Mercury derives much of its hydro power from the Lake Taupō catchment, in the Waikato. Photo / Brian Smith
New Zealand’s run of bad weather has at least benefited the power companies, which are due to report their results next month.
The high rainfall has filled the hydro lakes — which act as a giant battery for the electricity grid — keeping wholesale prices low.
And companies with fossil fuel-burning thermal assets — Genesis and Contact — have been able to rely more on their hydro stations, which are cheaper to run.
“The beauty of the power companies, unlike some of the other companies, is that they provide monthly operating statistics as to how they are going, so there are never any surprises by the time August results roll around,” said Mohandeep Singh, senior research analyst at Craig’s Investment Partners.
“We have obviously had really good hydro conditions.
“It’s been at record levels for the North Island — particularly for Mercury, because of the Waikato catchment,” he said.
“The [power] companies are being seen positively at the moment from that perspective, but also for the developments that they are doing for renewables.”
Singh said the possible closure in 2024 of the Tiwai Point aluminium smelter — which consumes about 12 per cent of the nation’s power — was now less of an “elephant in the room” as some of the bigger generators sought other sources of demand, helped along by the Government’s push to decarbonise the economy.
“The results will definitely be solid. My guess is that there will not be any negative surprises and there could be some positive surprises if they come in better than forecasts,” he said.
“Mercury is the obvious one. They have had a good run and they could surprise.”
Contact
Forsyth Barr expects Contact Energy (August 14) to finish its June 30 financial year strongly, mainly due to one-offs and aided by accounting changes.
The broker said Contact’s June month earnings before interest, tax, depreciation, amortisation and financial instruments (ebitdaf) of $83 million were its best on record, $2m ahead of the previous month’s record and $32m ahead of the previous comparative period.
However, its performance had been flattered in part by a $7m gain on the sale of its Te Rapa plant, and accounting changes.
The broker has forecast Contact’s full-year ebitdaf at $553m, $19m better than its old forecast and $24m better than the company’s guidance.
Genesis
Genesis Energy (August 24) has had a strong finish to 2023, with favourable commercial pricing outcomes and record fourth-quarter hydro generation lifting Forsyth Barr’s 2023 ebitdaf forecast by $10m to $532m.
“Whilst we maintain our view that the current dividend is unsustainable when Kupe [gas field] earnings start declining, positive earnings momentum is easing the dividend downside risk and we believe it is more than priced into the share price,” the broker said.
Key features of the fourth quarter’s operating statistics were the strong hydro generation numbers and strong commercial electricity pricing.
Record hydro generation of 874GWh capped a record 2023, with hydro generation 34 per cent above average.
“That has enabled record low thermal generation and a materially lower cost of generation,” Forsyth Barr said.
Mercury
Mercury (August 21) has capped 2023 with another quarter of strong hydro generation.
“Slightly higher than forecast generation volumes and stronger than expected financial sales pricing has lifted our 2023 ebitdaf forecast $25m (up 3.1 per cent) to $820m, and $25m above guidance,” Forsyth Barr said.
The broker said it had been a record-breaking year on several levels.
“Hydro generation was a new [Mercury] record, totalling 5209GWh. And it could have been more, with [Mercury] unable to generate and therefore spilling a further 1025GWh of water.”
While Mercury’s fourth-quarter generation was not a record, it was 34 per cent above average.
During the year, Mercury fully commissioned its Turitea wind farm and it has just completed a full 12 months with the Trustpower retail acquisition.
“These factors have combined to produce a record earnings year, with our revised ebitdaf estimate of $820m, up 39 per cent on the record-setting 2022 year,” Forsyth Barr said.
Meridian
Meridian (August 29) also broke hydro generation records, but that did not translate into earnings.
Cyclone Gabrielle created some significant challenges for Meridian’s Harapaki wind project, which the power company said had lost about three months due to the cyclone.
Harapaki is now expected to produce its first power in October this year and achieve full power in September next year.
Forsyth Barr said that while it was wet, it was not windy, and wind generation was 33 per cent below average, the lowest June month and second lowest on record.
Its forecast for ebitdaf is $782m, up 10 per cent on 2022.
There were four key drivers — two positive and two negative. “The positive earnings factors have been strong generation (5 per cent above average) and higher retail energy prices (up 11 per cent on full-year 2022).
“These have been partially offset by higher operating expenditure (up 14 per cent) and weak wholesale electricity prices due to high hydro generation nationwide,” it said.
Units in the NZX-listed Carbon Fund rallied sharply, reflecting a boost in the spot price for Emissions Trading Scheme NZ units (NZU) following a change of heart by the Government.
Salt Funds, which manages the Carbon Fund, welcomed the Government’s decision to adjust the Emissions Trading Scheme (ETS) auction settings.
Carbon auction price floor settings will rise from the current level of $33.06 to $60 in December, with further increases thereafter.
In December, the price to trigger any release of extra NZU volumes from the Cost Containment Reserve (CCR) will be $173 rather than the current trigger price of $82.
In 2024, the total CCR volume will decrease from 8 million NZUs under the current settings to 7.7 million NZUs, and will continue decreasing in the following years.
The Government has accepted most of the Climate Change Commission’s recommendations from 2022 but has made earlier cuts to the volume of units available at auction, thereby smoothing out the steep rate of decline that would have otherwise been needed from 2026.
The price of NZUs rallied sharply to $63.50 on the news. One NZU allows a polluter to emit one tonne of carbon dioxide.
Salt Funds managing director Paul Harrison said the moves effectively reduce the supply of available units, which will tighten up the market.
“They needed to put some confidence back into the market because the market had become concerned that the Government was not as committed to the ETS and to an appreciating carbon price, when it ignored the Climate Change Commission’s advice last year,” he told Stock Takes.
“The market wanted a clear signal from the Government that they were committed to this, so that they can make investment decisions and invest in new technology to reduce carbon emissions,” Harrison said.
Claire Higgins, Ryman Healthcare’s interim chairwoman, opened yesterday’s annual meeting by saying the resumption of dividend payments in the 2024 year was being considered.
The retirement village company’s underlying profit for 2024 is expected to be in the range of $310m-$330m.
“The board will consider the resumption of paying dividends in 2024 taking into account trading performance, cash flow and market conditions,” she said.
The board was in the process of reviewing the dividend policy and would look to provide an update at the time of the interim results in November.
In February, Ryman asked shareholders to stump up $902m to help repay debt, and said it would not pay a full-year dividend.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
Fletcher Building, Spark and Ryman are potentially all on the radar.