Mercury earnings affected by lower generation

Below average generation due to drier Waikato hydro conditions impacted on Mercury’s earnings for the financial half-year to December 31.

So says departing chief executive Fraser Whineray who adds that scheduled maintenance on several geothermal stations and the sale of smart metering business Metrix also impacted on Mercury’s earnings.

He says while earnings (EBITDAF) of $258 million and net profit after tax of $83m was down on the near-record prior corresponding period ($302m and $104m respectively), when adjusted for lower generation and the Metrix sale the result reflected strong execution across Mercury’s business.

“While hydro generation was below the mid-point forecast we had at the start of the financial year, our portfolio strategy has captured opportunities in this dynamic environment,” Whineray says.

Hydro generation was down 306GWh to 2142GWh (2448GWh HY2019) while geothermal generation was down 71GWh to 1286GWh (1357GWh HY2019).

“A deliberate portfolio strategy to maintain a longer net-generation position, particularly from October, has been positive for earnings and risk management,” Whineray says.

“Applying our expanded analytics capability helped enhance integration of our portfolio approach with our customer strategy.

“We have been able to better apply insights to digital initiatives that reward loyalty and value. Mercury’s focus on customer value rather than growing customer numbers at all costs saw mass market customer numbers down 16,000, however we achieved a 1.8% uplift in yield across our mass market segment through disciplined portfolio management.”

Operating expenditure was $94 million ($99m HY2019). Mercury’s stay-in-business capital expenditure (SIB capex) was $53m, up $8m on the prior corresponding period due to scheduled geothermal well drilling costs.

Free cash flow at $127m ($126m HY2019) was slightly up due to lower interest costs, tax paid and elevated working capital requirements in the prior corresponding period.

Whinery says Mercury expects to see ongoing challenging wholesale conditions due to national thermal fuel and transmission constraints.

However, he says the company’s portfolio is well positioned.

“Intense competition in retail and strained retail margins will continue to be a feature. I also anticipate further competitor decisions on new generation development and retirement.

“Mercury is well positioned for the full year as a result of our portfolio and channel management, reinvestment activities in generation, digital and our people, and new investment decisions.”

Mercury’s FY2020 EBITDAF guidance has been revised to $500 million and FY2020 SIB capex guidance is $120m, up $15m from initial guidance due to costs related to bringing forward the drilling of a geothermal well at Rotokawa.

FY2020 ordinary dividend guidance remains at 15.8 cents per share, fully imputed, representing a 2% increase on FY2019 and the 12th year of progressive ordinary dividends.

Mercury chair Prue Flacks says the board had approved a fully imputed interim dividend of 6.4 cents per share, an increase of 3.2% on HY2019, to be paid on April 1.

Total shareholder return across the 12-months to December 31, 2019 was 43%.

Whineray leaves Mercury in March to take up a new role at Fonterra.

Trustpower chief executive Vince Hawksworth succeeds Whineray, joining Mercury in late April.