Mercury earnings strong despite less water

Mercury came close to matching last financial year’s record first half performance despite less favourable hydro conditions in the Waikato catchment leading to lower hydro generation.

Chair, Joan Withers said that earnings (EBITDAF1) of $302 million ($304 million2 HY2018) reflected strong execution across the entire business, underpinned by record spot market prices, a lift in net sales yields, a disciplined focus on costs and strong execution of the planned work programme.

Mercury will pay a fully-imputed interim dividend of 6.2 cents per share on 1 April 2019 to its nearly 85,000 owners, including the Crown. This represents 40% of the full-year ordinary dividend guidance of 15.5 cents per share, an increase of 2.6% on FY2018.

“The period once again saw strong, focused execution of the company’s strategy. Mercury’s people have excelled in many areas core to our business,” Mrs Withers said.

FINANCIAL RESULTS

EBITDAF for the period was boosted by movements in energy margin, where elevated wholesale price volatility and increased geothermal generation experienced during the period came close to compensating for the higher hydro generation output in the prior comparable period.

Net profit after tax for the period of $104 million was down from $131 million2 (HY2018), negatively impacted by the change in fair value of financial instruments (reflecting higher futures prices). Underlying earnings were steady at $114 million.

Stay-in-business capital expenditure of $45 million ($59 million HY2018) was focused on the advancement of refurbishment work at Whakamaru and Aratiatia hydro stations, IT enhancements and the progression of Mercury’s Auckland office consolidation to Newmarket which brings together around 550 people from multiple locations.

At $99 million for the period, operating expenditure was in line with HY2018.

HY2019 MILESTONES

Mercury Chief Executive Fraser Whineray said that the ongoing programme of investment in core assets, such as the refurbishment of Whakamaru and Aratiatia hydro stations contributed to the long-term sustainability of the business, while securing the country’s renewable energy advantage. The programme is being further advanced, with a $75 million modernisation project for Karapiro announced in January.

“We are now five of nine stations into a carefully prioritised programme of upgrades that secures Mercury’s ongoing operations for the long term, while delivering valuable capacity and efficiency improvements,” Mr Whineray said.

In the first quarter of the period, Mercury commissioned a grid-scale and grid-connected battery at its Penrose R&D centre, trialling automated trading of battery stored electricity. The trial discharged 285MWh back into the grid in the first quarter of operation.

DELIVERING CUSTOMER ADVOCACY

Mercury also advanced the ease by which customers can interact with the business through the successful launch of its Mercury Go app, which has already achieved more than 30,000 downloads.

Mercury’s focus on customer value contributed to a reduction in customer numbers of 7,000 over the period but delivered a 4% lift in the net sales yield across the mass market segment. Mercury brand trader churn, where a customer changes retailer without moving house, at 7.4%, continues to be maintained at a rate lower than the market average (8.0%).

SPOT MARKET VOLATILITY

Mr Whineray noted that the sector experienced significant spot market volatility in the period, driven by an unusual alignment of factors including multiple unplanned disruptions in New Zealand’s natural gas sector and low hydro inflows across the country.

“For context, however, the spot market still did not reach the Electricity Authority’s stress test scenario of $250/MWh for a quarter. The Authority’s quarterly stress test is something that every electricity market participant’s board of directors is aware of, by design,” Mr Whineray said.

Importantly none of Mercury’s mass market customers were impacted by those spot market conditions.

Mr Whineray said there were still lessons, and opportunities for improvement in how the sector responds.

“We believe the electricity market would benefit from a much stronger disclosure regime from thermal generators concerning their fuel position and upstream gas and coal supplies, which would make it equivalent to the ability to monitor hydro positions (lake levels) which are available in real time.”

FY2019 GUIDANCE CONFIRMED

Mercury’s FY2019 EBITDAF guidance remains at $515 million with anticipated 4,150GWh of hydro generation, subject to any material events, significant one-off expenses or other unforeseeable circumstances including hydrological conditions.

FY2019 stay-in-business capital expenditure guidance remains at $95 million.

The full year ordinary dividend guidance remains at 15.5 cents per share, up 2.6% on FY2018. This would represent the 11th consecutive year of ordinary dividend growth.

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