Earning the opportunity to be chosen.

CHIEF EXECUTIVE’S UPDATE FOR FY2017 ANNUAL REPORT

At Mercury, we respect that freedom to choose sits with our customers, people, owners and communities. We have worked hard throughout the year to distinguish ourselves by the choices that we offer.

I am proud of what the dedicated people at Mercury have achieved this financial year, and what this momentum means for the years that will follow. The customer focus within our business has delivered real change and this report outlines several of our successful innovations. These include data-driven digital solutions, our leadership and partnership approach to EV uptake, and our provision of solar and battery options fit for New Zealand conditions.

We have also executed well across the business, and that is critical to earn the trust of our owners.

Our geothermal drilling campaign resulted in four new wells and one well repair at the Kawerau and Rotokawa fields in a programme that involved 170,000 working hours and spanned 30 separate organisations. The campaign was completed safely, ahead of time, and $7.5 million under target. 

We delivered important IT and digital enhancements designed to improve our capacity to meet customer needs efficiently and effectively. Our IT team completed a migration of the majority of our business applications to the cloud.  System upgrades of our core asset management system (Maximo) and our SAP customer service and billing system, and their transfer to the cloud, are expected to be completed in the first half of FY2018.

Customer satisfaction, influenced strongly by our focus on loyalty, reached its highest-ever level during the year.Our employee engagement score, which reflects many aspects of our business though includes our considerable focus on wellbeing and management training, is at the highest level in Mercury’s history. 

Our FY17 financial outcomes are also the strongest in Mercury’s history.

These customer, employee and financial measures confirm the success of our rebrand, undertaken to align our approach externally and internally, and our focus on rewarding customer loyalty.

Strategic use of data is an important enabler for Mercury. We have commercialised more initiatives based on smart meter data than any other energy retailer in New Zealand.

Financial performance

Mercury’s net profit after tax increased $24 million to $184 million.  Underlying earnings after tax increased by $24 million, or 16%, to $176 million, reflecting improved operating earnings and flat operating costs.

Operating costs of $214 million were flat in FY2017 when compared with FY2016. This reflects Mercury’s continued focus on controlling costs, improved procurement strategies, our exit from international geothermal development and the mothballing of Mercury’s thermal generation site at Southdown. Operating expenditure has progressively been focused towards customer innovation over the past two years.

Stay-in-business capital expenditure, which represents the capital expenditure incurred by the Company to maintain our assets in good working order, was $114 million. This was above our normalised level of $80 million per annum, reflecting phasing of ongoing hydro refurbishment projects at Aratiatia and Whakamaru, and Mercury’s geothermal drilling programme. Capital expenditure was $10 million below original FY2017 guidance of $125 million, due to the performance of the geothermal drilling campaign.

Our Customers

To be New Zealand’s leading energy brand, we need to earn the opportunity to be chosen by New Zealanders to meet their energy needs. 

This year we paid close attention to the things that our existing, loyal customers said they wanted: rewarding them, inspiring them and making their interactions with us easier.

Mercury’s Free Power Days, which allowed customers to boost their enjoyment of electricity at no cost on certain days, resonated strongly. One customer reported using a Free Power Day to wash, dry and pamper their dog, hence our cover image. Another customer dried out his model plane that had crashed into a lake. Mercury’s Free Power Day platform is entirely digital, and all up more than 157,000 Free Power Days were enjoyed throughout the year, the equivalent of up to 430 years of free power.

Mercury’s innovation approach is to be alongside our customers as technology moves from what is possible to what is commercially probable in New Zealand’s small market, with a unique and world-leading structure. 

Customers enjoyed wonderful experiences on e.bikes, whether saving on commuting times or parking costs or simply having fun cycling through beautiful parts of our country like the Waikato River Trails. 

Innovations led by the needs and expectations of our customers also saw customers receive new monthly statements with clearer, easier-to-understand and more useful information.Mercury delivered a mobile phone app solution to GLOBUG customers having to transition from their previous in-home displays. Our team’s broad thinking resulted in a programme to re-purpose redundant stock in collaboration with NIWA and community groups in order to minimise waste to landfill.

Overall, in FY2017 Mercury, excluding Bosco and GLOBUG, gained 19,000 residential customers through our focus on loyalty and retention.

Recognising customers’ desire for choice, we increased our solar energy options, along with battery storage capability, via Mercury Solar, launched in November 2016. Auckland’s demand for solar installations, however, was lower than anticipated in FY2017. Reflecting that, Mercury’s installations were below our expectations. 

As we have said previously, solar will likely remain a niche in New Zealand due to a highly competitive renewable electricity market, factors such as our climate and geography and winter peaking electricity demand.

We will continue to develop our research and development facility, based in Penrose, Auckland, to understand how advances in global technology in areas such as solar energy and battery storage can deliver better customer outcomes tailored for New Zealand conditions.

Strategic use of data is an important enabler for Mercury. We have commercialised more initiatives based on smart meter data than any other energy retailer in New Zealand. Smart meter use contributes strongly to customer-led product development as well as helping customers towards more efficient use of energy in their homes.

Our metering division, Metrix, is the second-largest smart meter data and services provider in the country. For FY2017 Metrix contributed $49 million in revenue with over 400,000 meters owned at 30 June 2017 and more under management. Metrix is expected to complete a systems upgrade in FY2018 that will offer certified half-hour data for an expanded number of energy retail customers.

We paid close attention to the things that our existing, loyal customers said they wanted: rewarding them, inspiring them and making their interactions with us easier.

Our People

As well as being chosen by customers, Mercury must be chosen as a great place to work.

This year our people achieved excellent outcomes by bringing our new brand to life and promoting our attitudes of commitment, sharing and connecting, and being curious and original. Our success in this area is reflected in our 2017 Employee Engagement Survey, where 81% of employees identified themselves as engaged (up from 79%). Another humbling insight from the survey was that those who identified themselves as Maori showed the highest levels of engagement at 91%. Mercury benefits from the diverse views and experiences of all our people as they reflect the communities in which we operate.

Supporting employee development, Mercury, in an industry first, aligned our in-house contact centre training programme with NZQA requirements. Thirty-nine employees have now gained NZQA accredited qualifications through this programme.

Having a great place to work also contributes to high-performing teams. Excitement is growing in relation to consolidating Mercury’s four Auckland office locations into one new location in Newmarket, scheduled for FY2019. Planning is progressing well to ensure the new premises offer workspace choices and an environment that complements and enhances our customer-led brand.

We broadened our diversity objectives in 2016 from gender to also cover age, ethnicity, inclusion and flexibility. Progress is encouraging. The proportion of women across our total workforce increased to 41% from 38% in 2016, and across our leadership group to 30% from 25% in 2016. We will continue to focus on building diverse and inclusive teams to deliver business success.

Keeping our people well is another commitment we make. From the range of benefits they can choose from, one in six of our people had an annual health check subsidised by Mercury; 275 took up the opportunity for a free influenza vaccination; and 17 employees used some or all of the two weeks’ paid leave available to partners supporting a primary caregiver with the arrival of a new child. Pleasingly, our Employee Engagement Survey identified that 95% of our people agree or strongly agree that Mercury is committed to the health and safety of our people.

Our people also faced some unique challenges this year.

On 6 February 2017, there was a tragic incident at the Aratiatia Rapids, the natural spillway on the Waikato River below Mercury’s Aratiatia Dam. A young woman, Rachael De Jong, who was at the rapids with her friends, lost her life. An extensive internal review tested safety measures at the rapids and they were confirmed as functional and fit for purpose before tourism observation spills from the dam were reinstated. To further raise awareness of the importance of safety at the rapids, a joint statement with safety guidelines was distributed in conjunction with other stakeholders including the Department of Conservation, Waikato Regional Council, Water Safety New Zealand, and the Taupo District Council. Our deepest sympathies are with the De Jong family.

On behalf of Mercury, I would also like to acknowledge the passing during the year of three employees who, in different but very important ways, contributed greatly towards who we are as a company: Cathy Tarrant, John Foote and Peter Hutchen. Our thoughts are with their families and they are fondly remembered.

Our Renewable North Island Generation

It is a significant commercial advantage to Mercury that our generation of electricity from  our renewable hydro and geothermal stations is based relatively close to large areas of energy consumption in the North Island. 

Our nine Waikato River hydro stations meet around 10% of New Zealand’s current electricity needs and benefit from inflows (rain) that typically correlate with consumers’ winter peak demand. When temperatures drop in New Zealand homes, Mercury’s hydro inflows typically help provide renewable warmth.

Low South Island lake levels this winter impacted on electricity output from competitors managing South Island hydro stations, with consequential impacts on spot prices for electricity. New Zealand’s security of supply was assisted by 96th percentile annual inflows into our North Island system. Mercury’s maintenance and enhancement programme meant we were able to play our part to help consumers by generating strongly through this period. On 4 July 2017, we achieved a key milestone: running all of our 39 turbines in the Waikato Hydro System to achieve a record peak generation of 1,063 MW.

Our people who manage the hydro stations also play a key role in water management throughout the Taupo and Waikato River catchments. We take great pride in how our people assisted the flood manager, Waikato Regional Council, to mitigate flooding in low-lying areas from the heavy rains from consecutive cyclones Debbie, Cook and Donna in the second half of FY2017.

This year we continued our programme to improve the operational efficiency and long-term reliability of our hydro stations. The rehabilitation of the first of four units at our Whakamaru station was successfully completed and is performing better than planned. The full upgrade, scheduled for completion in 2020, will increase capacity by 24 MW to 124 MW, the energy equivalent of providing power for approximately 16,000 EVs. 

Solid progress has also been made in preparing Aratiatia hydro station for its upgrade which is scheduled to commence on site in October 2017, with completion expected mid-2020. 

Mercury’s geothermal stations provide steady baseload electricity, equivalent to 7% of national demand. To ensure the sustained performance of our geothermal production, this year we successfully completed a substantial geothermal drilling programme, mentioned earlier. In addition and as mentioned in previous reports, Mercury is primed for domestic growth when commercial conditions are right, with consented high-quality wind farm sites at Turitea and Puketoi available to add to our renewable electricity fleet.

Our Partnerships

Collaboration based on mutual understanding and delivering shared value guides Mercury’s approach to partnerships. We seek to learn from and respect the past, and believe that this provides a hard-to-replicate model that distinguishes us from our competitors.

Kaitiakitanga (guardianship) and kotahitanga (working together for today and tomorrow) are constructs we embrace in our commercial partnerships.  They influence the decisions we make as we manage and grow our renewable electricity generation resources for the benefit of all New Zealanders, including our nearly 90,000 New Zealand owners.

Our partnerships with the Tauhara North No.2 Trust and the Tuaropaki Trust have not only added to New Zealand’s geothermal electricity generation but have also created opportunities for Maori to grow economic wealth from their whenua (land). We are inspired by their mahi (work).

Our relationships with iwi in the Waikato River catchments are hugely valued by us, and have been built over many years based on respect and trust. We support programmes that are mutually mana-enhancing and of benefit over the ultra long-term. As an example, Mercury worked with Ngāti Koroki Kahukura to instal a solar energy system at Pohara Marae in the Waikato.

Mercury is primed for domestic growth when commercial conditions are right, with consented high-quality wind farm sites at Turitea and Puketoi available to add to our renewable electricity fleet.

Our programme of work

Major activities planned through the 2018 financial year that support our mission of energy freedom include:

  • growing our customer-led digital offerings and capability by completing an upgrade of our customer systems to a fully-supported cloud-based environment
  • extending our high performance team framework
  • evolving our health and safety approach beyond occupational health and safety to include wellness and process safety
  • refurbishing and the returning to service of two new hydro units at Aratiatia and Whakamaru, and the drilling of a new geothermal well at Ngatamariki
  • completing and embedding Metrix’s new operating platform
  • delivery of our Maximo asset management system upgrade.

Our sustainability and outlook

Acting with ultra long-term sustainability in mind is the way we do things at Mercury. This is embedded into the way we manage the natural resources we rely on for electricity generation and how we maintain our assets and the relationships we form with our key stakeholders. In all our decisions, we consider the way we impact on, and are impacted by key sustainability opportunities, along with the valuable role we can play towards safeguarding New Zealand’s sustainability.

Climate change and its impacts are a significant global and national challenge and we actively seek to influence better outcomes for all New Zealanders. We do this by focusing on making a positive contribution ourselves, and also by seeking to influence others to move New Zealand towards a low-carbon economy.

There is an important role for us to play given Mercury’s renewable electricity generation and a great opportunity for New Zealand to take in seeking to electrify our transport sector.

Mercury operates in an unsubsidised electricity market in New Zealand that is more than 80% renewable and the opportunity exists here to extend this natural advantage.

The Government’s target of 90% renewable electricity generation by 2025 is unnecessary, given the pipeline of competitive renewable electricity projects.  The real issue is the use of non-renewable sources for our wider energy requirements. Almost 60% of our overall energy usage still involves fossil fuel, much of which is imported. 

This dependence on fossil fuel impacts negatively on New Zealanders through our balance of trade, it keeps consumers vulnerable to overseas oil supply and oil price shocks, and it is a constraint to New Zealand’s efforts to reduce carbon emissions. To break free from this dependence, rather than a renewable electricity target New Zealand needs a renewable energy target focused on reducing fossil fuel use. 

Electrification of transport and the utilisation of renewable sources of energy such as geothermal for heat in industrial processes are two of the biggest areas of opportunity if we are to reduce New Zealand’s dependence on non-renewable sources of energy significantly. This drives Mercury’s own efforts to support the uptake of EVs in New Zealand. Continuing to influence positive change, we are confident we will have met our target of 70% EVs in our total fleet within the first half of FY2018. This will be well within the timeframe of the commitment stated at our ASM in November 2014, and represents the conversion of every car possible.

We are entering an exciting period for consumers with more choice than ever about how they want to engage with their energy services. Enabling competitive markets has been the cornerstone of Mercury’s policy approach and this has delivered for consumers. We want to see the benefits that the market has delivered continue, which is why we see an opportunity now to get the regulatory settings right around emerging technology and the pricing of distribution. 

Pricing reform of distribution networks is needed to ensure pricing structures are simplified and made more equitable. Prices must also send the right signals to retailers to support their customers investment decisions for new technologies like solar, batteries and EVs.

Mercury welcomes the Government’s recently announced review of the regulated low fixed-charge tariff (LFCT) as we believe the LFCT is an ineffective approach that does not benefit the majority of those households originally targeted by the tariff. 

Getting the settings right in these areas is important to ensure a fair outcome for all consumers, particularly the most vulnerable, over the long term.

Access to water as well as the quality of it, is a very important opportunity for our country to get right. Mercury is committed to being an active participant in helping to secure the sustainability and improvement of New Zealand’s freshwater resources. We seek to do this by understanding, managing and minimising any impacts our operations have on water, together with looking at the ways we can continue to innovate and improve the efficiencies of our water utilisation.  We believe there is a very clear distinction between non-consumptive use of water, such as our use of gravity for hydro generation and consumptive uses which remove water from the environmental system.

Overall, we continue to be encouraged by the constructive approach to policy development across the political spectrum. 

Final words

On behalf of Mercury’s Executive Team, I am very pleased with what has been achieved throughout this  financial year and excited by the opportunities which lie ahead. The customer-led focus on execution and innovation has supported a strong financial performance that underpins Mercury’s wider contribution to customers and the country.

The customer-led focus on execution and innovation has supported a strong financial performance that underpins Mercury’s wider contribution to customers and the country.

We acknowledge the choices that our customers, our owners, our people and our partners have all made and thank you for being part of our story.


Together we are Mercury.
Energy Made Wonderful.

Nga mihi nui ki a koutou katoa.

 

» FRASER WHINERAY
CHIEF EXECUTIVE