a number of those activities that need to take place.

Next up, we have Grant Swanepoel from Jarden. You want to unmute your mic.

I'm just going to follow on from Andrew as my first question. So your Manawa hedge is rolling off. You guys are building a whole lot of renewables, and you're talking about HFO as being a good thing, and then you're talking about maybe some overbuild. Are we seeing your company pushing quite aggressively to build as quickly as possible and potentially not worrying too much about costs? So follow-on from that question is, how do you see the wholesale price developing over time? I think the last time you guys spoke, it wasn't much over NZD 100 long-run marginal cost. Has that changed much in your book? I've got a couple more questions after this.

Sure. Thanks, Grant. So just in terms of your first question, the answer is no. We are heavily focused both on building renewables as fast as we can in a way that is commercially beneficial to the company and also provides generation for New Zealand's grid. Equally, the focus is on cost. A couple of reasons for the cost increase in the first half of this year, but certainly, there's a strong focus from myself and from the executive team and further into the organization to look at what we can do to bring those synergies to bear and to make sure the rest of our costs are in control. So the answer is we are focused very heavily on both. From a wholesale price perspective, I think that's your second question. I'd say that generally, we're pretty aligned with, I think Mike Fuge and the Contact team in their half year results was at last week, spoke to the range of NZD 115 to NZD 125. I would say that we're broadly aligned in terms of our perspective on that.

Okay. So that has moved up a little bit.

Yes. Much, much higher than that. And yes, in terms of pricing, we're not out of the woods yet. In terms of gas, gas supply is still highly uncertain around. I don't know, sovereign risk and willingness of upstream suppliers to commit. Gas is important. Huntly we've already called out is important and strategic around coal because in the absence of gas and coal in the short term is key. And yes, thermal fuels remain expensive and therefore, are still setting prices. So yes, it's difficult. The forward curve right out to '28 is still showing very elevated prices, and that's on the back of essentially prices jumping since 2018. So that's a 10-year stretch of elevated rates. So the only way that you're going to get prices down from a market solution is to effectively bring on new supply.

Yes. Because of all these pressures and uncertainties, are you going to follow the type of strategies that companies like Genesis are approaching, which is actually pulling back 1 to 2 terawatt-hours of retail exposure or load?

Well, no, because you can't because actually, the customers generally are demanding fixed price product. So if that's not being supplied by generators, then I think you've got a challenge because I don't think it's a good idea for anyone who's buying power to be sitting on spot prices. It's highly risky, and we're seeing the consequences of that. So I think it's incumbent on gentailers to effectively offer product because from a risk management perspective, suppliers are in a much better place to manage market risk than someone who makes [ widgets ]. So I think, yes, I think the industry as a whole needs to step up. And if customers want fixed power prices, which they do, then it's incumbent on us to supply that.

And we keep providing those when customers come forward, both in terms of fixed prices, but equally in terms of flexibility and flexible products.

And I'm going back to Andrew's first question on op costs. I'm still getting a disconnect. At the start of the year, you were talking about NZD 20 million of cost synergies coming through in FY '25, even though there was some inflation. Now you pushed that up NZD 25 million of NZD 9 million. So it's up NZD 16 million net. So in the second half, should we see cost synergies -- I mean costs come down, particularly as you're saying those cost synergies are delayed into the second half?

Yes. We're working through that. We've got a delay because our [ Elcom ], we haven't got to turn off SAP yet in terms of those retail synergies because we've only just gone live on [ Elcom ]. So we've got to get everything off that stack to be able to decommission SAP. So you've got delays causing an increase in cost in terms of [ Elcom ], but you've also got delays in turning off SAP. So you got a double cost. Our expectation is that, that will definitely occur before end of this financial year. So you'll see the benefits turning up in '26. But yes, we're right on the cusp of completing that work.

That's good news. And then my final question, just on those extra drills in Nga Tamariki next to the NZD 47 million. Without changing your maintenance CapEx from NZD 150 million, does that just mean that the drills continue at the same maintenance CapEx cost for this year and now that extra spills into FY '26?

Yes.

Goodbye, Will. It's been fantastic these last 20-odd years.

Thanks, Grant.

Okay, next up we have Cam Parker from Craigs. Just going to bring you on. You can unmute, Cam.

Just going back to the structural length you mentioned, Will, with your portfolio, you've traditionally managed it to about 400 gigawatt-hours long. Is there a change to that going forward that we should be thinking about?

We are increasing it, but you can increase it by contracting, which is different from it's not going to sell fixed customers.

Yes.

So yes, I think as we look to a world where you've got increasing intermittent renewables, flexibility becomes really important, and we all know that hydros can provide a lot of flexibility provided they've got water in the lake. And so therefore, a more conservative storage mentality is important. So I think you're going to find that. And I think you're seeing that right now across the board hydro operators.

And so what's the approach heading into this winter in terms of are you like [ MEL ], are you looking to lock in that cover straight away now? Or how are you managing your portfolio going into another year or another winter that looks like there's some dry year risk occurring?

Yes. Again, obviously, we're in a pretty dry segments at the moment. Droughts always break at some point. Yes. Again, if you look at that risk curve, it's still remote that you've actually got a real security issue. We are steering into quite elevated ASX prices. We've done -- yes, we've done contracting. We're managing our lakes. We're making sure the fleet is available. We're still comfortable with our position. Yes. But yes, if it stays really dry, yes, there's no doubt that will have an impact on earnings because we don't have a hedge for reductions in primary hydrology. That protects you from 0 cost power.

Yes.

Heading into this year, we're certainly managing the lake in a way that is trying to hit us into winter in a good spot. But it's been incredibly dry over the last few months. If you back that up with the loading of the HFO and MSO that we have with Genesis, combined with other contracting, which includes actually we are looking to have 50,000 households on hot water control management heading into this winter. It's about 20-megawatt peak load. So there's a number of activities underway to try and support that, but it will still make it very challenging if the rain doesn't fall.

Last one for me. Just in terms of the build cost and wind and so forth, I think we're a bit surprised at how high costs were going into Kaiwaikawe. Any update on that or any update on the market that you're seeing in terms of wind build costs?

Yes. I think it's still a good project. As you say it's marginal compared to some of the others we've done recently. And there's a few key reasons for that. One is the size of the wind farm, 77 megawatts capacity. It's smaller than some of the other wind farms that we've recently done and some of the next few key that are in our pipeline. The other is just the location, both from a grid access, even [ roading ] to get in and out. So there's some reasons for the capital cost of that project being higher than what we'd expect certainly have seen previously and what we might expect for the next few projects in our pipeline.

Cam, we're looking forward to see what [ MEL ] negotiates on [indiscernible] because that's probably the next [indiscernible] from a procurement perspective. So yes, there's no doubt that we're still seeing quite a lot of pressures from suppliers of generation equipment around pricing.

Guys, all the best for the future. Will, thanks for all your input over the years.

Thanks, Cam.

Next up, we have Steve Hudson from Macquarie. Want to unmute? Steve, you there?

Hi, can you hear me?

Yes.

Just a couple of quick ones from me. Just on the mass market, can you give us a feel for what I suppose credit stress you're seeing across your mass market portfolio, past due buckets or any kind of sense that you can give us?

Yes, we're still not seeing -- I think it's slightly deteriorated but nothing material. I think in the hierarchy of bill people pay, power still ranks quite highly. We're very focused around managing our vulnerable customers. You'll see the comments around 0 credit disconnections over the last 6 months, which is awesome. So we're still not seeing credit pressure come through in terms of the nonpayment of electricity bills.

Okay. That's useful. Just on solar, I know interested in, I suppose, both Will and Stew, your view, how you -- whether or not your thinking is changing as we come into potentially a second dry year, dry winter and the diversification benefits that solar may provide a portfolio like yours and the cost data points that we've seen, whether or not you're softening your view on solar, I suppose, is the question.

Yes. I'd say solar clearly has a key part to play in New Zealand future. We're talking primarily from a gentailer perspective, grid scale solar. And if that's the case, and we continue to want to be one of the big players in the market, then definitely it has to enter into our perspective future view. So whether that's through actually being a developer, a builder ourselves, or whether it's supporting offtake agreements to enable others to develop and build, it's in our thinking as we move through our generation and development pipeline. And there are the sorts of -- there's a number of projects which we'll be exploring to see how they fit. To date, we still think that the wind prospects that we have in our pipeline are really good and commercially stack up very well compared to some of those other alternatives we'll be looking at. But certainly, we'll continue to keep an eye on some of those solar opportunities as well.

Certainly there are some advantages. Obviously, the transporting large wind turbines to site is quite complicated versus solar. So the construction is relatively straightforward. We are worried about the back end of the ownership curve. So it looks fine today, but you put 2, 3, 4 gigawatts of solar into the grid, it's quite interesting when you start looking at summer daytime prices. So when you've got peak power and 0 spot, I don't know, doesn't sound like it's going to be worth a lot. Batteries don't really help you with that.

I guess it's interesting that the latest PPA that's gone off is a 10-year one, I suppose, in that vein.

[ Correct ].

Just one final one, just on geothermal. Congratulations on what appears to be a really successful Nga Tamariki drilling -- or sorry, expansion. Can you remind us what else you've got in terms of brownfield and greenfield in geothermal? I know we're getting to the bottom of it, but just an updated thinking there would be useful.

So, at the moment, there's nothing that we have publicly disclosed in terms of work either brownfields or greenfields. But certainly, as we look forward, there are a number of potential opportunities at the range of geothermal reservoirs we have. So as we work through with our partners at those sites as to what there could be, we'll share that as it comes to hand.

Could that be meaningful, Stew, the mix?

Definitely. Geothermal is a really important part of not only our portfolio mix, but New Zealand's mix. If you look at steady baseload supply, regardless of whether it's raining or shining or blowing. So yes, definitely, there's still potential opportunity inside New Zealand. We're talking conventional geothermal, right? We're not even talking supercritical, even just conventional geothermal, there's definitely some meaningful opportunities. I saw Contact talk to [ Sahara South ] and some of the Wairakei activities. But we think we've got some meaningful opportunities inside the Mercury portfolio also.

That's great. I'll also just add my voice to say thanks, Will, and all the best. I'm not sure how we're going to sum up 30 years of achievements, but I guess we'll try over a beer next time I see you.

Oh, yes. No, that sounds good. I think we are catching up for a beer. So there is no try. Let's do or do not, Steve. I vote for do.

Love it.

Thanks, everyone, for your questions. That's the end of the Q&A. Back to you, Stew.

Great. So thank you very much, everybody. As I mentioned, really wanted to thank the Mercury team for the work they've done to manage what has been a challenging first half and looking forward to playing our key part in the solution as we head into the second part of this year, and look forward to catching up with you all soon. Thank you.