Focused
delivery.

CHAIR’S UPDATE FOR FY2017 ANNUAL REPORT 

This has been a milestone year for Mercury, with the business strongly establishing itself under one brand with clarity of focus on our strategic drivers: delivering customer advocacy, leveraging our core strengths and delivering sustainable growth. Our aim is for Mercury to earn, in everything we do, the long-term trust and support of our customers, our people, our owners and our communities

Your Board is pleased to report encouraging momentum in a number of key areas, with record customer satisfaction, record employee engagement and record financial performance, all of which are detailed in this report.

Our performance

Mercury achieved a 6.1% lift in operating earnings (EBITDAF) to $523 million for FY2017 ($493 million in FY2016), largely reflecting strong inflows across the Waikato catchment in the second half of the financial year. Hydro generation of 4,724 GWh for the financial year was 858 GWh up on FY2016.

Mercury’s result was supported also by strong portfolio and plant management, growth in our retail business through our focus on customer loyalty and a solid contribution from our Metrix smart metering business.

Underscoring the year’s performance, Total Shareholder Returns, or returns via dividends paid and share price appreciation, within FY2017 was 16.4%. The Board is also pleased to be returning a total of $270 million to our nearly 90,000 owners, including the Crown, from cash flows generated through the year. Details of our final ordinary dividend and a special dividend are outlined later in this update.

Our people are at the heart of what we do, and our commitment to their wellbeing is fundamental to the sustainability of our business.

People, leadership and governance

Our people are at the heart of what we do, and our commitment to their wellbeing is fundamental to the sustainability of our business.

While not related to our reporting requirements, on behalf of the Board I wish to acknowledge the death of Rachael De Jong from a tragic incident in the Aratiatia Rapids in February this year. My heartfelt condolences to Rachael’s family for their loss.

Incidents involving injury to Mercury employees this year were mostly of low severity, but we are still dissatisfied with this outcome. There was one serious injury that related to a stair fall in one of our offices. Fortunately the IT contractor involved in that incident has made a full recovery. Our goal continues to be Zero Harm.

We have seen a steady increase (39%) in the reporting of meaningful near-miss events from across all parts of Mercury. This is a very positive sign as it signals both collective ownership and collective awareness of what constitutes a hazard.

The Board is delighted with the performance of the Executive Team during the financial year in review. Under Fraser’s leadership as Chief Executive, we have assembled a talented, high-performing executive group which operates in a collegial manner and whose conduct, demeanour and integrity reflect the standards and provide the example we strive for as an organisation. The recent Employee Engagement Survey reinforced the fact that our Executive Team is highly engaged, has a common purpose and strongly believes in and is committed to the Company’s direction.

Fraser’s influence on issues that matter to New Zealand has extended well beyond our own organisation. Over the past two years, he has driven much of the momentum on raising awareness of the benefits EVs can provide to the country, both in economic and environmental terms.

He recently headed a mission to Switzerland with many leading New Zealand business-people and as a board we have received tremendous feedback about his role and participation.

The relationship between the Chair and Chief Executive is critical. I enjoy working with Fraser immensely; he is always receptive to the feedback the Board provides and I am energised by the passion and commitment he demonstrates in the role.

Mercury’s Board and Executive have been stable throughout the year, with the only change being the departure of director Mike Allen in November 2016 after seven years’ service.

Dr Allen’s expertise in geothermal development contributed strongly towards the Company’s geothermal investment programme. Your Board is working carefully towards appointing a replacement director. I am strongly focused on ensuring that your Board continues to be  well balanced with the skills, experience and diversity to guide Mercury over the long term in a dynamic and highly competitive environment. We continue to scrutinise the need for relevant skills in our regular assessment of our skills matrix and we secure independent facilitation of our Board performance reviews.

A recent investor survey showed that the performance and composition of your Board is highly regarded.

Mercury continues to support the development of governance capability in New Zealand through the Institute of Directors’ Future Directors Programme. We welcomed Nicky Ashton, a brand and marketing expert, as a Future Director on an 18-month term which will conclude on 31 December 2017.

Your Board is committed to maintaining the highest standards of business behaviour and accountability. Along with Mercury’s Executive Team, we are also committed to developing our reporting so that it provides clarity on how Mercury creates value, our ultra long-term sustainability and prosperity.

Our approach to embedding sustainability in everything we do is reflected in the foundations of our business: wellbeing (of our people and customers), kaitiakitanga (custodianship of our environment) and commercial (making commercially-astute decisions). 

This has also guided the development of this report so that it brings forward material sustainability topics – What Matters Most. From discussions with owners both here and around the world we appreciate the drive towards understanding how organisations sustainably grow value over the long term. In this report we have incorporated principles from the Integrated Reporting <IR> Framework and have reported against Global Reporting Initiative (GRI) standards. Mercury will look to build on our integrated thinking and reporting. This includes reporting on how we incorporate sustainability into our strategy, governance and operations, and how we manage sustainability risks and opportunities.

Building on this approach, Mercury is an early adopter in aligning our reporting against the NZX Corporate Governance Best Practice Code 2017. We also support the initiatives driven by individual and collective investors and shareholder representative groups, such as the New Zealand Shareholders Association, to improve transparency in remuneration disclosures and on opportunities such as diversity. We believe that having high standards of corporate governance is critical for New Zealand’s prosperity.

Your Board is pleased to be returning $270 million in total to our approximately 90,000 shareholders, including the Crown, for the full year.

Returning value

As mentioned, your Board is pleased to be returning a total of $270 million to our nearly 90,000 owners, including the Crown, for the full year. 

The final ordinary dividend is 8.8 cents per share, fully-imputed. This brings the full-year fully-imputed ordinary dividend to 14.6 cents per share, up from 14.3 cents per share in FY2016. This is consistent with Mercury’s policy to make ordinary distributions with a pay-out ratio of 70% to 85% of Free Cash Flow on average through time. This return to shareholders is also on guidance and represents the ninth consecutive year of ordinary dividend growth.

As well as the fully-imputed ordinary dividend, Mercury has announced a special dividend, also fully-imputed, of 5.0 cents per share as a means of returning cash to shareholders that is surplus to the Company’s requirements.

As we have previously stated, Mercury seeks to utilise its balance sheet and Free Cash Flow to fund value enhancing initiatives, however no such opportunities requiring additional capital were executed in FY2017. This special dividend distributes excess Free Cash Flow plus proceeds from carbon credit sales within FY2017.

Mercury’s final and special dividends will be paid to shareholders on 29 September 2017.

Our capital management initiatives support Mercury’s investment-grade credit rating (BBB+), which was reaffirmed by S&P Global Ratings in December 2016. 

We have issued guidance for the FY2018 year based on a return to average hydro inflows into the Waikato catchment, though elevated by 150 GWh based on performance during the first month of the financial year. 

With a moderate level of earnings variability from year to year due to hydrological conditions, Mercury adopted a single ‘point-estimate’ for EBITDAF guidance from FY2017. EBITDAF guidance updates are provided at least twice-yearly: at Mercury’s Annual Shareholders’ Meeting (ASM) and as part of our Interim Results. Quarterly Operational Updates include mid-point estimates for forecast full-year hydro generation.

EBITDAF guidance for FY2018 is $500 million, subject to any material events, significant one-off expenses or other unforeseeable circumstances including hydrological conditions. Ordinary dividend guidance has been issued at 15.0 cents per share, an increase of more than 2% on FY2017.

Stay-in-business capital expenditure guidance is $115 million, above our normalised level of $80 million due to planned hydro, geothermal and technology investments in FY2018.

Connecting

To assist with Mercury’s customer focus, your Board all spent time at the Company’s contact centre and even made customer calls during the year. These were wonderful experiences. I was assisted by Customer Service Representative Jahmeel Nowell, and was very impressed by the dedication he, and other members of the team around him, showed towards the customer experience. It was encouraging to the Board to observe the care shown by all our people for the customers they interact with each day.

To assist with delivering close connections also with our owners, we maintain our commitment to providing an update on our business performance and strategic priorities, as well as to sharing with you more of our customer-led innovations, at our ASM in Auckland. This year’s meeting will be held on 7 November. I look forward to welcoming you there. If you are not able to attend, you can follow proceedings on a live webcast, and you can also cast a proxy vote on any resolutions by post or online.

Looking forward

Given the momentum developed by Mercury this year, strong execution across the business, and the customer-led innovation that we outline in this report, the Company is well positioned to continue generating consistent and growing returns for our owners, along with value for our partners, our customers, our people and our communities.

We will continue to focus on earning your support through our strategy of delivering customer advocacy, leveraging our core strengths and delivering sustainable growth.

We will continue to focus on earning your support through our strategy of delivering customer advocacy, leveraging our core strengths and delivering sustainable growth.

I would like to thank all of our people, the Executive Team and my fellow directors. Your professional efforts and advocacy for Mercury throughout the year have helped to bring to life our new Mercury brand and to inspire New Zealanders to enjoy energy in more wonderful ways.

» JOAN WITHERS
CHAIR