Mercury Quarterly Operational Update

17 October 2018

Three months ended 30 September 2018

Generation above-average; hydro GWAP improves with increased hydro flexibility

17 October 2018 – Mercury's strong starting storage position enabled hydro generation of 1,446GWh during the quarter. This fell from record quarterly generation in the prior comparable period but remained at the 84th percentile1, contributing to total generation of 2,179GWh including stable geothermal output.

Mercury's LWAP/GWAP ratio moved favourably to 1.07 versus 1.09 in the same quarter last year as the timing of inflows enabled Mercury to utilise its hydro asset flexibility, shown through the increase in the relative value of our hydro generation with hydro GWAP/TWAP being 1.09 versus 1.07.

Average wholesale prices for the quarter were $87/MWh at Otahuhu and $77/MWh at Benmore, decreasing by $6/MWh and $19/MWh respectively from Q1-FY2018 (which was affected by dry hydrological conditions). Prices increased over the quarter as national hydro storage declined from 103% to 85% of average. Wholesale market conditions were further impacted by an ongoing Pohokura gas outage commencing in September which is expected to last till late November.

Short-term futures prices responded strongly to the changes in wholesale market conditions with the FY2019 Otahuhu price lifting more than $14/MWh from $73.91/MWh at the start of the quarter to $88.17/MWh by the end of the quarter (with a further increase to $141.38/MWh as at 15 October 2018). Longer-term futures prices remained largely unchanged despite the tightening supply and demand dynamic and the increased volatility observed in wholesale prices.

Sustained high competition increases churn

Strong competition, especially in the North Island, resulted in Mercury's customer numbers across all brands decreasing by 2,000 to 386,000 at the end of the quarter. As at 30 September 2018, Mercury group churn increased to 20.0%2 which remains below market churn at 21.1%2; churn for the Mercury brand also increased to 16.8%2 (from 14.7%2 as at 30 September 2017). Mercury churn levels for the quarter were impacted by the transfer of customers from Tiny Mighty Power to the main Mercury brand (which will also impact churn in the following quarter).

Mass Market electricity sales VWAP was higher at $127.04/MWh. IFRS changes relating to the treatment of customer credit acquisition costs have reduced this yield by $1.41/MWh compared to the previous standard with the Commercial & Industrial segment VWAP being unaffected.

Urban and rural sectors lead underlying demand growth

National demand continues to grow despite warmer than average temperatures, increasing by 1.4% on a temperature-adjusted basis (+1.1% on an unadjusted basis) versus the prior comparable period. This increase was primarily driven by the urban (+0.5%) and rural (+0.5%) sectors with the dairy sector (+0.2%) also contributing.

1 For quarters ended 30 September since 1999
2 12-monthly rolling average

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ENDS

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