UPDATE: Mercury earnings fall less than expected on geothermal offset
(Adds detail, broker comment from 6th paragraph)
By Paul McBeth
Aug. 20 (BusinessDesk) - Mercury NZ's annual operating earnings fell 11 percent, less than forecast, as record geothermal production helped offset a dry spell in the North Island that weighed on its hydro schemes.
Earnings before interest, tax, depreciation, amortisation and financial instruments declined to $505 million in the 12 months ended June 30 from a record $566 million a year earlier. That was better than the $495 million Mercury forecast in April. Forsyth Barr analyst Andrew Harvey-Green predicted earnings of $503.7 million as generation levels returned to normal in the second half of the year.
However, Mercury's net profit climbed to a record $357 million from $234 million a year earlier. That included a $177 million gain on the sale of its Metrix metering business. It sold the unit to IntelliHUB Group for $270 million. Revenue rose 11 percent to $2 billion.
"Making the most of the challenging hand dealt by Waikato catchment inflows and elevated spot pricing required a very strong performance from generation and wholesale markets teams in FY2019," chief executive Fraser Whineray said.
Mercury enjoyed two years of above-average inflows at its Waikato hydro catchment and generated a record 7,704 gigawatt hours in the 2018 financial year. Drier conditions in the North Island through much of the latest year saw Mercury generate 6,902 GWh, including a record 2,896 GWh from geothermal plant.
Greg Smith, head of research at Fat Prophets, said the result was a good one considering the inclement weather Mercury faced.
"Strong generation and high spot prices have made for an operational and financial sweet spot, but it is encouraging that Mercury is also planning for the future, investing in key existing assets, such as the refurbishment of Karapiro, and with an eye on growth elsewhere, particularly in renewables and the move into windfarms," Smith said.
Mercury spent $115 million on capital spending in the year, of which $89 million was stay-in-business investment on refurbishing its hydro assets and consolidating its Auckland office. The other $26 million was spent on growth projects, largely to do with the $256 million windfarm it plans to build at Turitea.
The company expects to spend $105 million on stay-in-business capital investment in the current financial year, including refurbishing three hydro power stations and drilling two wells at Kawerau.
The board declared a final dividend of 9.3 cents per share, payable on Sept. 30 to shareholders on the register on Sept. 13. That takes the annual payment to 15.5 cents, compared to 15.1 cents last year.
The company forecast lower ebitdaf for the 2020 financial year of $485 million based on average generation of 6,620 GWh, although it expects to pay a bigger dividend of 15.8 cents.
The earnings projection assumes increased operating costs from multiple geothermal shuts and ongoing hydro refurbishment, and anticipates growth from improving margins, cost transparency and the general trading performance.
The shares slipped 0.3 percent to $4.925 in early trading, having hit a record this month as investors flock to stocks offering reliable dividends in an environment where global interest rates remain on a downward trajectory.
Smith said low rates have been providing a tailwind for earnings and the share price, which has climbed 35 percent so far this year despite the higher price pushing down the dividend yield.