Mercury Quarterly Operational & EBITDAF Guidance Update

Mercury Quarterly Operational Update
Three months ended 31 December 2018

Spot prices rise due to national hydro conditions and thermal fuel constraints

23 January 2019 – Dry conditions, with national hydro inflows at 86% of average1, combined with limited thermal fuel availability resulted in record spot prices for the quarter. Average spot prices reached $206/MWh at Otahuhu and $175/MWh at Benmore; an increase of $113/MWh and $85/MWh respectively from Q2-FY2018.

Generation down from record levels; GWAP lift

Mercury's hydro generation during the quarter was 1,002GWh, a 170GWh decrease from record levels in the prior comparable period, with Waikato catchment inflows at 84% of average1. Mercury's full year hydro generation forecast has been reduced by 50GWh to 4,150GWh.
The value of Mercury's generation improved as the LWAP/GWAP ratio moved favourably from 1.06 in Q2-FY2018 to 1.04 in this quarter due to the timely dispatch of available generation. This was largely driven by higher hydro generation in October, the highest-priced month in the quarter, and illustrated through the positive movement in the hydro GWAP/TWAP ratio from 1.04 in the same quarter last year to 1.11. Geothermal generation increased year-on-year as output in the previous year was reduced by two-yearly maintenance outages.

Wholesale market conditions lead futures higher; long-term price expectations lifted

The elevated spot price environment led to a significant increase in short-term futures prices with the FY2019 Otahuhu futures price increasing from $88/MWh to $135/MWh. Longer-term futures prices also lifted with the Otahuhu FY2020 and FY2021 prices increasing to $95/MWh and $84/MWh respectively as market perspectives of the supply/demand balance were adjusted.

Mercury maintains commercial discipline in competitive retail market

Despite high levels of retail market activity, Mercury has maintained a disciplined approach in pursuing value over volume. Mercury's focus on the customer rather than simply customer numbers contributed to the volume-weighted average price received for Mass Market sales increasing from $120/MWh in the same period last year to $127/MWh. During the quarter higher levels of Commercial & Industrial sales activity occurred on elevated futures prices, however any increase in volumes will be reflected only in future quarters.
Market churn remains high, rising from 21.1%2 at the end of Q1-FY2019 to 21.3%2 as at 31 December 2018. Mercury group churn increased to 20.4%2 at the end of the quarter with churn for the Mercury brand also increasing to 17.6%2 (from 16.8%2 as at 30 September 2018). Group churn was impacted by the transfer of Tiny Mighty Power customers to the main Mercury brand which was completed during the quarter.

Irrigation demand down; industrial demand rises on Tiwai potline startup

National demand decreased by 2.9% on a temperature-adjusted basis versus the prior comparable period, primarily due to a significant decrease in irrigation load (-1.6%) as high precipitation in irrigation areas increased soil moisture levels. Industrial demand made a positive contribution (+0.4%) due to NZAS 4th potline being brought online, increasing average Tiwai load from 581MW in October to 611MW in December. Excluding Tiwai, industrial sector demand decreased by 1.6% partly in response to high wholesale prices, and decreases were also seen across the urban (-0.5%), rural (-0.3%) and dairy (-0.6%) sectors.

1 For quarters ended 31 December since 1927
2 12-monthly rolling average

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