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Mercury Earnings Impacted By Lower Generation

HY2020 Financial Results Summary

 HY2020ChangeHY2019
EBITDAF ($M)258 15%302
NET PROFIT AFTER TAX ($M)83  20%104
UNDERLYING EARNINGS AFTER TAX ($M)90 21%114
STAY-IN-BUSINESS CAPITAL EXPENDITURE ($M)53 18%45
FREE CASH FLOW ($M)127 1%126
FULLY IMPUTED ORDINARY DIVIDEND (CENTS PER SHARE)6.4 3.2%6.2

25 February 2020 Below average generation and the divestment of smart metering business Metrix impacted Mercury’s earnings for the financial half-year to 31 December 2019, Chief Executive Fraser Whineray says.

Mr Whineray said that while earnings (EBITDAF) of $258 million ($302 million HY2019), and net profit after tax (NPAT) of $83 million ($104 million HY2019), were down on the near-record prior corresponding period, when adjusted for lower generation and the sale of Metrix the result reflected strong execution across Mercury’s business.

Highlights included:

· committing to complete the construction of NZ’s largest windfarm at Turitea by building the remaining 27 consented turbines, adding to the 33-turbine project announced earlier in 2019

· effective portfolio management to capture opportunities in a dynamic wholesale and retail market

· investment in data science and analytics capability to better inform our customer strategy

· configuration of Rotorua and Maraetai workspaces to support a more collaborative and high-performance team environment

· completion of an upgrade to our Maximo asset management system

· management of planned geothermal maintenance shuts

Generation during the period reduced by 377GWh to 3,428GWh due to drier conditions in the Waikato and important scheduled maintenance on several geothermal stations as part of Mercury’s long-term asset management plan.

Hydro generation was down 306GWh to 2,142GWh (2,448GWh HY2019) while geothermal generation was down 71GWh to 1,286GWh (1,357GWh HY2019).

“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,” Mr Whineray said.

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

“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,” Mr Whineray said.

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

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

INTERIM DIVIDEND

Mercury’s Chair Prue Flacks said 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 1 April 2020. This represents approximately 40% of the full-year ordinary dividend guidance of 15.8 cents per share.

Total shareholder return (TSR) across the 12-month period to 31 December 2019 was 43%.

Ms Flacks noted that this interim report was Fraser’s last as Chief Executive, before he leaves in March for a role at Fonterra.

“Fraser has been an inspiring leader for Mercury, and a pleasure to work with,” Ms Flacks said.

Mercury has appointed former Trustpower Chief Executive Vince Hawksworth to succeed Mr Whineray, with Mr Hawksworth joining in late April.

FULL YEAR OUTLOOK

Mr Whineray said Mercury expects to see ongoing challenging wholesale conditions due to national thermal fuel and transmission constraints, however 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,” Mr Whineray said.

“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.”

GUIDANCE

Mercury’s FY2020 EBITDAF guidance has been revised to $500 million, subject to any material events, significant one-off expenses or other unforeseeable circumstances including hydrological conditions. Guidance at the time of this report assumes 3,900GWh of hydro production. FY2020 SIB capex guidance is $120 million, up $15 million 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.

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