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Tilt strategy still emerging - Mercury

Tuesday 21st August 2018

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Mercury NZ needs to participate in wind development if it is to materially benefit from the shift to renewables, but says it’s too early to say how its investment in Australia’s Tilt Renewables will play out.

Tilt has the best pipeline of development options in Australia’s fast-growing renewables market and that’s why Mercury bought into the Melbourne-based business, chief executive Fraser Whineray told analysts and investors today.

Building its own platform of projects in Australia would have taken years. It will learn more about wind and utility-scale solar development as Tilt’s projects are developed, and other options for adding value may yet emerge, he said on a conference call.

Whineray noted that the firm last week found itself making a joint takeover offer for Tilt in partnership with Infratil, having only bought its initial stake 90 days earlier.

Infratil is an astute and “very active manager” and he could see three or four different scenarios for getting additional value from the Tilt portfolio. But how and when they might unfold was hard to say.

“It’s not a one-off thing,” he said. “Think about it more as a series of chess moves.”

Mercury shares were unchanged at $3.41 on the NZX. They have gained about 2 percent this year.

Mercury is the biggest hydro generator in the North Island where it also operates five geothermal plants. It spent almost a decade through 2013 identifying and then consenting wind options in the lower North Island but has yet to erect any of its own turbines.

Tilt, split out of Trustpower in 2016, has just completed its fifth wind farm in Australia and is preparing to spend about A$600 million on its sixth. It also has a string of wind and solar development options there. In New Zealand it operates the Tararua and Mahinerangi wind farms and also has further consented development options at Mahinerangi, at Kaiwera Downs in Southland and at Waverley on the southern Taranaki coast.

Whineray said Mercury’s sites at Turitea, south-east of Palmerston North, and on the Puketoi Range in Wairarapa are among the best in the country. Given the transmission connection between the two, Turitea would logically be built first, he said, but he wouldn’t say when that might be.

Electricity demand is picking up again and the move to greater electrification of transport and industry will also boost demand long-term.

But generators say new capacity may not be built for some years, given flat forward power prices and smaller increments coming to market through plant upgrades and solar. New Zealand homes and business added about 18 MW of solar in the year through July, taking national capacity to 78 MW, according to Electricity Authority data.

Mercury paid about $144 million for its Tilt stake, its biggest chunk of new investment in five years. Two years of strong hydro inflows, record generation, strong cash flows and low debt levels meant the firm was able to make that investment while also increasing its ordinary dividends and spending $50 million on a share buy-back.

Chief financial officer William Meek told analysts that, should Tilt proceed with its 336 MW Dundonnell wind project in Victoria, much of the A$60 million Mercury will need to put up can be funded from free cash flow.

Assuming a return to more normal hydrology, the firm should increase its underlying earnings by about $10 million this year from a combination of measures, mostly from reducing complexity in its charging and reconciliation, Meek said.

“It’s not about prices changing, although price changes may flow from that.”

Mercury earlier today reported record full-year operating earnings of $561 million, 7 percent more than a year earlier. Net profit of $234 million was also a record and a 27 percent increase from the year before.

A second year of high inflows pushed the firm’s total generation to a record and enabled it to profit from high prices last winter and again over the summer months when South Island lakes were low.

Whineray said the firm had done well to turn an extra 220 GWh of hydro production into $40 million of earnings at a time when it was also completing upgrades at four of its geothermal plants and at its Aratiatia and Whakamaru dams.

“The rain can fall but it takes a heck of a lot to capitalise on it in the way that we have.”

Mercury’s guidance on 2019 ebitdaf at $515 million assumes 4,200 GWh of hydro production – 5 percent above the long-term average - and operating expenditure unchanged at about $214 million for a sixth straight year.

The company is forecasting stay in business capex of $95 million this year, down from $112 million the past year. The forecast includes on-going upgrades at the Aratiatia, Whakamaru and Karapiro hydro stations, but also about $16 million for the firm’s relocation to new offices in Auckland.

Storage in Lake Taupo was equivalent to 423 GWh of generation yesterday, 28 percent above average for this time of year, according to NZX Energy data. National storage was equivalent to 2,578 GWh, 6 percent above average for late August.


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