Customer,
Community,
Country.

Chief Executive's update for FY2018 annual report.

"Across key financial, brand and people metrics, we have set new records in FY2018."

Since rebranding two years ago, Mercury has continued to accelerate the execution of its strategy to deliver customer advocacy, leverage core strengths and achieve sustainable growth.

Across key financial, brand and people metrics, we have set new records in FY2018 above the previous records achieved in FY2017. We are pleased to have advanced these in strong alignment with our mission of Energy Freedom; for customers and the country.

A fundamental driver of performance has been a clear customer-led approach backed by a comprehensive lift in leadership capability throughout Mercury. The team is in very good shape, has a clear direction and is showing strong momentum early in FY2019. The year ahead will see our growth strategy take a stronger prominence, building on our underlying core business execution.

 

FINANCIAL PERFORMANCE

It rained. The resulting record Waikato Hydro scheme generation was the primary driver in lifting EBITDAF to record levels. However, capturing value from those inflows would not have been possible without the expertise and efforts of our people. In flood or drought, teams throughout the company dynamically manage planned and unplanned plant maintenance, our portfolio and wholesale markets positions and hundreds of resource consent conditions as part of environmental stewardship.

It continues to be clear that the value of the Waikato Hydro scheme as a buffer to nature’s volatility is as fundamental to the Waikato community as it is for its contribution to New Zealand’s renewable electricity generation. Absent the Waikato Hydro scheme, the rainfall over the last few years, particularly with the ex-cyclones of 2017, would have likely resulted in extensive environmental and public and private asset damage around Taupo and throughout the lower Waikato. We continue to enjoy a very strong relationship with the Waikato Regional Council who is the flood and drought manager for the catchment and is the critical co-ordinator in balancing matters across the catchment in such events.

Stay-in-business capital expenditure (SIB CAPEX) of $112 million reflected high quality execution across hydro, geothermal and technology platforms. The reinvestment programme is critical to our sustainability and delivery of renewable energy over the long-term for New Zealanders. The story of our Aratiatia refurbishment is told later in this report.

We have continued a very strong run on cost management with operational expenditure (OPEX) remaining flat at $214 million for five years. We are forecasting to maintain the same levels in FY2019.

 

TEAMWORK

We have invested in ourselves and our teamwork this year, and the results are strong. On the back of our FY2017 employee survey results we were assessed as the best workplace in New Zealand (IBM enterprise category, IBM Best Workplace Awards). The internal aspects of our rebranding to Mercury also resulted in Mercury receiving recognition at the New Zealand HR Awards 2018 for the Workplace Engagement Programme of the Year.

In FY2018 our people lifted their engagement to even higher levels. Latterly, this has been through the roll out of a High Performance Team framework to support inclusion, performance and alignment. Our annual employee survey saw our engagement index strengthen further to 81.5% from last year’s 81%. The survey also identified that 94% of our people agree or strongly agree that Mercury is committed to the health and safety of our people. The highest employee survey result was in response to the statement that Mercury takes its environmental responsibilities seriously (95.6%).

CE Update bubble 1

 

SAFETY, WELLBEING AND INCLUSION

I am especially pleased that there were no serious injuries for employees and on-site contractors throughout the year, particularly given the very high levels of plant reinvestment activity. StayLive, a large generator and transmission safety information sharing group, received its first external award. This co-operative approach to safety, established by Neal Barclay (now Chief Executive of Meridian), Bob Weir (then Genesis Energy) and myself eight years ago, continues to provide real and growing value to participants.

A very large safety investment was made during the year resulting in the submission of three geothermal safety cases to WorkSafe for review, reflecting a process safety approach at those sites. We are also investing in process safety cases in specific areas elsewhere in the business for key customer and hydro risks.

Wellbeing and inclusion continue to be focus areas that underpin effective delivery of our strategy. They are reported on further in the governance section of this report.

On behalf of everyone at Mercury, I acknowledge the passing during the year of two employees who made a wonderful contribution to Mercury, Dave Keppel and Eucharist (Naisa) Ng Shiu. Dave and Eucharist are fondly remembered, and our thoughts are with their families.

"WE HAVE CONTINUED A VERY STRONG RUN ON COST MANAGEMENT WITH OPERATIONAL EXPENDITURE REMAINING FLAT AT $214M for five years."

 

ENJOYING THE ENERGY

Our brand continues to strengthen, with awareness and satisfaction measures reaching record levels during FY2018. This is in part driven by our campaign to take the message about New Zealand’s renewable energy advantage – and Energy Freedom – from the head to the heart. We have brought this to life through the story of customers enjoying life through a classic ’57 Ford Fairlane converted to the wonderful energy of electricity thanks to: a specialist Dunedin workshop, Control Focus; a Hamilton power electronics company, Scott Drive; a bus-strength electric motor from Siemens, Germany; and a lot of creativity from our marketing team and our agency FCB.

More than 80% of New Zealanders love our EV ad campaign, which has translated to record high positivity toward Mercury.

There is a very important New Zealand narrative behind Mercury’s extensive and four-year strong campaign on electric vehicles, namely the country’s Energy Freedom. At our 2014 ASM we committed to 70% of our vehicle fleet being electric in 2018. We achieved that one year early, with one of New Zealand’s largest business sector EV fleets of 91 vehicles. We also predicted at the time that the number of EV’s sold would exceed the number of solar installations if the facts of the environmental and economics benefits became well known. This milestone was reached for New Zealand in October 2017.

Mercury continues to focus on the things our loyal customers tell us they want; inspiring, rewarding and making things easy for them.

"MORE THAN 93,000 CUSTOMERS ENJOY DETAILED ENERGY USAGE DATA THROUGH OUR GEM SYSTEM."

Customers have continued to enjoy wonderful experiences on e.bikes. More than 1,200 people are estimated to have ridden e.bikes at Mercury ride days, and e.bike ownership continues to grow strongly. A partnership with Big Street Bikers in downtown Auckland introduced a solar powered e.bike “rechargery”, a bike-by-the-hour scheme, as well as rent-to-buy options with discounts for Mercury customers.

Mercury’s Free Power Day concept is always well subscribed. Around 90,000 customers enjoyed a June Free Power Day. One long-term customer and owner, Mr Warren Johns, later in this report wonderfully tells his story of how this day inspired him to clean, bake and connect with friends in his home of over 50 years.

CE Update bubble 2A2 

INNOVATION

Our approach to innovation is to be alongside our customers as opportunities are tested and proven to be viable, feasible and desirable – not just one or other of these measures. More than 93,000 customers enjoy detailed energy usage data weekly through our GEM system. Through GEM our customers have, for more than five years now, been able to understand their energy consumption down to the half-hour, receive estimates of their consumption by usage in the home, receive emails predicting their month end bill and also weekly updates to help them manage consumption in near real time. We have launched a loyalty focused customer app for smart devices, the current release of which incorporates access to these on-line GEM features. Our digital experience (DX) team has been working on smart device voice activated services with Amazon’s Alexa, the first energy company in New Zealand to do so.

Many of our customers experienced power outages during April’s storms. Using our Incident Management Plan, we implemented a widespread and coordinated effort across our metering and retail teams to minimise the consequences to our customers. This included placing a team from our award-winning contact centre into a network company to reduce its call queues and creatively meshing smart meter data to more accurately identify affected homes to help network companies with power restoration.

 

MEETING CUSTOMER NEEDS GLOBUG

GLOBUG continues to be New Zealand’s largest pre-pay electricity provider. We work closely with various social services around the provision of this pre-pay product which, by design, helps avoid the potential for customers to build up unmanageable debt.

GLOBUG gets considerable media attention at times, partly because of some of the vulnerable customers that it helps. We remain committed to this product for the role it plays in giving consumers choice. GLOBUG customer numbers, despite high churn, are relatively flat year on year, showing that this is a very important part of the market. The data clearly shows that GLOBUG’s net impact is to keep the lights on.

"GLOBUG CONTINUES TO BE NEW ZEALAND’S LARGEST PRE-PAY ELECTRICITY PROVIDER"

 

OUR VOICE

Consistent with my report last year, we continue to work towards a reset of distribution pricing settings and are engaged in a number of trials with network companies. We remain highly focused on seeing New Zealand adopt a low carbon energy target, and ideally removing the renewable electricity target. We will continue to promote the electrification of transport, in its many forms including heavy transport, as this country’s greatest achievable opportunity for reducing carbon emissions. We will continue to engage with decision makers to convey the importance of deep energy storage for New Zealand’s security of supply (and Energy Freedom).

We intend to ramp up our activity in FY2019 to influence Government, NGOs and the business sector to focus on meaningful, scalable and connected solutions to climate change which fit a New Zealand context. I am concerned at the tendency towards ‘window-dressing’ that masks big carbon emissions by reporting small advances in reporting or offsetting. “Every little bit” does not always help when it results in countries and their citizens misallocating their time, effort and capital to tackle a global issue which commands only our best collective performance.

 

CE Update bubble 3A

 

GUARDIANSHIP

Our ultra long-term approach has seen us continue to focus on kaitiakitanga, or guardianship, of the resources and environment that support our contribution to New Zealand.

During the year Mercury, working alongside iwi partners and other stakeholders, arranged a study tour of Australia’s Murray/Darling catchment to korero, grow relationships, and consider how collaboratively we can support the best long-term outcomes for the health and wellbeing of New Zealand’s most essential water catchment.

We also continue to invest in maintaining our hydro and geothermal assets. This important work builds on the legacy of those who created them over the course of nearly a century so that they contribute the future of local communities and to New Zealand for many decades to come.

As but one example, at our Kawerau geothermal station we replaced the turbine after 10 years of service in the largest planned shut undertaken at the site. Ongoing curiosity, a common goal and strong teamwork saw the plant achieve daily records and make sustainable production gains across the year. On a recent visit I was delighted to hear from Dean Cowell, who has been a plant operator and technician of the complex facility since opening in 2008, express that the teamwork was the best he had ever known it. There are many similar stories of quality teamwork and execution throughout Mercury.

 

GROWTH

In previous annual reports we have outlined our strategy for growth. An opportunity taken this year was the purchase of a 19.99% stake in Tilt. Tilt is well established in Australasia, both in terms of its expertise and its own growth through solar and wind developments. This purchase allows Mercury to benefit from Australia’s necessary transition towards levels of renewable electricity that New Zealand has largely achieved. It fits within a broader context of wind growth and development, a journey we have been on now for more than a decade.

Mercury also participated in AGL’s divestment process to purchase their smart metering business in Australia, though we were unsuccessful.

CE Update bubble 4

 

MARKET CONDITIONS

Wholesale market conditions have become more volatile with the supply/ demand mix rebalancing in combination with periods of average to below average national hydrology. Such volatility plays into the strengths of the Waikato Hydro scheme, the North Island’s largest peaking plant.

In FY2019 we look forward to New Zealand's Aluminium Smelter (NZAS) increasing national electricity demand by more than 1% with the restart of its fourth potline at Tiwai Point. This is a positive development for New Zealandsourced aluminium relative to carbon intensive Australian production.

 

CAPITAL STRUCTURE

We have strengthened our capital structure by buying back $50 million of Mercury shares for an average price of $3.21 per share. In combination with a buyback in 2014, we now have 2.7% of Mercury’s shares as treasury stock, meaning that existing shareholders receive a larger proportion of the company’s profits (reflected in a full year dividend higher than guidance for FY2018). It also enables Mercury to re-issue those shares to more easily raise equity capital to support both opportunity and risk management.

Extensive hedging of interest rates was taken out in 2008 prior to the $1.4 billion domestic geothermal development program. These are in the process of rolling off, and we expect a $20 million per annum benefit to post-tax cashflow as interest costs revert to current market levels.

Per our notification (nzx.com/announcements/318630) to all of our owners in May, I apologise for the error which saw owners’ email addresses and Common Shareholder Numbers listed on the Companies Office website for a time. Once this error was identified we made every effort to communicate this transparently, quickly and clearly and have changed the process for lodging information to the Companies Office to prevent a recurrence.

 

PARTNERSHIPS

Mercury’s partnership approach has also created opportunities. This year we announced a plan to trial New Zealand’s first large scale, national grid connected, battery electricity trading initiative. Tesla successfully tendered for provision of the battery, and our teams have been working with the Electricity Authority, Transpower and others to enable trading back to the grid from the battery-stored power. We look forward to sharing what we learn over the next year following commissioning in August 2018.

We have the largest partnerships with commercial Maori entities of any NZX company. The investment in geothermal from those entities, ourselves and Contact Energy of more than $3 billion between 1996 and 2014 was responsible for the displacement of large quantities of base load thermal generation from the New Zealand electricity system. This drove the largest reduction in New Zealand’s total greenhouse gas emissions over that decade and made geothermal, the only commercial weather independent renewable fuel system, the number two source of electricity in New Zealand, behind hydro. In combination with New Zealand’s first and largest carbon off-take tender in 2010 of circa $100 million over 15 years covering some 10,000 hectares linked to specific new growth forests, Mercury is carbon positive (our carbon offsets exceed our carbon creation). Our approach is to address those things that make a difference with substantive action, and we will continue to challenge “window dressing” by those who should be doing more.

We acknowledge and recently celebrated the recent 20-year anniversary of the Rotokawa geothermal facility which was opened on 27 June 1998 by the late Kurupai Whata of Ngati Tahu, a mana whenua of the area.

"WE HAVE THE LARGEST PARTNERSHIPS WITH COMMERCIAL MAORI ENTITIES OF ANY NZX COMPANY."

 

OUR PROGRAMME OF WORK

Last year’s annual report (p18) highlighted the key initiatives across our brand, digital assets, generation assets and people we expected to complete in FY2018. All have been achieved.

For FY2019 we highlight the following key activities:

  • Continuing to promote New Zealand’s competitive advantage in low-cost renewable energy to key Government and regulatory decision makers,
  • Actively investing in material growth strategies,
  • Embedding our High Performance Team framework,
  • Ongoing development of our brand, customer loyalty and digital offerings,
  • Ongoing major hydro refurbishment at Aratiatia, Whakamaru and Karapiro,
  • Research and development projects including the grid scale battery, solar product development, silica extraction from geothermal fluids and e-mobility extensions,
  • Further leverage of our metering data services platforms,
  • Resolving long-standing distribution pricing signals for retailers that are compatible with new technology,
  • Enhancing the long-term water quality of the Waikato Catchment.
"THIS YEAR WE ANNOUNCED A PLAN TO TRIAL NEW ZEALAND’S FIRST LARGE SCALE, NATIONAL GRID CONNECTED, BATTERY ELECTRICITY TRADING INITIATIVE."

 

OUTLOOK

We have started FY2019 strongly. With quality execution against our clear mission and strategy from an engaged Mercury team we expect to grow value for our consumers, communities, people, country and owners this year.

Over the past four years we have taken very deliberate steps to simplify and reinvest in the business. The core business is performing strongly, though delivering only incremental growth in a very challenging retail environment. We expect to take more meaningful steps towards growth in the next couple of years. However, as we have demonstrated in the last few years, a commercially disciplined approach is essential.

We continue to listen carefully to all of our stakeholders, in particular the new Government, with its focus on value, fairness and choice for customers; renewable energy; and the regional economy. We have been delivering in these areas and will ensure that they continue to be emphasised.

On behalf of everyone at Mercury I thank you again for being part of our story. There is much more to be done to achieve our mission of Energy Freedom, and progress is very encouraging.


Together we are Mercury.
Energy Made Wonderful.

Nga mihi nui ki a koutou katoa.

 

FRASER WHINERAY
CHIEF EXECUTIVE

Read the Chair's Update