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Mercury grows earnings and engagement

21 August 2018

Mercury grows earnings and engagement in year of strong execution

Summary

>> Operating earnings (EBITDAF) $561 million, up 7%

>> Net profit after tax $234 million, up 27%

>> Final ordinary dividend 9.1 cents per share fully imputed to be paid on 28 September 2018

Record hydro generation for a second consecutive year has driven another record financial result for Mercury (NZX:MCY) in the 12-months to 30 June 2018. An emphasis on enabling people and their performance saw further growth in employee engagement and the successful delivery of major reinvestment and several key customer-focused innovations.

Mercury today reported a 7% lift in operating earnings (EBITDAF) to $561 million for the 2018 financial year ($523 million FY2017). The record result was significantly influenced by strong and timely hydro inflows across the Waikato River catchment, and high geothermal availability was maintained. Total hydro generation of 4,947GWh for the year was 947GWh (24%) ahead of average generation and up on FY2017’s record of 4,724 GWh. The lift in Waikato hydro generation above average increased New Zealand’s proportion of renewable electricity by more than 2%. Total generation including geothermal was 7,704 GWh (7,533 GWh FY2017).

Financial Results

FY2018FY2017FY2016 FY2015FY2014
EBITDAF ($M)561523493482504
NET PROFIT AFTER TAX ($M)23418416047212
UNDERLYING EARNINGS AFTER TAX ($M)198176152145185
FULLY IMPUTED ORDINARY DIVIDEND (CENTS PER SHARE)15.1*14.614.314.013.5
FULLY IMPUTED SPECIAL DIVIDENDS

(CENTS PER SHARE)

5.0 7.5
UNIMPUTED SPECIAL DIVIDEND (CENTS PER SHARE) 4.0 -
SHARE BUYBACK$50m $50m
ELECTRICITY GENERATION (GWh)7,7047,5336,8426,5366,295

* above guidance of 15.0 cps reflecting share buyback reducing the number of shares on issue.

Mercury’s chief executive, Fraser Whineray, said that sustaining high levels of operational performance while executing a number of key strategic projects puts Mercury in a strong position for the year ahead.

Key projects during the year included a major ICT systems upgrade, completion of Metrix’s meter data project upgrade expanding its ability to provide certified half-hourly meter reads; hydro refurbishments at Aratiatia and Whakamaru stations (ongoing); and major maintenance outages at geothermal stations.

Employee engagement increased to 81.5% from 81% as measured by the 2018 IBM Employee Engagement Survey Index. During the year Mercury received major honours at the IBM Best Workplace Awards and the New Zealand HR Awards.

The Mercury brand maintained its trader churn (customer switching to an alternative retailer) advantage at 6.4% compared to the rest of the market at 8.1%.

“Retail market conditions remain very competitive, however our brand and customer service activity, focused on inspiring, rewarding and making things easy for our customers, continues to show strong results,” Mr Whineray said.

Mercury brand activity from the prior year won the two top awards at New Zealand’s premier marketing events during FY2018 year, claiming top spot against marketing heavyweights such as Air New Zealand and Z Energy.

“Mercury is benefitting from developing a distinctive brand. We advanced our e-bike campaign and launched a high-profile integrated campaign utilising a converted classic ’57 Ford Fairlane to challenge misconceptions about electric vehicles (EVs).”

Brand recognition has increased strongly to 63% from 43% since Mercury’s brand relaunch in 2016.

Mercury executed a $50m share buyback through the year. Mercury also completed the purchase of a 19.99% stake in Tilt Renewables (NZX/ASX:TLT), a company with significant operational and consented wind generation interests in Australasia, in May.

“Our shareholding in Tilt is an extension of our long-term growth strategy. It gives Mercury a meaningful interest in significant development opportunities related to Australia’s accelerating transition to renewable energy sources and is part of Mercury’s broader wind strategy which has been worked on for more than a decade,” Mr Whineray said.

Net profit after tax increased 27% to $234 million from (FY2017 $184 million), reflecting higher earnings partially offset by higher tax expense. Underlying earnings after tax increased 13% to $198 million (FY2017 $176 million).

Operating costs were flat for the fifth consecutive year at $214 million and remain $45 million below their peak in FY2012.

Stay-in-business capital expenditure remained elevated beyond normalised rates at $112 million (FY2017 $114 million) reflecting ongoing hydro refurbishment and ICT investment.

Dividend

Mercury Chair Joan Withers says Mercury’s nearly 85,000 owners, including the Crown, will receive a final ordinary dividend of 9.1 cents per share, fully imputed. This brings full year final ordinary dividend payments to a total of 15.1 cents per share, fully imputed, up 3.4% on FY2017. This is above guidance and reflects the reduced number of shares on issue following the completion of the $50 million share buyback. It is Mercury’s tenth consecutive year of ordinary dividend growth.

“We are pleased to continue to deliver strong shareholder returns while executing on our strategy that includes delivering sustainable growth.” Mrs Withers said.

“Execution of Mercury’s priorities this year has been impressive and I acknowledge the contribution to that of people right through the business, along with the support of shareholders, partners and the loyalty of customers.”

FY2019 Guidance

EBITDAF guidance is $515m for FY2019, based on forecast hydro generation of 4,200 GWh. This guidance is subject to any material events, significant one-off expenses or other unforeseeable circumstances including hydrological conditions.

Operating expenditure is forecast to be flat versus FY2018; maintained at a similar level for the sixth year in a row. Stay in business capital expenditure guidance is $95 million. This expenditure supports ongoing hydro and geothermal investments that contribute to efficient generation, technology aligned to customer needs, and investment in people and culture through Mercury’s Auckland office consolidation.

Ordinary fully imputed FY2019 dividend guidance has been issued at 15.5 cents per share, a 2.6% increase on FY2018.

Mercury will continue to provide updates of its mid-point estimate of full-year hydro generation with its quarterly operating statistics.

Outlook

Mr Whineray said that Mercury was well positioned to build momentum through developing its people, inspiring its customers and executing on its growth strategy.

“Notwithstanding strong execution, weather can be fickle year on year, and our role is to maximise the outcomes from the hand we are dealt,” Mr Whineray said.

“We expect continued electricity demand growth. While industrial demand decline remains a trend, we see this being partially offset over the medium-term as industrials shift energy use away from fossil fuels.”

Mr Whineray said that the expected restarting of New Zealand Aluminium Smelter’s fourth potline at Tiwai Point, Southland, is expected to contribute around 1% annually to demand growth.

ends

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