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Mercury raises guidance on increased storage, high spot prices

Friday 18th October 2019

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Mercury NZ has raised its full-year earnings guidance by $25 million on the back of rising storage in its Waikato catchment and sustained high wholesale electricity prices.

Storage in Lake Taupo has climbed steadily since May. It is at a 19-month high and about 20 percent above average for this time of year.

Recent “wetter than average” weather in the region should deliver about 50 gigawatt-hours more electricity, lifting the firm’s total expected hydro production for the year to June 30 to 4,070 gigawatt-hours, the company said in a statement to NZX.

That extra production, coupled with higher wholesale prices and a shift toward more commercial and industrial load, means the company is now expecting June-year earnings before interest, tax, depreciation, amortisation and changes in financial instruments of about $510 million. That is up from the firm’s August guidance of $485 million.

Mercury shares rose 2.4 percent to $5.59, taking their gain this year to about 59 percent.

The country’s third-largest electricity retailer typically makes two-thirds of its power at nine power stations on the Waikato River and benefited from record inflows in 2017 and 2018. Dry conditions last year saw ebitdaf for the year through June fall 11 percent to $505 million. Hydro generation that year was 4,006 GWh. The company also operates five geothermal plants.

Spot electricity prices have remained high most of this year due to constrained gas supplies and low North Island hydro storage. In the three months through September, declining South Island lake levels left national storage 17 percent below average at Sept. 30, Mercury noted. National storage is currently about 9 percent below average, according to NZX Energy data.

Electricity futures prices are also high, reflecting a planned month-long shutdown of the Kupe gas treatment plant in November, three months of work on the high-voltage link across Cook Strait early next year – which will reduce supplies from the South Island – and a two-week shutdown planned at the Pohokura gas field in March.

“Mercury is proactively managing its electricity sales portfolio in response to wholesale market conditions, which are expected to persist with FY2021 and FY2022 Otahuhu futures prices increasing to $112/MWh and $103/MWh respectively as at 30 September 2019.

“This has seen the company bias sales towards higher-yielding spot and commercial and industrial channels.”

That strategy saw the firm’s September-quarter mass-markets sales fall 6.5 percent to 892 GWh, but average prices rose 1.4 percent to $128.80 a megawatt-hour as the firm reduced its discounting. Commercial and industrial sales increased by 83 GWh to 671 GWh with the average price rising 6.7 percent to $88.32/MWh.

Mercury had 361,000 power customers at Sept.30, about 25,000 fewer than a year earlier.

It noted that only about 28 percent of customers acquired in the September quarter were offered discounts, down from 57 percent in the same period a year ago.

The firm also did not renew a marketing deal with Fonterra’s Farm Source programme. That saw about 3,000 customers – with about 8,000 power connections – switch away during the quarter.

“This predominantly dairy load imposed additional cost to Mercury as peak consumption coincides with seasonally low summer inflows into Mercury's Taupo catchment.”

Mercury’s total generation in the quarter was almost 11 percent lower at 1,950 GWh, driven by a 16 percent decline in hydro production to 1,214 GWh.

Its average generation price climbed to $123.03/MWh from $85.90/MWh a year earlier.


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