Mercury’s earnings up, generation down

Lower hydro generation didn’t dampen Mercury’s returns for the half year ended December 31, 2020.

Lifts showed across all key financial measures due to careful management of generation and retail portfolios, astute contract trading and ongoing cost control, the electricity generation and retail company says.

Mercury has demonstrated resilience faced with ongoing COVID-19 uncertainty, sustained elevated wholesale and futures price for electricity and a highly competitive environment, its chief executive Vince Hawksworth says.

With such conditions forecast to continue, Mercury is pressing forward with changes to deliver ongoing success, he adds.

The ability to plan for an orderly exit of the Tiwai aluminium smelter sees Mercury remain relatively well positioned for this eventuality with sources of renewable electricity generation located close to key areas of demand.

And the Climate Change Commission’s draft report in February presents a number of opportunities, with renewable electricity seen as key driver to decarbonising the New Zealand economy.

“Mercury is looking forward to supporting swift action from the Government to respond to the findings,” Hawksworth says, adding it is pleasing to see strong support for transport electrification, with the Government already committed to an emissions standard and considering other incentives to support a faster transition.

Mercury recently announced an executive restructure, implemented from February 2.

“We are undertaking process and operational changes aimed at enhancing efficiency and effectiveness and are reviewing both our long-term asset management plans and our customer strategy to ensure they are fit and flexible enough for such a dynamic environment,” Hawksworth says.

“Guiding our evolution is our desire to balance the internationally recognised energy trilemma of ensuring that we achieve our sustainability goals, keep the lights on for New Zealanders and do this all at the least cost for consumers.”

Mercury’s earnings (EBITDAF) were $294 million, up $36 million on the prior comparable period.  Higher energy margin associated with generation and customer portfolio decisions, additional trading profits and cost control, partially offset by 108GWh lower overall generation, explain most of the earnings uplift.

Net profit after tax (NPAT) was up $47 million to $130 million due mostly to higher EBITDAF and Mercury’s gain on sale recognised from the sale of its interest in Hudson Ranch and its geothermal power station in California receiving net proceeds of about $40 million.

Operational expenditure of $87 million was down $7m on the prior comparable period.

Total capital expenditure for the period was $148m (up $54m), comprising $27m stay-in-business (SIB) expenditure and $121m relating to growth with $115m related to the Turitea wind farm construction and $5m for its Rotokawa geothermal plant upgrade which will increase output across the Rotokawa field by 5MW from FY22.

Construction of the Turitea wind farm continues with transmission infrastructure (scaled for future development at Puketoi) now largely complete.

Delivery delays mean completion of the northern turbines is unlikely until October and construction of the southern turbines is also delayed until about July 2023.

Overall customer numbers were down 3% to 336,000, during the period – expected given Mercury’s focus on value and lower acquisition of customers in a high wholesale price environment which is forecast to continue.  Reduced mass market volume has been replaced with higher yielding wholesale sales.

Work at Rotokawa geothermal station to boost output by optimising its geothermal fuel mix remains on track to deliver an expected 4-5MW uplift in generation capacity.

Mercury chair Prue Flacks says the board has declared a fully imputed interim dividend of 6.8 cents per share payable to more than 75,000 owners, including the Crown. This represents an increase of 6% on the HY20 dividend and equates to 40% of the guided full year normal dividend of 17 cents per share.

The dividend will be paid on April 1.

Mercury aims to deliver a $30m EBITDAF benefit in FY22.

Mercury’s FY21 EBITDAF guidance has been revised from $535m to $520m, reflecting an expected 100GWh decrease in full year hydro generation to 3800 GWh due to dry weather in the Taupo catchment since mid-January and ASX electricity futures indicating wholesale prices will remain elevated for the remainder of the financial year.