CHAIR’S UPDATE.

On behalf of your Board it is my pleasure to report to you, our owners, on Mercury’s results for FY2018.

"High quality and aligned execution across a broad and complex range of activities has been a hallmark of this year."

Last year I highlighted the momentum evident across the business under Mercury’s new brand. That momentum delivered record customer satisfaction results, record employee engagement and record financial results. This year it is extremely heartening for me to see a continuation of this performance, with strong results set in these same areas.

Employee engagement was 81.5% (FY2017 81%). Customer satisfaction was 63% (FY2017 64%). And Mercury has once again achieved record earnings (EBITDAF) of $561 million, up 7% on FY2017, following a second year of record generation.

We made progress with our sustainable growth strategy through the purchase of a 19.99% stake in NZX and ASX-listed Tilt (NZX:TLT) for nearly $144 million, or $2.30 per share.

Mercury also completed an on-market share buyback programme acquiring nearly 15.6 million ordinary Mercury shares (1.1%) for total consideration of NZ$50 million, or NZ$3.21 per share. Consistent with the 2014 buyback, the shares are being held as treasury stock to provide greater balance sheet flexibility.

The buyback and Tilt investment have lifted the company’s gearing. We target a standalone rating of BBB (upgraded to BBB+ because of the Crown’s 51% shareholding) and at 2.0 we remain at the conservative end of S&P's indicative range of 2.0x to 3.0x debt to EBITDAF ratio. I make further comment on our capital management initiatives later in this report.

Concurrent with this extensive activity, Mercury received significant external recognition, with 22 awards won across the organisation through the financial year. These included awards for our contact centre (teams and individuals); for our marketing (two major awards for our brand work); for our innovation (our Auckland R&D Centre); for our legal team; and two awards for our people: Workplace Engagement Programme of the Year and Best Workplace.

 

OUR RETURNS

Due to levels of rainfall higher than average across almost the entire year, Mercury’s hydro generation of 4,947GWh was 223GWh up on FY2017, a new record.

Total Shareholder Return (TSR), or the return from dividends paid and share price changes, within FY2018 was 7.5%. TSR was negatively impacted by our removal from the MSCI global standard index, as the significant share price escalation of A2 Milk (NZX:ATM) triggered its inclusion in our place. Given the number of funds mandated to follow the MSCI index, this event resulted in record levels of shares transacting over a very short period of time.

The Board is pleased to be returning $207 million in total ordinary dividends to our nearly 85,000 owners, including the Crown, from cash flows generated through the year. Details of our final ordinary dividend are outlined later in this update.

While delivering strong financial results, Mercury continues to play a broader role in support of its customers, communities and the country that distinguishes the business in a highly competitive market.

During the year Mercury continued to influence the national narrative on energy and transport innovation, promoting the electrification of transport and initiating a scalable national grid connected 1MW/2MWh battery trial to be commissioned in August 2018. As a board, we are delighted with the role Chief Executive Fraser Whineray has played in being a very early protagonist of the benefits to be gained by the country moving to a renewable energy target, rather than just a renewable electricity target, and the importance of the electrification of vehicles as part of that goal. We also influenced the regional narrative on water, working collaboratively with iwi and other stakeholders who desire long-term sustainable outcomes across the Waikato River catchment. Mercury co-led a multi-stakeholder visit across three Australian states to the complex and diverse Murray Darling basin in August 2017.

Mercury also influenced the sector’s narrative on safety. This year the sector’s StayLive workplace safety programme, strongly supported by Mercury, won the Electricity Engineers’ Association’s workplace safety award, while Mercury advanced its detailed process safety programme across its Mokai, Ngatamariki and Rotokawa geothermal sites in collaboration with other geothermal operators.

 

PEOPLE, LEADERSHIP AND GOVERNANCE

High quality and aligned execution across a broad and complex range of activity has been a hallmark of this year, which Fraser will outline in his update.

As a board, we are absolutely committed to delivering the best possible governance to the Company. Again, this year, we have conducted an externally facilitated board performance review. Our board has been acknowledged in the highly regarded Corporate Confidence Index which measures institutional confidence in 50 major listed companies across Australia and New Zealand as being in the top six in critical areas such as effective board, high standard of corporate governance and appropriate board composition.

The composition of our board is always under review and this year we were delighted to have Scott St John join us. Scott’s investment banking and wider commercial background is a valued addition to our mix of skills and experience. You can see the graphical description of those skills on page 34 our 2018 Financial Report.

I announced at the 2016 Annual Shareholders’ Meeting that I would not be seeking re-election beyond my current term which will end at the 2019 ASM. Succession planning for my replacement as Chair is underway and we are blessed in that we have a number of high calibre contenders currently sitting as directors. Under our constitution the Minister of Finance must approve the appointment of the Chair and I have great confidence your board will provide an excellent successor for ratification.

Mercury has been and continues to be a strong supporter of the Future Directors programme which aims to improve the pipeline of younger talent coming into governance. We said farewell to Nicky Ashton in December and we have just appointed Anna Lissaman, Director of People and Talent at TVNZ, to the Future Director position for an 18-month period from 1 July 2018.

Within the business, there has been considerable focus on making human capital a competitive advantage for Mercury through the development and implementation of a High Performance Team framework. This has focused very much on how formal and informal teams interact, self-diagnose and improve team performance.

Our commitment to the wellbeing of people at Mercury is fundamental to the sustainability of our business. Our goal continues to be Zero Harm. We were unsuccessful in that goal, though we are very pleased to report that there were no serious injuries this year.

Our measure, Mercury’s total recordable injury frequency rate (TRIFR), was 0.87 (down from 1.05 FY2017). Eighty-nine percent of employees confirm that Mercury cares about the wellbeing of its people, compared with the 2017 benchmark across all New Zealand organisations of 79%.

"MERCURY CONTINUES TO PLAY A BROADER ROLE IN SUPPORT OF ITS CUSTOMERS,COMMUNITIES AND THE COUNTRY THAT DISTINGUISHES THE BUSINESS IN A HIGHLY COMPETITIVE MARKET."

Chairs update bubble 1A

 

RETURNING VALUE

As noted earlier, your Board is pleased to be returning a total of $207 million to our owners, including the Crown, for the full year.

The final ordinary dividend is 9.1 cents per share, fully imputed. This brings the full year fully imputed ordinary dividend to 15.1 cents per share, up from 14.6 cents per share in FY2017. This represents an increase of 0.1 cents per share on guidance as a result of fewer shares on issue following our share buyback.

Mercury’s dividend is consistent with our 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 represents the tenth consecutive year of ordinary dividend growth.

Mercury’s final dividend will be paid to shareholders on 28 September 2018.

Our capital management initiatives support Mercury’s investment-grade credit rating (BBB+), which was reaffirmed by S&P Global Ratings in December 2017.

We have issued guidance for the FY2019 year based on forecast hydro generation of 4,200GWh, 200GWh above average based on catchment inflows and generation year-to-date.

EBITDAF guidance for FY2019 is $515 million, subject to any material events, significant one-off expenses or other unforeseeable circumstances including hydrological conditions.

Ordinary dividend guidance has been issued at 15.5 cents per share, an increase of 2.6% on FY2018, again reflecting fewer shares being on issue following our share buyback.

Stay-in-business capital expenditure guidance is $95 million due to planned hydro, geothermal and technology investments in FY2019, as well as investment in people and culture through Mercury’s Auckland office consolidation to Newmarket.

"ORDINARY DIVIDEND GUIDANCE HAS BEEN ISSUED AT 15.5 CENTS PER SHARE, AN INCREASE OF 2.6% ON FY2018."

 

CONNECTING

I look forward to providing an update on Mercury’s business performance and strategic priorities at our ASM in Auckland. This year’s meeting will be held earlier than in the past, on 28 September. This has been arranged following feedback, expressing a desire for us to discuss our results with you, our owners, in closer proximity to them having been finalised. Owners not able to attend can follow proceedings on a live webcast and you can cast a proxy vote on any resolutions by post or online.

We will also talk about our business at a retail investor roadshow at a number of locations around the country late in the first half of the new financial year.

 

CONCLUSION

What has heartened me most through the year has been the strong alignment evident across Mercury as we build on our heritage through quality execution of our strategic plan.

I extend my sincere thanks to my colleagues on the board and I especially want to pay tribute to our Chief Executive Fraser Whineray, his executive group and all our team members across the country for their dedication, commitment and contribution to Mercury’s achievements. I gratefully acknowledge our customers, partners, other stakeholders and you, our owners, for your continued trust and support.

JOAN WITHERS
CHAIR

 

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