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Fickle rainfall favours Mercury, Genesis in gen-tailers' first-half earnings

Tuesday 27th February 2018

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Reporting season was a tale of two islands for the electricity sector as dry South Island conditions sapped first-half earnings for Contact Energy and Meridian Energy, forcing them to lean on backstop Genesis Energy, while Mercury NZ's North Island hydro schemes were inundated with rain. 

Forsyth Barr analyst Andrew Harvey-Green said the results "were in line with what we were expecting given what the hydrology had done".

"Obviously, it's very different from what we had been expecting at the beginning at the financial year but then the rain came in the right places or the wrong places, depending on how you look at it and that changed the expectations quite a bit."

New Zealand's spring and summer months left hydro-lakes in the South Island at levels below average, meaning Meridian and Contact were more reliant on elecricity purchased from the wholesale market, where prices more than doubled. that was a boon to Genesis and its Huntly back-up supply, while heavy rainfall in the North Island bolstered Mercury's nine hydro generation stations on the Waikato River.

Auckland-based Mercury today lifted first-half profit 17 percent to $132 million in the six months ended Dec. 31 on record generation, driven by favourable North Island rainfall. Earnings before interest, tax, depreciation, amortisation and fair-value adjustments rose to a record $301 million from $270 million. It also operates five geothermal plants in the North Island. 

Earlier this month, Genesis reported a 28 percent gain in first-half earnings, underpinned by a 29 percent gain at its wholesale division to $106.4 million as low South Island hydro-lake levels swelled demand for wholesale electricity. Genesis provides access to back-up supply in the event of a dry year and during periods of peak demand.  Its portfolio of thermal generation and renewable generation assets located in different parts of New Zealand, including the Huntly Power Station, which runs on both natural gas and coal. 

In contrast, Meridian, the country's biggest generator, posted a 7 percent fall in first-half earnings as low inflows into its South Island hydro catchments reduced its electricity output. Meridian has seven hydro stations on the South Island and also generates power from wind and solar. 

Contact Energy's first-half earnings fell 11 percent and its earnings from generation dropped 13 percent to $173 million in the half due largely to a 21 percent decline in hydro generation to 1,635 GWh due to record low inflows to the Clutha dam. 

Trustpower didn't report first-half results this month as its financial year ends March 31 but in January the Tauranga-based company affirmed annual earnings guidance, having raised its outlook three times this financial year on strong wholesale electricity prices.  

Harvey-Green said most companies cannot easily buffer themselves from weather-related issues. "The one company that has more stability around that is Genesis in terms of its own portfolio and the plants it can run which to support the rest of the market," he said.

Overall, he noted while earnings got pushed around, the sector as a whole registered little volatility on the share market. 

Mercury recently traded at $3.22 and has gained 2.9 percent over the past 12 months while Genesis was recently at $2.345, up 9.6 percent over the past year. Meridian shares were at $2.835 and have lifted 5.2 percent since this time last year while Contact is at $5.28, up 9.3 percent on the year.  

Looking ahead, Harvey-Green said it is impossible to predict whether companies will meet their full-year guidance as it all depends on "where it rains."


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