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Mercury Quarterly Operational Update

Mercury Quarterly Operational Update
Three months ended 30 June 2019

Thermal fuel uncertainty gains prominence as driver of spot market prices

Quarterly spot prices were elevated at the 90th percentile1 as thermal fuel constraints, including maintenance outages on the Pohokura gas field, offset above-average national hydro inflows. Average spot prices for the final quarter of FY2019 were $116/MWh at Otahuhu and $95/MWh at Benmore leading to FY2019 spot prices reaching record levels of $143/MWh at Otahuhu and $123/MWh at Benmore.

The market's view of future thermal availability also affected the long-term outlook of wholesale market prices as the Otahuhu futures price remained at historically high levels, increasing to $114/MWh for FY2020 and to $99/MWh for FY2021 during the quarter.

Hydro generation returns to average following dry H2; hydro peaking ability increases generation value

Mercury's hydro generation was 796GWh in the most recent quarter, a decrease of 422GWh from near-record levels in the prior comparable quarter as Waikato catchment inflows were below average at the 14th percentile2 (207GWh below average) in Q4-FY2019. Despite below average inflows in the quarter, Mercury was able to finish the year strongly by utilising the peaking capability of the Waikato Hydro Scheme to benefit from spot price volatility. This resulted in the LWAP/GWAP ratio decreasing favourably from 1.05 in Q4-FY2018 to 0.99 in Q4-FY2019.

Hydrological conditions were unusually dry in the latter half of the financial year with Waikato catchment inflows only reaching the 4th percentile3 (477GWh below average) resulting in annual hydro generation falling from 4,947 in FY2018 to 4,006GWh in FY2019, close to the long-run mean of approximately 4,000GWh. This was achieved in spite of low inflows by drawing on Lake Taupo storage which decreased from 139% of average (or 107GWh above average) at the start of FY2019 to 65% of average (or 98GWh below average) at the end of FY2019.

Mercury's geothermal generation increased by 23GWh to 731GWh in Q4-FY2019 from 708GWh in the prior comparable period, which had more planned maintenance outages, and contributed to FY2019 geothermal generation of 2,896GWh; the highest annual geothermal generation for the company.

Mercury focuses on value as reduced acquisition activity leads to decline in customer numbers

Mercury's focus on value and existing customers resulted in reduced acquisition activity as retail margins narrowed with the continued rise in the electricity futures curve. Mercury acquired ~4,000 fewer customers in Q4-FY2019 compared to Q4-FY2018 with the proportion of Mercury brand customers acquired on discounted rates falling from 55% in Q4-FY2018 to 27% in Q4-FY2019. This contributed to customer numbers across all brands decreasing by 6,000 across the quarter to 373,000.

The volume-weighted average price received for Mass Market sales in the current quarter was flat year-on-year at $128/MWh as Mercury did not increase residential prices in FY2019. Market churn decreased from 21.1%4 as at 31 March 2019 to 20.5%4 as at 30 June 2019 with Mercury group churn also falling from 20.0%4 to 19.6%4 over the same period.

Demand down led by urban and dairy sectors; industrial demand increases despite signs of price sensitivity

National demand decreased by 1.2% in Q4-FY2019 after adjusting for temperature (1.4% on an unadjusted basis) versus Q4-FY2018 due to a decline in urban sector demand (-0.9%) and decreased dairy sector (-0.5%) demand, reflecting reduced milk production compared to the same period last year. These declines were partially offset by increased industrial sector demand (+0.4%) which was driven by increased Tiwai load. Non-Tiwai industrial demand decreased by 0.2%, possibly due to spot-exposed users responding to high spot prices. Demand was flat in the irrigation (+0.0%), rural (-0.1%) and other (-0.1%) sectors.
1 For quarters ended 30 June since 1999
2 For quarters ended 30 June since 1927
3 For 6-monthly periods ended 30 June since 1927
4 12-monthly rolling average


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