OUR 2018
ANNUAL REPORT
02 OUR MISSION: ENERGY FREEDOM
04 AT A GLANCE
06 CHAIR AND CHIEF EXECUTIVE UPDATES
18 OUR SUSTAINABILITY STATEMENT
22 24 HOURS OF WONDERFUL ENERGY
26 NEW THINKING AND HIGH PERFORMANCE TEAMS
30 KEEPING THE POWER COMING
34 CONNECTING WITH COMMUNITIES
38 GROWING SOLUTIONS TO CLIMATE CHANGE
42 FINANCIAL COMMENTARY
46 YOUR DIRECTORS
47 OUR EXECUTIVE TEAM
02 // 03
BUSINESS
FUNDAMENTALS
CHAIR AND
CHIEF EXECUTIVE
UPDATES
OUR
SUSTAINABILITY
STATEMENT
PILLARS CUSTOMER
PEOPLE
COMMERCIAL
PARTNERSHIPS
KAITIAKITANGA
FINANCIAL
COMMENTARY
OUR TEAM
OUR MISSION:
ENERGY FREEDOM.
Energy Freedom is an outcome sought for all New Zealanders.
It is about New Zealand being less vulnerable economically and
better off environmentally through better use of homegrown
renewable energy.
REALISING
OUR PURPOSE
EXECUTING
OUR STRATEGY
TO INSPIRE NEW ZEALANDERS
TO ENJOY ENERGY IN MORE
WONDERFUL WAYS
DELIVERING CUSTOMER
ADVOCACY
LEVERAGING CORE STRENGTHS
DELIVERING SUSTAINABLE
GROWTH
BUILDING ON
OUR FOUNDATION >
WELLBEING
OF OUR PEOPLE AND
CUSTOMERS
LIVING
OUR ATTITUDE
ACHIEVING
OUR GOAL
TO BE NEW ZEALAND’S
LEADING ENERGY BRAND
COMMIT
& OWN IT
SHARE &
CONNECT
CURIOUS
& ORIGINAL
BUILDING ON
OUR FOUNDATION >
KAITIAKITANGA
THE CUSTODIANSHIP OF
NATURAL RESOURCES
COMMERCIAL
COMMERCIALLY ASTUTE
DECISIONS
04 // 05
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UPDATES
OUR
SUSTAINABILITY
STATEMENT
PILLARS CUSTOMER
PEOPLE
COMMERCIAL
PARTNERSHIPS
KAITIAKITANGA
FINANCIAL
COMMENTARY
OUR TEAM
AT A GLANCE.
Mercury is an electricity generator,
retailer and metering provider
whose purpose is to inspire
New Zealanders to enjoy energy
in more wonderful ways.
We have a long heritage in
renewable electricity generation.
Hydro and geothermal power
stations operated by Mercury
generate renewable energy
sufficient for 850,000 New Zealand
homes. This year we expanded
our renewable reach through the
acquisition of a 19.99% stake in
Tilt Renewables (Tilt) which has a
growing portfolio of wind and solar
projects in Australasia. We also
have our own consented windfarm
development options in the lower
North Island of New Zealand.
Mercury serves customers through
the Mercury brand and other
specialty brands, including the
leading prepay service GLOBUG.
Mercury’s smart metering
business, Metrix, enables better
energy choices through data.
We have a growing solar business,
Mercury Solar, with expertise in
battery and off-grid solutions.
Research and development is
also something we do: Mercury
is pioneering a scalable, national
grid-connected Tesla battery.
We support our people to be high
performers through a commitment
to wellbeing, inclusion and
development.
Our mission of Energy Freedom is
pursued in many ways, including
through the electrification of
transport. Four years ago, Mercury
identified the electrification of
transport as New Zealand’s
greatest opportunity for reducing
carbon emissions. We encourage
the adoption of electric vehicles
(EVs) and electric bikes (e.bikes)
and partnering on non-home
charging infrastructure and data.
Our goal is to be New Zealand’s
leading energy brand: inspiring,
rewarding and making things easy
for our customers.
91
EVs IN
OUR FLEET
16
PARTNERSHIPS
388K
CUSTOMERS
2 geothermal joint ventures
4 formal iwi partnerships
10 community & commercial
partnerships
CUSTOMERS
341,286 residential
41,987 commercial
1,857 industrial
2,770 spot
2,181 solar customers
243 customers on
EV package
FY2018
FY2017
YOY
CHANGE
7704
7533
2.3%
4.59
4.57
1.25
1.04
> MERCURY
GENERATION VOLUME
(GWh)
MARKET CAP
($bn as at 30 June)
NET DEBT
($bn as at 30 June)
> INDUSTRY
FY2018 MARKET SHARE
19%
14%
GENERATION
SALES
891
EMPLOYEES
366
FEMALE
525
MALE
413K
SMART METERS
AUCKLAND
KAWERAU
KARAPIRO
ARAPUNI
WAIPAPA
MARAETAI
I AND II
WHAKAMARU
MOKAI+
ATIAMURI
OHAKURI
NGATAMARIKI
ARATIATIA
LAKE TAUPO
ROTOKAWA
NGA AWA
PURUA+
R&D Centre
Hydro stations
Geothermal stations
+ Not 100% owned by Mercury.
19.99%
SHAREHOLDING
IN TILT
14 POWER
STATIONS*
606 in Auckland
105 in Hamilton
18 in Taupo
57
105 in rest of New Zealand
in Rotorua
Services include:
> Providing electricity
consumption data
> Maintaining &
servicing assets
> Installing
infrastructure
4,947
2,757
GWh of hydro
generation
GWh of
geothermal
generation
* Two are partnerships with Maori land trusts
06 // 07
BUSINESS
FUNDAMENTALS
CHAIR AND
CHIEF EXECUTIVE
UPDATES
OUR
SUSTAINABILITY
STATEMENT
PILLARS CUSTOMER
PEOPLE
COMMERCIAL
PARTNERSHIPS
KAITIAKITANGA
FINANCIAL
COMMENTARY
OUR TEAM
HIGH QUALITY AND ALIGNED
EXECUTION ACROSS A BROAD
AND COMPLEX RANGE OF
ACTIVITIES HAS BEEN A
HALLMARK OF THIS YEAR.
JOAN WITHERS
CHAIR
ACROSS KEY FINANCIAL, BRAND
AND PEOPLE METRICS, WE HAVE
SET NEW RECORDS IN FY2018.
FRASER WHINERAY
CHIEF EXECUTIVE
08 // 09
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KAITIAKITANGA
FINANCIAL
COMMENTARY
OUR TEAM
CHAIR’S UPDATE
ALIGNED EXECUTION.
On behalf of your Board it is my pleasure to report to you,
our owners, on Mercury’s results for FY2018.
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 of 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.
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.
$561M
RECORD EARNINGS
4,947GWh
A NEW RECORD
HYDRO GENERATION
7.5%
TOTAL
SHAREHOLDER
RETURN
10 // 11
10 // 11
BUSINESS
FUNDAMENTALS
CHAIR AND
CHIEF EXECUTIVE
UPDATES
OUR
SUSTAINABILITY
STATEMENT
PILLARS CUSTOMER
PEOPLE
COMMERCIAL
PARTNERSHIPS
KAITIAKITANGA
FINANCIAL
COMMENTARY
OUR TEAM
ORDINARY DIVIDEND GUIDANCE HAS
BEEN ISSUED AT 15.5 CENTS PER SHARE,
AN INCREASE OF 2.6% ON FY2018.
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%.
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.
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
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.
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.
12 // 13
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UPDATES
OUR
SUSTAINABILITY
STATEMENT
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PEOPLE
COMMERCIAL
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KAITIAKITANGA
FINANCIAL
COMMENTARY
OUR TEAM
CHIEF EXECUTIVE’S UPDATE
CUSTOMER,
COMMUNITY,
COUNTRY.
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%).
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.
WE HAVE CONTINUED A VERY
STRONG RUN ON COST MANAGEMENT
WITH OPERATIONAL EXPENDITURE
REMAINING FLAT AT $214M
FOR FIVE YEARS.
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.
891
EMPLOYEES
91%
EMPLOYEES WHO CONFIRM
THAT MERCURY HAS A CLEAR
VISION OF WHERE IT IS
GOING, COMPARED TO 2017
ALL NZ ORGANISATIONS
BENCHMARK OF 76%1
94%
EMPLOYEES CONFIRM
MERCURY IS COMMITTED
TO HEALTH AND SAFETY,
COMPARED TO ALL
ORGANISATIONS
BENCHMARK OF 85%
1
IBM Workplace Engagement Survey Benchmark
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.
14 // 15
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FUNDAMENTALS
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UPDATES
OUR
SUSTAINABILITY
STATEMENT
PILLARS CUSTOMER
PEOPLE
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KAITIAKITANGA
FINANCIAL
COMMENTARY
OUR TEAM
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.
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 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,
GLOBUG CONTINUES
TO BE NEW ZEALAND’S
LARGEST PRE-PAY
ELECTRICITY PROVIDER
90K
CUSTOMERS ENJOYED A
JUNE FREE POWER DAY
1,200
CUSTOMERS HAVE
ENJOYED RIDING
MERCURY E.BIKES
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.
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.
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.
19.99%
STAKE PURCHASED
IN TILT RENEWABLES
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.
16 // 17
BUSINESS
FUNDAMENTALS
CHAIR AND
CHIEF EXECUTIVE
UPDATES
OUR
SUSTAINABILITY
STATEMENT
PILLARS CUSTOMER
PEOPLE
COMMERCIAL
PARTNERSHIPS
KAITIAKITANGA
FINANCIAL
COMMENTARY
OUR TEAM
WE HAVE THE LARGEST
PARTNERSHIPS WITH
COMMERCIAL MAORI
ENTITIES OF ANY NZX
COMPANY.
$112M
STAY-IN-BUSINESS CAPITAL
EXPENDITURE INCLUDED
DELIVERY OF KEY
TECHNOLOGY PROJECTS AND
PLANT REFURBISHMENT
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 Zealand-
sourced 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 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,
THIS YEAR WE ANNOUNCED A PLAN
TO TRIAL NEW ZEALAND’S FIRST
LARGE SCALE, NATIONAL GRID
CONNECTED, BATTERY ELECTRICITY
TRADING INITIATIVE.
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.
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.
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
18 // 19
BUSINESS
FUNDAMENTALS
CHAIR AND
CHIEF EXECUTIVE
UPDATES
OUR
SUSTAINABILITY
STATEMENT
PILLARS CUSTOMER
PEOPLE
COMMERCIAL
PARTNERSHIPS
KAITIAKITANGA
FINANCIAL
COMMENTARY
OUR TEAM
OUR
SUSTAINABILITY
STATEMENT.
SUSTAINABILITY AT MERCURY IS ABOUT
ENERGY FREEDOM, BUILT ON OUR
FIVE PILLARS OF CUSTOMER, PEOPLE,
COMMERCIAL, PARTNERSHIPS AND
KAITIAKITANGA. OUR HISTORY GOES
BACK ALMOST ONE HUNDRED YEARS
AND WE INTEND TO BE HERE FOR AT
LEAST A HUNDRED MORE.”
During FY2018 Mercury reviewed its approach to integrating sustainability. The starting
point was a discussion around the need for a specific statement: something that
conveyed simply and concisely our view of sustainability as an essential element of
the way we operate, Our Direction.
The resulting statement (above) speaks of Energy Freedom, our mission, and also
our vision of sustainability, not just for Mercury, but for New Zealand. Internally it is
supported by five pillars: customer, people, commercial, partnerships and kaitiakitanga;
and associated focus areas. Our statement signals clearly that we fully intend to build
on our proud history for the next century and beyond.
PILLAR:
PEOPLE
FOCUS AREAS:
High Performance
Teams
Safety and
Wellbeing
Capability and
Development
PILLAR:
PARTNERSHIPS
FOCUS AREAS:
Industry/Research
Iwi
Government
PILLAR:
COMMERCIAL
FOCUS AREAS:
Operational
Excellence
Generation Development
Sustainable Growth
PILLAR:
KAITIAKITANGA
FOCUS AREAS:
Natural Resources
Climate Change
Assets
PILLAR:
CUSTOMER
Inspire, reward,
make it easy
FOCUS AREAS:
Brand
Loyalty
Experience
INTEGRATED THINKING
Mercury understands that integrating sustainability means
taking an ultra long-term view which guides our thinking, our
business planning and the way we operate on a day to day basis.
In FY2018 we took a step back, conducting a detailed review of
past disclosures, included revisiting our stakeholders, their
expectations of us and the things that they consider important.
The result is a simplification of the language used to describe
our five pillars and the refinement of associated focus areas.
The focus areas are a consolidation and rationalisation of the
twenty-two elements of a materiality matrix included in our
FY2017 annual report.
The executive then challenged themselves to consider the
future and created statements, for each of the focus areas,
to succinctly describe what success will look like in 2028 if we
have met stakeholder expectations. Theses ten-year forward
statements continue to be worked on and through FY2019
will be shared and discussed more widely with our people
and our stakeholders.
20 // 21
BUSINESS
FUNDAMENTALS
CHAIR AND
CHIEF EXECUTIVE
UPDATES
OUR
SUSTAINABILITY
STATEMENT
PILLARS CUSTOMER
PEOPLE
COMMERCIAL
PARTNERSHIPS
KAITIAKITANGA
FINANCIAL
COMMENTARY
OUR TEAM
capitals weighted to
Mercury’s Focus Areas
SOCIAL RELATIONAL 27%
HUMAN 11%
INTELLECTUAL 4%
MANUFACTURED 15%
FINANCIAL 28%
NATURAL 15%
INTEGRATED
REPORTING
Mercury continues to integrate
sustainable business practice, refining
our approach and the language used, to
enable transparent and easily understood
disclosures. We think it important to
clearly convey our views and intentions.
To ensure our future disclosures meet
the expectations of shareholders and
investors we mapped our pillars and
focus areas against the International
Integrated Reporting Framework .
The requires organisations to reflect
on six capitals that are essential for value
creation. The capitals: natural, social and
relational, manufactured, intellectual,
human and financial, also need to be
considered from the perspective of
minimising future risks to the business
or “value destruction”.
The process resulted in Mercury being
able to map a close correlation between
our focus areas and the six capitals. It
also confirms we can continue to report
and communicate our performance in a
language that is already very familiar to
our internal and external stakeholders.
As a first step the scorecard is being
used to review all FY2019 to FY2023
business unit plans and create a
rolled-up group plan.
NEXT STEPS
The first step was to take our pillars and
focus areas and create a sustainability
scorecard. The scorecard: informs and
guides the internal business planning
process; provides a consistent approach
to shorter term, one and three-year
planning cycles and enables Mercury
to continue to embrace, and further
integrate, sustainability.
We have already started to engage our
people on integrating sustainability with
specific workshops and presentations
to enterprise and business leaders,
supported by internal communications.
They are therefore directly involved in
looking at existing and potentially new key
performance indicators (KPIs), measures
of success and targets that Mercury can
use to measure its performance.
This annual report is another example
of a channel to communicate our
intentions and inform and educate our
stakeholders, including our owners, and
we welcome any feedback you may have.
We have included the symbols that
represent our five pillars throughout this
report to reflect the integrated thinking
now underway.
We will continue to develop our use of
the integrated reporting framework and
other frameworks such as GRI and the
United Nations Sustainable Development
Goals (SDGs) to ensure our disclosures
reflect global standards.
Taking this comprehensive approach
to integrating sustainability reduces
business risks, identifies potential
opportunities and guides engagement
with all our stakeholders. We will
continue to review and report openly
and honestly on our performance on
a regular basis to ensure the utmost
transparency and we look forward to
sharing our progress with you.
22 // 23
BUSINESS
FUNDAMENTALS
CHAIR AND
CHIEF EXECUTIVE
UPDATES
OUR
SUSTAINABILITY
STATEMENT
PILLARS CUSTOMER
PEOPLE
COMMERCIAL
PARTNERSHIPS
KAITIAKITANGA
FINANCIAL
COMMENTARY
OUR TEAM
CUSTOMER
24 HOURS OF
WONDERFUL
ENERGY.
Friday 6 June, 0005 hours. It might be the small hours of
the morning, but one home in Auckland is glowing with light.
A washing machine starts its first cycle of woolly jumpers,
bedding and tea towels.
Friday 6 June, 0010 hours. A stove switches on, and a pot
of pea and ham soup is underway.
Friday 6 June, 0025 hours. On goes a heater. It stays on
for another 19 hours. The oven starts, ready for three fruit cakes
and a loaf, all waiting to be baked.
And so begins Warren Johns’ day.
He had his Free Power Day booked for
6 June and was up at 12 o’clock that
morning to make the most of it.
Seven loads of washing completed.
Four cakes baked to share with friends.
Two hot baths while the rain pattered
outside. One batch of slow cooked
lamb shanks simmering in the oven.
All of this inside a warm toasty house
with National Radio playing in the
background.
Each of these activities by themselves
might not seem like much but together
they become something quite special
– showing how electricity really delivers
a whole host of wonderful options.
Mr Johns, who lives in his family home,
has continued the relationship his parents
had with us as the original owners of his
home. All up, they’ve been loyal Mercury
customers for nearly 20 years – right
back to day one of our company’s history.
He is also one of our investors.
Our relationship with him has grown over
time thanks to a series of inspiring,
customer-focused initiatives. Our newest
advocate for electric vehicles – a 1957
Ford Fairlane converted to plug-in electric
and christened Evie – is another great
example of “energy made wonderful”.
A self-confessed vintage and classic car
enthusiast, Mr Johns saw Evie at the
‘Galaxy of Cars’ show earlier this year.
It reminded him of his father’s 1937
Ford V8 Coupe. So he talked to
our Mercury team, who were on site,
about Evie's vitals:
| 2.2 m wide | 5.5m long | 2.2 tonnes |
218 battery cells | 50 kWh capacity |
2 hour charging |
He has had a number of conversations
with us during his time with Mercury,
but never about a car.
It is a powerful illustration of how our
customer promise – to inspire, reward
and make things easy – has value across
the business. Through partnerships and
connecting it helps us learn about
what customers expect and value,
and that guides innovation. It also
allows us to show people the real value
of New Zealand’s renewable energy.
VISIT OUR FACEBOOK PAGE FOR MORE
STORIES OF WHAT OUR CUSTOMERS
DID WITH THEIR FREE POWER DAYS.
Please visit facebook.com/mercurynz
24 // 25
BUSINESS
FUNDAMENTALS
CHAIR AND
CHIEF EXECUTIVE
UPDATES
OUR
SUSTAINABILITY
STATEMENT
PILLARS CUSTOMER
PEOPLE
COMMERCIAL
PARTNERSHIPS
KAITIAKITANGA
FINANCIAL
COMMENTARY
OUR TEAM
90K
FREE POWER
DAYS ENJOYED
42K
FACEBOOK
ENGAGEMENTS
420K
CONVERSATIONS
WITH OUR
CUSTOMERS
WARREN’S STORY
Mr Johns’ story came to our attention
after he wrote to Fraser, Mercury’s Chief
Executive, to outline how he used his
Free Power Day, his appreciation of
Evie and the wonderful ways he has
interacted with our people.
Upon receiving the letter, Fraser called
Mr Johns to thank him for sharing the
story of his wonderful day. As part of
Mr Johns’ letter he also told us how
much he would love to go for a drive in
Evie one day. It was an opportunity we
couldn’t resist, so on 7 August we took
him for a ride around his neighbourhood.
See what happened when we picked
him up at: http://bit.ly/evieandwarren
EVIE’S STORY
Evie is our beautiful 1957 Ford
Fairlane, converted from a gas guzzler
to plug-in electric.
She is the poster-child for electric
vehicles, and really brings Mercury’s
mission, Energy Freedom, to life. We
think she is the perfect symbol of our
escape from the cost (environmental
and financial) and reliance on fossil fuels.
We have long promoted the rational
benefits of electric vehicles to New
Zealanders. At an equivalent of 30c per
litre compared with petrol and delivering
2,000kgs in annual reductions in carbon
emissions, they’ve always been an easy
decision for the head.
Converting this classic was a way for us
to start capturing people’s hearts as well.
Evie helps people see how wonderful
electric vehicles can be.
We plan to use Evie to continue to
showcase the outstanding opportunity
New Zealand has to achieve energy
freedom through renewable electricity
powering our transport. If we raise our
sights beyond renewable electricity
targets to our overall renewable energy
use, particularly across the transport
and industrial sectors, our country
could take major steps towards reducing
our overall greenhouse gas emissions
and dramatically reduce the cost that
imported fuel has on households and
the New Zealand economy.
FIND OUT MORE ABOUT
EVIE’S STORY.
Please visit mercury.co.nz/evie
26 // 27
BUSINESS
FUNDAMENTALS
CHAIR AND
CHIEF EXECUTIVE
UPDATES
OUR
SUSTAINABILITY
STATEMENT
PILLARS CUSTOMER
PEOPLE
COMMERCIAL
PARTNERSHIPS
KAITIAKITANGA
FINANCIAL
COMMENTARY
OUR TEAM
PEOPLE
NEW THINKING AND
HIGH PERFORMANCE
TEAMS.
Three graduates (from AUT and MIT) joined Mercury
during the year as part of a programme to attract new
skills and thinking to our business while introducing our
sector to potential future leaders. The graduates spent
their first few months engaging directly with customers
in Mercury’s award-winning Contact Centre.
The graduates brought up-to-the-minute IT skills, fresh
thinking and energy. They gained and then have been
able to share with Mercury a fresh perspective and their
valuable understanding of our customers.
Our Contact Centre teams also benefitted from
having the IT graduates onboard. They contributed to
process improvements and a new system for working
with customers.
The Digital Experience (DX) team are early adopters of
Mercury’s High Performance Team framework and have
utilised this in integrating the graduates into their team.
Siobhan Flynn, a Mercury Information Communication
and Technology (ICT) graduate, and Maurice van
Leeuwen, Senior Business Analyst, ICT - Digital Delivery,
tell their stories.
Mercury’s Attitude (our values):
COMMIT AND OWN IT
SHARE AND CONNECT
CURIOUS AND ORIGINAL
SIOBHAN FLYNN
ICT GRADUATE
I started as a graduate in the ICT team last August.
I’m definitely a ‘people person’. When I was at school and studying I worked for eight years
part time in retail. I loved the customers, and now I work for Mercury it’s still all about the
connections with the people I work with, as well as knowing that the work makes a positive
difference for our customers.
One of the things that attracted me to Mercury was our
commitment to renewable energy. It’s great that Mercury
cares about what’s happening in the world, and it’s
something that people of my generation particularly relate
to. It’s rewarding to see from the inside the different ways
that Mercury tries to connect with its customers and to
think about power in different ways such as through Evie,
the classic car converted to run on electricity.
Mercury seems ready to change as the world changes.
I started off with three months in Mercury’s customer
Contact Centre. This is the first time Mercury started ICT
graduates there, and it’s an amazing way of getting to
understand the business, and actually meeting (on the
phones) a lot of Mercury customers.
New Contact Centre team members have a full four-week
induction, with lots of support for learning and there’s a
really uplifting spirit evident. In all the teams I’ve been in
there’s a feeling of being able to express yourself and be
who you really are at work, and I really like the
encouragement of individuality.
Right from the beginning in the Contact Centre, we were
asked to keep a list of anything that raised a question for
us in terms of process, systems, or how they were working.
At the end of our time there we had a meeting with the
manager and the team leads and ran through the list.
We really felt that they listened.
Starting off in the Contact Centre now helps my ICT
roles. I’m able to connect what I learned about the
business and our customers with how our IT systems and
processes impact our customers. An example is knowing
the experience our customers have when they join us. It’s
been great to have that fresh knowledge that I can share
with the rest of the ICT team.
My managers also really encourage Mercury’s 'Curious and
Original' Attitude. If there’s something I don’t understand,
or something I think isn’t quite right, I ask. My managers
have told me: “you’re here to shake up the status quo and
challenge us”. I’ve felt very empowered that I can speak up.
5,100
OUR ATTITUDE E-CARDS
SENT BY EMPLOYEES TO
THEIR PEERS
79%
OF EMPLOYEES AGREE THAT THIS
ORGANISATION ENCOURAGES
IDEAS AND SUGGESTIONS ON HOW
TO IMPROVE THE WAY THINGS ARE
DONE, COMPARED TO 2017 NZ
ALL ORGS BENCHMARK 71% 84%
OF EMPLOYEES AGREE THAT
COOPERATION BETWEEN
TEAMS IS ENCOURAGED
IN THIS ORGANISATION,
COMPARED TO 2017 NZ ALL
ORGS BENCHMARK OF 71%
28 // 29
BUSINESS
FUNDAMENTALS
CHAIR AND
CHIEF EXECUTIVE
UPDATES
OUR
SUSTAINABILITY
STATEMENT
PILLARS CUSTOMER
PEOPLE
COMMERCIAL
PARTNERSHIPS
KAITIAKITANGA
FINANCIAL
COMMENTARY
OUR TEAM
A high performance
team is a diverse group
of individuals who all have
opinions and different
thinking styles, and who
are supported to give their
best to achieve great results.
We use the collective
brain power of the team
to make things easy for
our customers – faster.
527
MERCURY PEOPLE
COMPLETED AT LEAST
ONE OF OUR 69
DEVELOPMENT TRAINING
EVENTS IN FY2018
87%
OF LEADERS COMPLETED
TRAINING ON BUILDING HIGH
PERFORMANCE TEAMS
MAURICE VAN LEEUWEN
SENIOR BUSINESS ANALYST
ICT – DIGITAL DELIVERY
More and more of our customers are choosing to engage with Mercury through our digital
channels. I am a member of the Digital Experience (DX) team. We work mainly on the
Mercury website and the online customer portal My Account, to make these experiences easier
and more streamlined for our customers. That’s how we connect to Mercury’s mission of
Energy Freedom. This makes business sense too, as it differentiates us from our competitors.
There are seven of us in the team, representing different
areas of ICT. But it’s actually much bigger than that. The work
we do is informed by our colleagues from Marketing, Customer
Insights and the Contact Centre. They get feedback and ideas
from our customers and that filters through to us, to make the
technical changes.
I really enjoy working with the different Mercury teams,
and that the work we do has a positive impact on our
customers. It makes it easier for them to engage with Mercury.
The other thing I enjoy is the different way of working in the
DX team. In the digital world we know we need to move very
fast. With advances in technology, a year-long project might not
end up being the best solution for our customers. Our new way
of working delivers small bites of new features and continually
assesses whether we’re doing the best thing for our customers.
Every two weeks we make a plan for what we’re going to do,
with the goal to build, test and roll out something useful.
For this approach to work, the DX team members have to
have both the ability and the willingness to communicate.
This means actively contributing to discussions and also
listening respectfully to other points of view.
We also need to be able to deal with uncertainty.
Sometimes you’ve got to give something a go without being
sure of success. The two week pace of what we deliver forces
us to do that because you haven’t always got time to
explore things into the real nitty gritty detail.
The other thing is resilience. Sometimes things don’t work out.
But you learn from that and then you go forward.
I enjoy working with graduates like Siobhan. They are smart and
enthusiastic and they pick things up quickly. They’re keen to give
things a go, and they own the job and carry it through to the end.
Sometimes they’ll see things from a different perspective.
Because they’ve had experience in a different part of the
business such as the Mercury Contact Centre, they bring direct
customer focus to our team through that experience and their
conversations with customers.
The graduates ask us questions that make us question
ourselves and the way we work. It’s a real opportunity for us as a
team to talk about what we do and to learn. Sometimes you get
into a routine and it’s only when someone new comes in that
you really look at how you’re doing something. You’re delivering
stuff together, and also learning as well.
79%
OF EMPLOYEES AGREE
THAT THE FEEDBACK AND
COACHING THEY GET HELPS
THEM TO IMPROVE THEIR
PERFORMANCE, COMPARED
TO 2017 NZ ALL ORGS
BENCHMARK OF 67%
89%
OF EMPLOYEES CONFIRM
THAT MERCURY CARES
ABOUT THE WELLBEING
OF ITS PEOPLE, COMPARED
WITH 2017 NZ ALL ORGS
BENCHMARK OF 79%
JOIN THE TEAM AT MERCURY.
SEE OUR CAREERS PAGES.
Please visit mercury.co.nz/careers
30 // 31
BUSINESS
FUNDAMENTALS
CHAIR AND
CHIEF EXECUTIVE
UPDATES
OUR
SUSTAINABILITY
STATEMENT
PILLARS CUSTOMER
PEOPLE
COMMERCIAL
PARTNERSHIPS
KAITIAKITANGA
FINANCIAL
COMMENTARY
OUR TEAM
COMMERCIAL
KEEPING THE
POWER COMING.
A lot happens between when a raindrop falls on New Zealand’s
Central Plateau and when, 425 kilometres later after flowing
down the Waikato River, it enters the Tasman Sea. Along that
journey the water contributes to diverse ecosystems, it is enjoyed
for recreation, and some is diverted for drinking water not only for
people in towns along the way, and the city of Hamilton that it
flows through, but for New Zealand’s largest city, Auckland.
From Lake Taupo the water also drops
just over 350m to sea level: slightly more
than the height of Auckland’s Sky Tower.
That’s where Mercury comes in:
harnessing the energy as gravity exerts
its force on that water.
Mercury’s hydro generation on the
Waikato River can be traced back to
the commissioning of the Arapuni Dam
(1929), with the ninth and final station
commissioned in 1970 (Maraetai II).
The Waikato Hydro system feeds
electricity to the national grid to meet
around 10% of the New Zealand’s
electricity needs. The hydro stations,
along with our geothermal stations, are
also the commercial backbone of our
business. Over the past five financial
years, hydro has contributed 58% of
our total generation. With a view to
our overall ultra-long term sustainability
we understand our duty of care to this
critical infrastructure.
This year our multi-year, multi-million
dollar reinvestment in the Waikato Hydro
scheme passed several milestones,
including completing the successful
upgrade of the first of three units at
the Aratiatia hydro power station.
The 78MW Aratiatia station,
13 kilometres downstream from Taupo
township, was commissioned in 1964.
The Aratiatia Rapids above the station,
which have functioned as the dam’s
spillway since commissioning, are rated
as one of Taupo's top tourist sights,
showcasing a fraction of the power
harnessed by the station's three
generating units. From the beginning,
extra work and innovation has been
needed to optimise the station’s output.
Paul Betschart, Lead Engineer to the
project, has been with Mercury for 10
years, and joined the Aratiatia upgrade
project in 2015.
“We’re at the point now where a lot of the
original equipment has given all that we
could have expected in terms of service
life,” says Paul. “Replacement of parts
was identified as the best way forward for
reliability, risk avoidance and efficiency.”
Improving the station’s long-term
performance and sustainability
motivated the way the project was
implemented. The overhaul focused on
the huge machinery that harnesses the
energy from the water, turning it into
PAUL BETSCHART
LEAD ENGINEER
I selected my degree at
university knowing that I
was interested in science
and engineering. I joined
Mercury as a graduate,
and now I’m a Senior
Engineer on our hydro
power stations. I’ve been
here 10 years and I can’t
think of anything else that
I’d rather be doing.
The Aratiatia upgrade project is supported
by Mercury teams from our Taupo,
Hamilton, Rotorua and Auckland offices.
An extra 40 engineers and other specialists
will call the Taupo District home while
they partner with us on this project, and
around 20 businesses in and around the
Taupo area supply painting, transport,
welding, engineering, machining
and catering services.
There have been no
notifiable injuries.
1008
TECHNICAL DOCUMENTS
SUBMITTED BY ANDRITZ
Including 444 drawings, and
5243 email communications
between Andritz and the
Mercury team
OVER
150TONNES
OF ROTATING EQUIPMENT
IN EACH OF THE THREE
GENERATING UNITS
G2 HAS 31.5MW
GENERATOR CAPABILITY
and discharges over
100 tonnes of water per
second at full load
FULL PROJECT
COMPLETION:
2020
TOTAL EXPENDITURE:
$49M
32 // 33
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FINANCIAL
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OUR TEAM
THE MERCURY PROJECT TEAM
OWN THE LONGER-TERM VIEW.
WE UNDERSTAND WHAT WE
WANT AS A WHOLE PLANT,
OVER A 50-YEAR LIFE.
mechanical power and then electrical
power. After over 50 years of innovation,
tweaks and fixes, the project’s aim is
to safely restore and reconfigure the
station to deliver maximum value from
current and expected future operating
conditions. This has involved some
very creative approaches.
Paul explains: “The generators were
getting more prone to faults. That can
cost us generation time. The governors
that control the speed and output of the
turbine (like setting cruise control on a
modern car) could be updated with new
technology. And the turbines themselves,
the spinning water wheels and all the
equipment around them, were also in
need of attention.”
Long term, commercial thinking led
to the decision to replace one of the
station’s three turbines with a unit
specially configured to run at a lower
rate of water flow than that sustainable
with the old turbine design. This means
water use can be optimised when low
station flows are required, while still
retaining over 90% of the maximum
power capability of the old turbines and
also delivering a significant increase in
energy conversion efficiency. It was
decided to defer investment on replacing
the other two turbines until 2036, with
this long date giving Mercury additional
flexibility in its long-term planning.
Effective modernisation and
enhancement projects take time.
The contract was awarded to partner
Andritz in October 2015, two years of
assessment, planning, design, testing
and manufacture before the installation
of components. Paul and other team
members worked with Andritz in
Austria to discuss the preliminary
design. Manufacturing took place in
foundries and factories across the
globe: Austria, Germany, China, Czech
Republic, Hungary, Italy and India.
And once manufacture started the
quality assurance process started too.
“This is mechanically and electrically
stressed equipment. Safety and
performance depends on the design,
the materials and the execution. We
had reviewed the design, and then we
reviewed the materials and execution,”
says Paul.
Raw performance in terms of
megawatt (MW) output is guaranteed
in the contract. A lot of the work
throughout the design, manufacture
and installation of the machinery goes
beyond output, however, Paul says.
It’s about long-term performance,
making sure this plant will run as
long as possible, be easy to maintain,
be safe and be as reliable as possible.
Paul explains: “Our project partners
are on the same page and focused
on delivering a quality product. But we,
as the Mercury project team, own the
longer-term view. We understand what
we want as a whole plant, over a 50-year
life. Sometimes our experience and our
preferences lead to a different approach.
But it was all about teams working
together to get the best outcome.”
Installation of the first unit, G2, began
in October 2017, with return to service
completed in June 2018. Turning the
unit back on was itself a month-long
project. “Commissioning is pretty full on.
It’s both very well planned and managed,
and at the same time there’s quite a lot
of initiative required when you deal with
issues in real time.”
The three-year installation project means
there’s not a lot of time to pause and
contemplate the progress so far. Each
of the three units to be overhauled takes
around six months. Balancing complex
commercial, consumer and country
imperatives mean these stages are
timed to avoid having machines out
of action during New Zealand’s winter
energy demand peak, while working with
scheduled maintenance of other stations
on the river. Parts for Aratiatia’s next
unit to be overhauled arrived in July for
assembly. The G1 generator with its new
optimised low-flow turbine is scheduled
to return to service May 2019, and the
final unit, G3, will start its overhaul in
spring that year.
“Commissioning G2 was a huge
milestone,” says Paul. “Most of us were
looking forward to some downtime to
recharge. But everyone’s keen to take
what we learned and apply it to the
next two units.”
The outcome is a well-planned, safely
delivered project that returns the
generating units to operational service
with optimised capability incorporating
appropriate technology, resulting in long-
term reliability and sustainable operations
at Aratiatia for many years to come.
GO SOLAR.
GET A QUOTE ONLINE OR
PHONE 0800 676 527.
Please visit mercury.co.nz/solar
34 // 35
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OUR TEAM
PARTNERSHIPS
CONNECTING
WITH
COMMUNITIES.
Brian Pegler works for the Christchurch City Council’s Mayor’s Welfare Fund, which plays an integral
role in supporting vulnerable people in Christchurch.
For many of these individuals, our pre-pay brand GLOBUG is
sought as a tool to manage electricity – it breaks down
the barriers to reconnection, helps people avoid the spiral of
debt and can be paid for in small, manageable amounts.
While initially a sceptic of GLOBUG (and the sector in general),
continuous engagement with Brian has allowed our relationship to
evolve into one of collaboration. Together, we find better solutions
for our mutual customers, with dignity always at the heart.
customers. We ensured no disconnections occurred while
working with the Mayor’s fund at this critical time.
It is not the first time we’ve done this with Brian’s intel,
and we do not expect it to be the last.
Well-informed decisions like these enable us to maintain
the integrity of one of our core foundations – the wellbeing
of our customers. It is a value entirely aligned with Brian’s
own imperatives.
Brian is fundamental to our understanding of how we can best
support these individuals. In short, he is our eyes and ears, and
a voice for those who sometimes struggle to be heard.
It is also a commercially astute decision, helping our customers
see the value of continuing to choose GLOBUG as their
electricity provider.
Most recently Brian drew our attention to an increase in people
seeking support from the Fund, coinciding with the onslaught of
some bracingly cold winter weather. These insights allowed us to
work with the Mayor’s Welfare Fund on a solution for GLOBUG
“I have worked with vulnerable people for years. Without GLOBUG
many of the at-risk households I support would be without
electricity and further disadvantaged. Electricity is a basic human
need – it is absolutely vital to our health, wellbeing and income.”
BRIAN PEGLER
CHRISTCHURCH CITY COUNCIL
MAYOR’S WELFARE FUND
ELECTRICITY IS A BASIC HUMAN
NEED – IT IS ABSOLUTELY VITAL
TO OUR HEALTH, WELLBEING
AND INCOME.
DONATE TO STARSHIP
Please visit
starship.org.nz/mercury
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FINANCIAL
COMMENTARY
OUR TEAM
HELEN TUA
MERCURY
COMMUNITY RELATIONS MANAGER
Helen joined Mercury twenty years ago as an analyst,
helping the business transition onto a new data
platform. However, the trajectory of her career changed
dramatically when she realised her passion was in
supporting individuals and families who needed help.
Now, Helen leads Mercury’s community relations team and is
tasked with helping improve the wellbeing of our most vulnerable
customers by partnering with other groups like Christchurch’s
Mayor’s Welfare Fund.
Her role is unique, in that it covers customer support at an
individual level, grassroots community involvement, and also
engagement with key government agencies and stakeholders.
Helen believes having flexibility to navigate these multiple
touchpoints with fluidity sets Mercury apart in its community
engagement practices.
With a nationwide focus, Helen sees first-hand how diverse
communities across the country are. Each has its own unique
set of challenges and opportunities. A common thread is the
unconditional love, care and support for the families in these
close-knit groups. These insights highlight that a one-size-fits-all
approach doesn’t serve these families and individuals as well as
targeted and focused support.
Essential to achieving better outcomes is a fulsome view of the
different pressure points a family may be facing, along with the
acceptance that electricity accessibility is often one of the many
balls these families are struggling to keep in the air.
“Partnerships are a path we follow. Along that path there are
gates we go through and each gate is another organisation with
information to help us get to our destination – helping a family
get back on track. These voices are important to us finding
collective solutions that ease pressure in a more holistic and
sustainable way.”
$100K
DONATED THROUGH
OUR EMPLOYEE
COMMUNITY FUND
$900K
DONATED TO STARSHIP
94%
OF OUR PEOPLE SAY
WE MAKE A POSITIVE
CONTRIBUTION TO
OUR COMMUNITIES
In a world where environmental, social and
economic systems are inextricably linked, no
organisation can operate successfully in isolation.
This interconnectivity means the actions we take
create far-reaching ripples, and seemingly small
decisions are easily magnified. That is why
‘partnerships’ is one of our five pillars.
Mercury’s approach to partnerships is extensively
applied across our business. Whether it is
operating our hydro and geothermal assets,
serving our customers or looking after our people,
working with others contributes to better, more
sustainable outcomes.
FIND OUT MORE ABOUT HOW
WE WORK IN PARTNERSHIP
WITH IWI, STARSHIP, WAIKATO RIVER
TRAILS AND MANY OTHERS.
Please visit mercury.co.nz/partnerships
38 // 39
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KAITIAKITANGA
GROWING SOLUTIONS
TO CLIMATE CHANGE
Plump kererū (wood pigeon),
rare kārearea (New Zealand
falcon), kōtare (kingfisher),
ruru (morepork) and
pīwakawaka (fantail) call
through the thick regenerating
scrubby bush, secondary
beech and broadleaf forest,
manuka and remnant stands
of beech and northern rata
trees of Pigeon Bush Reserve.
Remote and isolated, the 1,157-hectare
reserve lies between the Remutaka
and Tararua Conservation Parks west
of Featherston in the South Wairarapa.
This steep, rugged land had been almost
completely cleared and intensively
farmed since the 1860s, but is returning
to dense forest after being bought,
protected and managed by the Native
Forest Restoration Trust since 1995.
The Trust is a leading organisation
in the protection and restoration of
New Zealand’s native forest. It is
committed to promoting the
regeneration of forests, protecting
native species and restoring their
habitats, and to improving the quality
of New Zealand’s waterways. Through a
ground-breaking commercial agreement
in 2012, Mercury has supported the
Trust’s work in this and some of the
other 7,000 hectares of native forests
and wetlands throughout New Zealand
it has purchased and protected.
The carbon credits that Mercury
purchases from the Trust come from
the regenerating native forest in Pigeon
Bush Reserve. The trees in the Reserve
are regularly measured and the extra
growth is calculated and converted into
carbon units, based on the age, size,
and type of tree.
Mercury has ten agreements that
support different New Zealand forestry
projects to offset carbon produced by
Mercury. The contract with the Native
Forest Restoration Trust was not only
commercially attractive, it stood out for its
strong alignment to Mercury’s ultra-long-
term view of kaitiakitanga (guardianship)
through the Trust’s objective of restoring
native forests so that New Zealanders
can enjoy them forever.
The Trust was born in 1980 out of direct
action taken by people protesting the
felling of giant totara in Pureora Forest.
Since that time, the Trust has continued
to protect New Zealand forests and has
rallied, purchased and protected well
over 7,000 hectares for the ongoing
benefit of all New Zealanders.
Sandy Crichton, Trust Manager, is clear
about the wider impact of the Trust.
“Protecting and restoring nature is an
important part of our climate change
response here in New Zealand.”
Through partnering with the Trust,
Mercury is supporting the Trust’s
stewardship of regenerating New Zealand
forest, and contributing to a positive
impact on climate change.
Sandy explains “From small beginnings,
founded on genuine passion to protect
and restore New Zealand’s native forest,
the Trust has gone on to become one
of the leading organisations involved in
native forest restoration. The Trust is still
relatively small, but we put the rallying
call out and huge numbers of passionate
people who really care a lot come
together. Our recent fundraising in
Northland and Taranaki is testament to
this, along with everyone who gives their
time on a volunteer basis.”
The Trust uses the extra income from
its contract with Mercury for reserve
management, including pest predator
control, weed control, track cutting,
signage and planting.
“Our relationship with Mercury is one of
our oldest and most important business
relationships,” says Sandy. “This was our
first contracted relationship around carbon
so it really paved the way in terms of other
relationships that we’ve since put in place.”
It was forward thinking at the time, it
is important now, and its value will be
experienced by all New Zealanders into
the future.
“The Trust recognises the efforts of
companies who have measured their
carbon footprint and then taken action
to try and reduce emissions, as well as
supporting native forest restoration to
reduce the impact of unavoidable
emissions,” says Sandy.
“The Trust’s work is only possible through
our incredible supporters and more
recently through ongoing carbon income
from organisations such as Mercury.”
FIND OUT MORE ABOUT
THE NATIVE FOREST
RESTORATION TRUST
Please visit nfrt.org.nz
40 // 41
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FINANCIAL
COMMENTARY
OUR TEAM
A GLOBAL ISSUE
The impacts of climate
change are a significant
global challenge that is
arguably starting to play
out locally in many parts
of New Zealand.
The Kyoto Protocol is an
international treaty aimed at
reducing greenhouse gas
emissions, whereby countries
can reduce emissions and/or
purchase carbon credits to cover
any excess emissions. In 2020
New Zealand’s obligations under
Kyoto are replaced for the
following decade by Paris
Accord targets.
FIND OUT MORE ABOUT OUR COMMITMENT
TO RENEWABLE GENERATION.
Please visit mercury.co.nz/renewables
The New Zealand Emissions
Trading Scheme (ETS)
was launched in 2008,
and Mercury and other
electricity generators were
entered into the Scheme
in 2010. The ETS puts a
price on emissions to
provide an incentive to
reduce emissions.
Mercury has contracts
with foresters that
enable us to buy
carbon units at a given
price in order to offset
our carbon liability
under the ETS.
CARBON IN OUR BUSINESS
Mercury carefully measures and manages its greenhouse gas emissions and has maintained a robust forestry
investment programme for the past eight years. An outcome of the programme is that Mercury has become
‘carbon positive’ in the past three years, where the forestry we invest in absorbs more carbon than Mercury
contributes to the environment.
• While geothermal generation is a renewable energy
source, it is not emissions free. During the generation
process, greenhouse gas is released from the
geothermal fluid extracted from our geothermal
reservoirs. We closely monitor and report on the
amount of greenhouse gas released from our
geothermal power stations as required by the
Emissions Trading Scheme.
• Mercury takes responsibility for the carbon produced
by all the energy we provide, including the gas
consumed by our dual-fuel customers. We calculate
the carbon emissions associated with this fuel each
year and offset that along with what we directly emit.
• Mercury is actively reducing carbon emissions
from our business. We mothballed our thermal
(gas-fired) power station in 2015. This reduced our
carbon emissions, and associated financial liabilities,
by 47% over the past three years.
• We believe that electric transport offers the best
solution for cutting national greenhouse gas
emissions, as well as curbing transport related air
and noise pollution. We have already replaced every
possible vehicle in our fleet (91 out of 129) with
Electric Vehicles (EVs) and plug-in hybrid EVs (PHEVs).
)
e
2
0
C
S
E
N
N
O
T
(
S
N
O
I
S
S
I
M
E
N
O
B
R
A
C
700,000
600,000
500,000
400,000
300,000
200,000
100,000
0
FY15
FY16
FY17
FY18
GWh
Emissions
)
h
W
G
(
N
O
I
T
A
R
E
N
E
G
7,800
7,600
7,400
7,200
7,000
6,800
6,600
6,400
6,200
6,000
5,800
Total reported carbon emissions include proportionate emissions
from our Tuaropaki Trust and Nga Awa Purua partnerships.
Moving away from
thermal generation has
seen our total emissions
from generation
decrease by 47% over
the past three years.
The emissions intensity
of the electricity we put
into the NZ grid has
decreased by 55% over
the same period.
MANAGING CLIMATE CHANGE RISKS
Mercury is aware climate change has the potential to create physical risks, as well as regulatory and financial,
for our operations well into the future. These could include more intense rainfall events in the Waikato catchment
and increasing average temperatures where we generate electricity.
We have undertaken preliminary modelling of various future climate change scenarios to 2050 and beyond.
Initial findings indicate increasing rainfall will provide the opportunity for increased generation. However, if the
intensity of rainfall events increases then more water may need to be spilled rather than used for generation.
Geothermal generation could also be reduced as increasing average temperatures will reduce the efficiency of
our cooling towers and the generation process. We will continue to monitor and manage climate change risks
and invest in a wide range of the most appropriate solutions.
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FINANCIAL
COMMENTARY
OUR TEAM
FINANCIAL COMMENTARY.
Mercury’s financial performance for the
12 months to 30 June 2018 set another
record, with EBITDAF of $561 million,
an increase of $38 million on the
previous financial year. This record result
was underpinned by the highest North
Island hydro inflows and total generation
in the company’s history, the disciplined
management of costs and strong
execution of work programmes across
the business.
In May FY2018, Mercury completed a
$50 million share buyback (15.6 million
shares) at an average price of $3.21 per
share, bringing total shares held as
treasury stock to 39.1 million (2.7 %).
Mercury also completed the purchase
of a 19.99% stake in NZX and ASX listed
generator, Tilt Renewables Limited, for
$144 million or $2.30 per share. Post
year end, Mercury announced with
Infratil a joint takeover offer for all
the shares in Tilt. If the takeover is
successful, Mercury’s equity interest
in Tilt will remain at 19.99%.
Energy margin
Our energy margin of $734 million was
$36 million higher than the prior year.
Wet weather in the North Island, resulted
in record hydro generation of 4,947GWh
an increase of 223GWh, or 4.7%, on
FY2017. Record generation production
also coincided and benefited from
higher average wholesale prices (FY2018:
$82/MWh versus FY2017: $55/MWh at
Whakamaru) due to drier than normal
South Island hydrology and peakier
demand for electricity.
Despite increasing competition, the
Mercury brand continues to experience
below market average customer
churn, reflecting our focus on growing
customer promises. Growing our
customer-led digital offerings and
capability and upgrading key customer
systems to a fully-supported cloud-
based environment also contributed
to this year’s strong result.
Other income
Other income increased by $7 million to
$47 million, once the impacts of carbon
sales from the prior year are considered,.
This includes a $3 million increase in
revenue generated by our metering
business Metrix, land sales, proceeds
from insurance and dividends received
from our investment in Tilt.
Operating costs
Operating costs remained flat for the
fifth year in a row at $214 million due
to our ongoing focus on managing
costs and improved procurement
practices. This included major planned
outages at most of our geothermal sites,
including a 22-day shut at our Kawerau
station to change out the steam turbine
rotor and refurbish the cooling towers
(the biggest shut in the plant’s history).
Operating costs represent the company’s
indirect costs of sales, including salaries
and wages, maintenance costs, and all
other corporate overheads.
$734M
ENERGY MARGIN
(UP $36 MILLION
FROM FY2017)
> FIGURE 1: ENERGY MARGIN
800
700
600
500
M
$
400
300
200
100
0
2014
2015
2016
2017
2018
FINANCIAL YEAR
OPERATING EARNINGS
(EBITDAF)
$561M
PROFIT FOR
THE YEAR
(UP $50 MILLION)
$234M
Operating earnings (EBITDAF)
As previously noted, EBITDAF for the year
was $561 million up $61 million on initial
guidance for the year and up $38 million
on FY2017, primarily due to the higher
hydro generation output and a focus on
capturing the value from higher and
more volatile wholesale electricity prices.
We have continued to execute well in our
core business by focusing on growing
customer loyalty, managing costs and
maintaining our strong regional
partnerships – all of which are reflected
in this record financial performance.
Profit for the year
Profit for the year was $234 million
up $50 million versus FY2017. Profit
increased due to higher operating
earnings, favourable fair value
movements in financial instruments
due largely to higher valuations of
non-hedge accounted electricity
derivative contracts, a roll down of
the group’s historic out of the money
interest rate swaps, and lower interest
expense, partially offset by higher
depreciation charges, mostly due to
current year asset additions and
geothermal generation asset
revaluations in the prior year, coupled
with higher tax expense because of
higher operating earnings. There were
no impairments recognised in FY2018.
> FIGURE 2: OPERATING COSTS
> FIGURE 3: OPERATING EARNINGS (EBITDAF)
M
$
250
200
150
100
50
0
600
500
400
M
$
300
200
100
0
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
FINANCIAL YEAR
FINANCIAL YEAR
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Capital structure and dividends
As noted, Mercury completed an
on-market share buyback programme
acquiring nearly 15.6 million ordinary
Mercury shares (1.1%) for total
consideration of NZ$50 million.
Consistent with the 2014 buyback, the
shares are being held as treasury stock
providing future balance sheet flexibility.
The share buyback and Tilt investment
lifted the company’s gearing level to 2.0
at the top (good) end of Mercury’s target
range of 2.0x to 3.0x debt/EBITDAF ratio
for our S&P credit rating of BBB+, which
was reaffirmed in December 2017.
In line with Mercury’s dividend policy,
targeting a pay-out ratio of 70% to
85% of Free Cash Flow on average over
time, a fully imputed 9.1 cents per share
final dividend has been declared.
This brings the full-year ordinary dividend
to 15.1 cents per share, up from 14.6
cents per share in FY2017, and marks
our 10th consecutive year of ordinary
dividend growth. The final dividend will
be paid on the 28th September 2018.
15.1 CENTS
FULL YEAR ORDINARY DIVIDEND
9.1 CENTS
FINAL DIVIDEND
BBB+
OUR S&P CREDIT
RATING
Underlying earnings after tax
Underlying earnings is presented to enable
stakeholders to make an assessment
and comparison of earnings after
removing one-off and/or infrequently
occurring events (exceeding $10 million
of profit before tax), impairments and
any changes in the fair value of derivative
financial instruments. Underlying Earnings
after tax increased by $22 million to
$198 million reflecting the company’s
stronger EBITDAF performance partially
offset by higher depreciation costs on
the previous year.
Net cash flows from operating
activities
Net cash provided by operating
activities represents the cash flows from
the sale of electricity and metering
services, along with the costs associated
with their sale and the cash costs of
interest and taxes. This decreased by
$1 million in FY2018 to $371 million.
Significantly higher cash taxes in FY2018
of $102 million versus $52 million in
FY2017 were due to tax prepayments
made in FY2016 and FY2018 for
dividend imputation reasons.
$198M
UNDERLYING EARNINGS AFTER TAX
> FIGURE 4: CAPITAL EXPENDITURE
> FIGURE 5: DIVIDENDS
120
100
80
M
$
60
40
20
0
SPECIAL
FINAL
INTERIM
NEW INVESTMENT
STAY-IN-BUSINESS
E
R
A
H
S
/
S
T
N
E
C
25
20
15
10
5
0
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
FINANCIAL YEAR
FINANCIAL YEAR
Balance Sheet
Total assets of the company increased by
$94 million in the financial year largely
due to the investment in Tilt. Net debt at
the end of the year rose to $1,249 million
compared to $1,038 million in FY2017.
The company invested $118 million
in capital expenditure (CAPEX),
comprising SIB CAPEX of $112 million
and $6 million of growth capex spent
mostly on new smart meter deployment.
The company invested $112 million of
SIB CAPEX in major hydro refurbishment
projects at our Aratiatia and Whakamaru
hydro stations. The second refurbished
generator and turbine at Whakamaru
lifted its capacity by 23% to 31MW. At
Ngatamariki the drilling of a replacement
well ensured the facility has continued
access to “fuel” to maintain its full
generation capacity.
Mercury continues to invest in its
technology systems and completed
projects across the business including
a new system to deliver certified
half-hourly data to Metrix’s customers,
improvements to our core SAP customer
and financial system, implementation
of SAP Hybris Service Cloud a new
cloud-based customer relationship
management system , the movement
to cloud-based data centres and the
upgrade of the generation asset
management system Maximo.
$112M
STAY-IN-BUSINESS CAPEX
> FIGURE 6: UNDERLYING EARNINGS AFTER TAX
200
150
M
$
100
50
0
2014
2015
2016
2017
2018
FINANCIAL YEAR
46 // 47
BUSINESS
FUNDAMENTALS
CHAIR AND
CHIEF EXECUTIVE
UPDATES
OUR
SUSTAINABILITY
STATEMENT
PILLARS CUSTOMER
PEOPLE
COMMERCIAL
PARTNERSHIPS
KAITIAKITANGA
FINANCIAL
COMMENTARY
OUR TEAM
YOUR DIRECTORS.
> JOAN WITHERS
CHAIR
> JAMES MILLER
DIRECTOR
> MIKE TAITOKO
DIRECTOR
> PRUE FLACKS
DIRECTOR
> PATRICK STRANGE
DIRECTOR
> ANDY LARK
DIRECTOR
> KEITH SMITH
DIRECTOR
> SCOTT ST JOHN
DIRECTOR
> ANNA LISSAMAN
FUTURE DIRECTOR
PLEASE SEE OUR WEBSITE
FOR FULL BIOGRAPHIES
mercury.co.nz/leadership
OUR EXECUTIVE TEAM.
> FRASER WHINERAY
CHIEF EXECUTIVE
> MATTHEW OLDE
METRIX CHIEF EXECUTIVE
> TONY NAGEL
GENERAL MANAGER CORPORATE AFFAIRS
> JULIA JACK
CHIEF MARKETING OFFICER
> WILLIAM MEEK
CHIEF FINANCIAL OFFICER
> KEVIN ANGLAND
GENERAL MANAGER DIGITAL SERVICES
> PHIL GIBSON
GENERAL MANAGER HYDRO & WHOLESALE
> MARLENE STRAWSON
GENERAL MANAGER PEOPLE & PERFORMANCE
> NICK CLARKE
GENERAL MANAGER GEOTHERMAL & SAFETY
SEE OUR GREAT ELECTRIC VEHICLE
INITIATIVES AND FUEL PACKAGES AT
mercury.co.nz/evs
OUR 2018 FINANCIAL REPORT
Mercury NZ Limited
ANNUAL FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
REPORT CARD.
01 REPORT CARD
02 FINANCIAL TRACK RECORD
03 INDEPENDENT AUDITOR’S REPORT
06 FINANCIAL STATEMENTS
33 GOVERNANCE AT MERCURY
40 REMUNERATION REPORT
46 DISCLOSURES
54 GLOSSARY
55 DIRECTORY
> FINANCIALS
$561M
EBITDAF UP $38M, REFLECTING ANOTHER
YEAR OF RECORD GENERATION FROM STRONG
HYDRO INFLOWS.
STATEMENT FROM THE DIRECTORS
The Directors are pleased to present Mercury NZ Limited’s
annual report and financial statements for the year ended
30 June 2018.
The Auditor-General is required to be the company’s auditor,
and has appointed Simon O’Connor of Ernst & Young to
undertake the audit on his behalf.
The Directors are not aware of any circumstances since the
end of the year that have significantly or may significantly
affect the operations of the Group.
This annual report is dated 21 August 2018 and is signed
on behalf of the Board by:
Joan Withers, Chair
Keith Smith, Director
$234M
NET PROFIT AFTER TAX $50M HIGHER,
ACHIEVED THROUGH STRONG EXECUTION
ACROSS THE BUSINESS.
$259M
FREE CASH FLOW FLAT YEAR ON YEAR
FROM HIGHER CASH RECEIPTS OFFSET
BY PREPAYMENT OF TAX.
15.1CPS
ORDINARY DIVIDEND UP 3.4%.
Mercury NZ Limited
ANNUAL FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
REPORT CARD.
01 REPORT CARD
02 FINANCIAL TRACK RECORD
03 INDEPENDENT AUDITOR’S REPORT
06 FINANCIAL STATEMENTS
33 GOVERNANCE AT MERCURY
40 REMUNERATION REPORT
46 DISCLOSURES
54 GLOSSARY
55 DIRECTORY
> FINANCIALS
> DELIVERING CUSTOMER ADVOCACY
$561M
EBITDAF UP $38M, REFLECTING ANOTHER
YEAR OF RECORD GENERATION FROM STRONG
HYDRO INFLOWS.
63%
6.4%
OF MERCURY CUSTOMERS RATING
AS ‘HIGHLY SATISFIED’.
MERCURY BRAND TRADER SWITCH CHURN,
LOWER THAN MARKET AVERAGE.
STATEMENT FROM THE DIRECTORS
The Directors are pleased to present Mercury NZ Limited’s
annual report and fi nancial statements for the year ended
30 June 2018.
The Auditor-General is required to be the company’s
auditor, and has appointed Simon O’Connor of Ernst &
Young to undertake the audit on his behalf.
The Directors are not aware of any circumstances since the
end of the year that have signifi cantly or may signifi cantly
affect the operations of the Group.
This annual report is dated 21 August 2018 and is signed
on behalf of the Board by:
Joan Withers, Chair
Keith Smith, Director
$234M
NET PROFIT AFTER TAX $50M HIGHER,
ACHIEVED THROUGH STRONG EXECUTION
ACROSS THE BUSINESS.
$259M
FREE CASH FLOW FLAT YEAR ON YEAR
FROM HIGHER CASH RECEIPTS OFFSET
BY PREPAYMENT OF TAX.
15.1CPS
ORDINARY DIVIDEND UP 3.4%.
> LEVERAGING CORE STRENGTHS
ZERO
HIGH SEVERITY INCIDENTS.
7,704GWh
RECORD GENERATION FROM FAVOURABLE HYDROLOGICAL
CONDITIONS AND STRONG EXECUTION OF KEY PROJECTS.
> DELIVERING SUSTAINABLE GROWTH
$214M
OPERATING EXPENDITURE FLAT FOR THE
FIFTH STRAIGHT YEAR.
19.99%
STAKE IN TILT RENEWABLES, CREATING PLATFORM FOR
EXPOSURE TO AUSTRALIA’S TRANSITION TO RENEWABLE
ELECTRICITY GENERATION.
02 // 03
FINANCIAL TRACK RECORD
Financial Performance Trends
For the year ended 30 June ($ million)
2018
2017
2016
2015
2014
Income statement
Energy margin
EBITDAF
Net profit for the year
Balance sheet
Total shareholders’ equity
Total assets
Total liabilities
Cash flow
Operating cash flow
Investing cash flow
Financing cash flow
Capital expenditure
Total capital expenditure
Growth capital expenditure
Stay-in-business capital expenditure
Other financial measures
Underlying earnings after tax
Free cash flow
Ordinary and special declared dividends
Ordinary dividends per share (cents)
Special dividends per share (cents)
Basic and diluted earnings per share (cents)
Net debt
Gearing (net debt/net debt+equity, %)
Debt/EBITDAF (x)1
Operational measures
Total recordable injury frequency rate (TRIFR)2
Sales to customers (FPVV, GWh)
Electricity customers (‘000)
Electricity generation (GWh)
1 Adjusted for S&P treatment of subordinated debt issued in FY2015.
2 Per 200,000 hours; includes onsite employees and contractors.
734
561
234
3,286
6,091
2,805
371
(260)
(136)
118
6
112
198
259
207
15.1
–
17.02
1,249
27.5
2.0
0.87
4,477
388
7,704
698
523
184
3,308
5,997
2,689
372
(90)
(298)
116
2
114
176
258
270
14.6
5.0
13.37
1,038
23.9
1.8
1.05
4,606
392
7,533
660
493
160
3,315
6,085
2,770
280
(37)
(228)
72
13
59
152
221
252
14.3
4.0
11.6
1,068
24.4
2.0
0.74
4,397
376
6,842
650
482
47
3,337
6,058
2,721
309
(103)
(195)
110
31
79
145
230
296
14.0
7.5
3.4
1,082
24.5
2.0
1.25
4,486
382
6,563
690
504
212
3,219
5,689
2,470
317
(99)
(213)
93
33
60
185
257
186
13.5
–
15.3
1,031
24.3
2.1
0.84
4,844
382
6,295
INDEPENDENT AUDITOR’S REPORT
TO THE SHAREHOLDERS OF MERCURY NZ LIMITED
REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
The Auditor-General is the auditor of Mercury NZ Limited (‘the entity’) and its subsidiaries and other controlled entities (collectively
referred to as ‘the Group’). The Auditor-General has appointed me, Simon O’Connor, using the staff and resources of Ernst & Young,
to carry out the audit of the consolidated financial statements of the Group on his behalf.
Opinion
We have audited the financial statements of the Group on pages 6 to 32 of the Financial Report, that comprise the consolidated
balance sheet as at 30 June 2018, the consolidated income statement, consolidated statement of comprehensive income,
consolidated statement of changes in equity and consolidated cash flow statement for the year then ended on that date, and notes
to the consolidated financial statements that include accounting policies and other explanatory information.
In our opinion, the consolidated financial statements of the Group present fairly, in all material respects, the consolidated financial
position of the Group as at 30 June 2018, and its consolidated financial performance and cash flows for the year then ended in
accordance with New Zealand Equivalents to International Financial Reporting Standards and International Financial Reporting
Standards.
The basis of our opinion is explained below. In addition, we outline the responsibilities of the Board of Directors and our responsibilities,
and explain our independence.
Basis for Opinion
We carried out our audit in accordance with the Auditor-General’s Auditing Standards, which incorporate the Professional and Ethical
Standards and the International Standards on Auditing (New Zealand) issued by the New Zealand Auditing and Assurance Standards
Board. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial
Statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
We are independent of the Group in accordance with the Auditor-General’s Auditing Standards, which incorporate Professional and
Ethical Standard 1 (Revised) Code of Ethics for Assurance Practitioners issued by the New Zealand Auditing and Assurance Standards
Board, and we have fulfilled our other ethical responsibilities in accordance with these requirements.
In addition to the audit we have carried out assignments including a review of the Group’s consolidated financial statements for the
six months ended 31 December 2017, payroll advisory services, along with tax compliance services in the United States, which are
compatible with those independence requirements. These services have not impaired our independence as auditor of the Group.
Partners and employees of our firm may deal with the Group on normal terms within the ordinary course of trading activities of the
business of the Group. Other than the audit and these assignments and trading activities, we have no relationship with, or interests in,
the Group.
Key Audit Matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated
financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial
statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the financial statements section of the
audit report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond
to our assessment of the risks of material misstatement of the financial statements. The results of our audit procedures, including the
procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying consolidated
financial statements.
04 // 05
How our audit addressed key audit matters
Key audit matter
Valuation of Generation Assets
How we addressed the key audit matter
Generation assets were revalued at 30 June 2018 as set out in
note 8 of the consolidated financial statements to $5,215 million.
The Group engages an independent external party to estimate
the fair value of generation assets using a discounted cash flow
model. The significant inputs used to calculate the fair value of
the generation assets include the wholesale electricity price path,
generation volumes, and the discount rate. The wholesale
electricity price path is estimated by the Group’s valuation
specialist as described in note 8 of the consolidated financial
statements and also considers Mercury NZ Limited’s own internal
five year forecast electricity price path. The model used to
estimate the wholesale electricity price path is complex and
includes a number of significant assumptions. The estimate of
the wholesale electricity price path is the most significant input in
estimating the fair values determined for the generation assets.
Our audit procedures included assessing the key inputs to
the model used to estimate the fair value of the generation
assets. Our procedures, which included the use of our valuation
specialists, were primarily focused on evaluating the process
undertaken by the Group’s valuation specialist and the Group
in forecasting the wholesale electricity price path and assessing
whether the forecast was consistent with internal and external data.
We assessed the professional competence, independence and
objectivity of the Group’s valuation specialist in the modelling of
the electricity price path and valuation of the generation assets.
We also compared budgeted performance information from
prior periods to historical data to assess the accuracy of the
forecasting process.
We further assessed the adequacy of the related financial
statement disclosures as described in note 8.
Valuation of Electricity Derivative, Currency and Interest Rate Derivative Financial Instruments
The Group’s activities expose it to electricity market price,
currency and interest rate risk which are managed using
derivative financial instruments. At 30 June 2018 derivative
assets total $141 million and derivative liabilities were $97 million
as set out in note 15 of the consolidated financial statements.
The valuations of the interest rate derivatives, foreign exchange
derivatives, and certain electricity price derivatives which are
prepared by The Group are based primarily on observable inputs
and are measured using standard valuation techniques. Certain
other electricity price derivatives are valued using inputs for
which inputs are not readily available in active primary or
secondary markets and require more complex valuation models
involving the wholesale electricity price path forecast by the
Group. The wholesale electricity price path forecast requires
significant judgement.
Our audit procedures included agreeing underlying data to the
contract terms on a sample basis, evaluating the
appropriateness of the valuation methodologies, assessing key
assumptions and inputs and recalculating the fair value of a
sample of electricity derivatives. We also performed procedures
on the wholesale electricity price path as explained above under
the section entitled ‘Valuation of Generation Assets’.
We further assessed the adequacy of the related financial
statement disclosures as described in note 15.
Information other than in the Financial Statements and Auditor’s report
The Board of Directors are responsible on behalf of the entity for the Annual Report and the Financial Report, which includes
information other than the consolidated financial statements and auditor’s report.
Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of
assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing
so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge
obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there
is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.
Directors’ Responsibilities for the Financial Statements
The directors are responsible on behalf of the entity for the preparation and fair presentation of the consolidated financial statements
for the Group that comply with, New Zealand Equivalents to International Financial Reporting Standards and International Financial
Reporting Standards.
The directors responsibilities arise from the Financial Markets Conduct Act 2013.
The directors are also responsible for such internal control as it determines is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to fraud or error and for the publication of the financial statements,
whether in printed or electronic form.
In preparing the consolidated financial statements, the directors are responsible, on behalf of the entity, for assessing the Group’s ability
to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of
accounting unless the Directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion.
Our responsibilities arise from the Public Audit Act 2001. Reasonable assurance is a high level of assurance, but is not a guarantee
that an audit conducted in accordance with the Auditor-General’s Auditing Standards will always detect a material misstatement when
it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
As part of an audit in accordance with the Auditor-General’s Auditing Standards, we exercise professional judgement and maintain
professional scepticism throughout the audit. We also:
•
Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error,
design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to
provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one
resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal
control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures
made by management.
• Conclude on the appropriateness of the use of the going concern basis of accounting by the directors and, based on the audit
evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the
Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention
in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our
opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or
conditions may cause the Group to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and
whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair
presentation.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the
Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and
performance of the group audit. We remain solely responsible for our audit opinion.
• We did not examine every transaction, nor do we guarantee complete accuracy of the financial statements. Also, we did not
evaluate the security and controls over the electronic publication of the financial statements.
We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit
findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and
to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and
where applicable, related safeguards.
From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the
financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report
unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a
matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to
outweigh the public interest benefits of such communication.
> SIMON O’CONNOR
ERNST & YOUNG
ON BEHALF OF THE AUDITOR-GENERAL
AUCKLAND, NEW ZEALAND
21 AUGUST 2018
06 // 07
CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 30 JUNE 2018
Total revenue
Total expenses
EBITDAF1
Depreciation and amortisation
Change in the fair value of financial instruments
Impairments
Earnings of associates and joint ventures
Net interest expense
Profit before tax
Tax expense
Profit for the year attributable to owners of the parent
Note
4
4
8, 9
15
10
4
6
2018
$M
1,803
(1,242)
561
(197)
49
–
2
(90)
325
(91)
234
2017
$M
1,597
(1,074)
523
(189)
31
(18)
6
(95)
258
(74)
184
Basic and diluted earnings per share (cents)
17.02
13.37
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 2018
Profit for the year
Other comprehensive income
Items that will not be reclassified subsequently to profit or loss
Movement in asset revaluation reserve
Movement in cash flow hedge reserve transferred to balance sheet
Share of movements in associates’ and joint ventures’ reserves
Tax effect
Items that may be reclassified subsequently to profit or loss
Movement in cash flow hedge reserve
Movement in other reserves
Tax effect
Other comprehensive income for the year, net of taxation
Total comprehensive income for the year attributable to owners of the parent
2018
$M
234
55
5
14
(17)
33
(64)
(9)
17
251
2017
$M
184
55
–
(14)
(15)
36
11
(11)
62
246
15
10
15
1 EBITDAF: Earnings before net interest expense, income tax, depreciation and amortisation, change in the fair value of financial instruments, impairments and equity
accounted earnings of associates and joint ventures
The accompanying notes form an integral part of these financial statements.
CONSOLIDATED BALANCE SHEET
AS AT 30 JUNE 2018
SHAREHOLDERS’ EQUITY
Issued capital
Treasury shares
Reserves
Total shareholders’ equity
ASSETS
Current assets
Cash and cash equivalents
Receivables
Inventories
Derivative financial instruments
Total current assets
Non-current assets
Property, plant and equipment
Intangible assets
Investments
Investment and advances to associates
Advances to joint operations
Derivative financial instruments
Total non-current assets
Total assets
LIABILITIES
Current liabilities
Payables and accruals
Provisions
Borrowings
Derivative financial instruments
Taxation payable
Total current liabilities
Non-current liabilities
Payables and accruals
Provisions
Derivative financial instruments
Borrowings
Deferred tax
Total non-current liabilities
Total liabilities
Net assets
Note
5
2018
$M
2017
$M
378
(101)
3,009
3,286
378
(51)
2,981
3,308
11
7
15
8
9
10
10
10
15
11
12
13
15
6
11
12
15
13
6
5
226
35
31
297
5,358
101
130
88
7
110
5,794
6,091
198
–
345
24
17
584
6
51
73
960
1,131
2,221
2,805
30
240
39
18
327
5,388
87
–
76
8
111
5,670
5,997
202
1
83
49
23
358
4
53
139
1,024
1,111
2,331
2,689
3,286
3,308
For and on behalf of the Board of Directors who authorised the issue of the Financial Statements on 21 August 2018.
Joan Withers
Chair
21 August 2018
Keith Smith
Director
21 August 2018
The accompanying notes form an integral part of these financial statements.
08 // 09
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 2018
Balance as at 1 July 2016
Movement in asset revaluation reserve, net of taxation
Movement in cash flow hedge reserve, net of taxation
Movements in other reserves
Share of movements in associates’ and joint ventures’
reserves
Release of asset revaluation reserve, net of taxation
Other comprehensive income
Net profit for the year
Total comprehensive income for the year
Dividend
Balance as at 30 June 2017
Balance as at 1 July 2017
Movement in asset revaluation reserve, net of taxation
Movement in cash flow hedge reserve, net of taxation
Movements in other reserves
Share of movements in associates’ and joint ventures’
reserves
Acquisition of treasury shares
Other comprehensive income
Net profit for the year
Total comprehensive income for the year
Dividend
Balance as at 30 June 2018
Issued
capital
$M
Retained
earnings
$M
Asset
revaluation
reserve
$M
Cash flow
hedge
reserve
$M
Other
reserves
$M
378
–
–
–
–
–
–
–
–
–
378
378
–
–
–
–
–
–
–
–
–
378
253
–
–
–
–
–
–
184
184
(253)
184
184
–
–
–
–
–
–
234
234
(273)
145
2,821
38
–
–
(12)
2
28
–
28
–
2,849
2,849
40
–
–
12
–
52
–
52
–
2,901
(76)
–
25
–
(2)
–
23
–
23
–
(53)
(53)
–
27
–
2
–
29
–
29
–
(24)
(61)
–
–
11
–
–
11
–
11
–
(50)
(50)
–
–
(14)
–
(50)
(64)
–
(64)
–
(114)
Total
equity
$M
3,315
38
25
11
(14)
2
62
184
246
(253)
3,308
3,308
40
27
(14)
14
(50)
17
234
251
(273)
3,286
The accompanying notes form an integral part of these financial statements.
CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED 30 JUNE 2018
CASH FLOWS FROM OPERATING ACTIVITIES
Receipts from customers
Payments to suppliers and employees
Interest received
Interest paid
Taxes paid
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant and equipment
Acquisition of intangibles
Acquisition of investment
Disposal of intangibles
Disposal of land and associated real property
Distributions received from and advances repaid to associates and joint ventures
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Acquisition of treasury shares
Proceeds from loans
Repayment of loans
Dividends paid
Net cash used in financing activities
Net decrease in cash and cash equivalents held
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
Cash balance comprises:
Cash balance at the end of the year
2018
$M
2017
$M
1,800
(1,237)
2
(92)
(102)
371
1,539
(1,022)
2
(95)
(52)
372
(94)
(33)
(144)
–
5
6
(260)
(50)
262
(75)
(273)
(136)
(25)
30
5
5
(103)
(20)
–
26
–
7
(90)
–
75
(120)
(253)
(298)
(16)
46
30
30
The accompanying notes form an integral part of these financial statements.
10 // 11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTE 1. ACCOUNTING POLICIES
(1) Reporting entity
Mercury NZ Limited (“the Company”) is incorporated in New Zealand, registered under the Companies Act 1993, an FMC
reporting entity under the Financial Markets Conduct Act 2013, and is listed on the NZSX and ASX.
The consolidated financial statements (“Group financial statements”) are for Mercury NZ Limited Group (“the Group”). The
Group financial statements comprise the Company and its subsidiaries, including its investments in associates and interests in
joint arrangements.
The majority shareholder of Mercury NZ Limited is Her Majesty the Queen in Right of New Zealand (“the Government”),
providing it with significant potential influence over the Group. The liabilities of the Group are not guaranteed in any way by the
Government or by any other shareholder.
(2) Basis of preparation
The Group financial statements have been prepared in accordance with the Financial Reporting Act 2013, the Companies Act
1993 and in accordance with New Zealand Generally Accepted Accounting Practice (“NZ GAAP”). They comply with New
Zealand equivalents to International Financial Reporting Standards (“NZ IFRS”) as appropriate for profit-oriented entities.
These financial statements also comply with International Financial Reporting Standards (“IFRS”).
The Group financial statements are prepared on the basis of historical cost, with the exception of financial instruments and
generation assets which are measured at fair value.
The Group financial statements have been prepared so that all components are stated exclusive of GST, with the exception of
receivables and payables that include GST invoiced.
Functional and presentation currency
These financial statements are presented in New Zealand Dollars ($) which is the Group’s functional currency, apart from
Mighty Geothermal Power Limited and its direct subsidiaries as their functional currency is the United States Dollar. Unless
otherwise stated, financial information has been rounded to the nearest million dollars ($M).
The assets and liabilities of entities whose functional currency is not the New Zealand Dollar, are translated at the exchange
rates ruling at balance date. Revenue and expense items are translated at the spot rate at the transaction date or a rate
approximating that rate. Exchange differences are taken to the foreign currency translation reserve.
Estimates and judgements
The preparation of financial statements requires judgements and estimates that impact the application of policies and the
reported amounts of assets and liabilities, income and expenses. Actual results may differ from these estimates.
The areas of significant estimates and judgements are as follows:
Generation plant and equipment (refer note 8)
Retail revenue accruals (refer note 11)
Restoration and environmental rehabilitation (refer note 12)
Valuation of financial instruments (refer note 14 and note 15)
Accounting policies and standards
No changes to accounting policies have been made during the year and policies have been consistently applied to all years
presented. Certain comparatives have been restated where needed to conform to current year classification and presentation.
Implementation of new accounting standards
New international financial reporting standards relating to Financial Instruments (NZ IFRS 9), Revenue from Contracts with
Customers (NZ IFRS 15), and Leases (NZ IFRS 16) will be adopted by the Group for the reporting period ending 30 June 2019.
The Group has reviewed its existing and future contracts and arrangements, and undertaken an assessment of the impact of
the new standards.
NZ IFRS 9 Financial instruments
NZ IFRS 9 addresses the classification, measurement and recognition of financial assets and liabilities through a simplified
mixed measurement model and establishes three primary measurement categories for financial assets, being (i) amortised
cost (ii) fair value through other comprehensive income and (iii) fair value through profit or loss.
The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the
financial asset. The expected credit losses model replaces the incurred loss impairment model used in NZ IAS 39. NZ IFRS 9
also expands the eligibility for hedge accounting by focusing on the economic relationship between hedged items and
hedging instruments.
This treatment may result in the increased ability for Mercury to hedge account for financial arrangements. Adopting this
approach will result in greater fair value movements recognised through the cash flow hedge reserve as opposed to the
income statement. On adoption, there are no additional financial derivatives that will be hedge accounted under the new
standard.
NZ IFRS 15 Revenue from Contracts with Customers
The core principle of NZ IFRS 15 is that an entity must recognise revenue at an amount that reflects the consideration it
expects to be entitled for transferring goods or services to a customer. This is achieved through the core principles of the
standard, including identification of performance obligations in a contract, and allocation of a contract’s transaction price to
each of those performance obligations as they are satisfied. NZ IFRS 15 also specifies the accounting treatment for costs
incurred to obtain and fulfil contracts with customers. Specific presentation and disclosure requirements are also provided,
which are more detailed than under current standards.
Generally, revenue received by Mercury will continue to be recognised over time, as consideration due equates to contract
performance completed to date. For expedience, Mercury will apply NZ IFRS 15 to portfolios of customer contracts (e.g.
end-user sales), as these contracts have similar characteristics, and the effects on financial statements do not differ materially
from applying current standards to individual contracts.
Certain items will require differential treatment from that which is applicable under current standards. The main items
impacted are:
• Customer credits in the form of discounts allocated to customers will be recognised against revenue. This is a departure
•
from current treatment of recognising through expenses.
Incremental costs of acquiring contracts with customers (e.g. commissions) will be capitalised to the balance sheet and
amortised over a period of two years.
• Disclosure requirements will increase. Revenue items will be disaggregated, contract balances disclosed and contract
performance obligations described via the notes to the financial statements.
While the timing of revenue recognition is similar to current standards, the Group will generally recognise a greater amount of
contract costs within revenue as opposed to its current practice of recognising within expenses.
NZ IFRS 16 Leases
NZ IFRS 16 will bring most leases on-balance sheet with the aim of providing more transparency around the impact of leases
on the Group. The standard provides a single lease accounting model, requiring the recognition of assets and liabilities for all
leases unless the lease term is 12 months or less or the underlying asset has a low value.
The presentation of Mercury’s financial statements will be significantly impacted by NZ IFRS 16. Operating leases with a term
of greater than one year (as shown in note 18) will be recognised on the balance sheet as right-of-use assets and lease
liabilities. An additional interest expense relating to the lease liability will be recognised over the lease term, and the right-of-
use asset will be depreciated via the income statement.
At the date of adoption, the Group will have leases relating mainly to building accommodation, with terms of up to 17 years.
The approximate impact on the 30 June 2018 financial statements of the three new standards is an immaterial impact on net
profit before tax (being increase in EBITDAF of $5 million and an increase in depreciation and interest costs of $5 million),
an increase in assets of $15 million, an increase in liabilities of $20 million, with a corresponding decrease in reserves of
$5 million.
12 // 13
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTE 2. SEGMENT REPORTING
Identification of reportable segments
The operating segments are identified by management based on the nature of the products and services provided. Discrete
financial information about each of these operating businesses is reported to the Chief Executive, being the chief operating
decision-maker, on at least a monthly basis, who assesses the performance of the operating segments on a measure of
EBITDAF. Segment EBITDAF represents profit earned by each segment exclusive of any allocation of central administration
costs, share of earnings of associates, change in fair value of financial instruments, depreciation, amortisation, impairments,
finance costs and tax expense. Operating segments are aggregated into reportable segments only if they share similar
economic characteristics.
Types of products and services
Energy Markets
The energy markets segment encompasses activity associated with the electricity production, electricity trading, and sale of
energy and related services and products to customers, and generation development activities.
Other Segments
Other operating segments that are not considered to be reporting segments are grouped together as “Other Segments”.
Activities include metering, sales of solar equipment, and international geothermal operations.
Unallocated
Represents corporate support services and related elimination adjustments.
Inter-segment
Transactions between segments are carried out on normal commercial terms and represent charges by Other Segments to
Energy Markets.
Segment results
June 2018
Total segment revenue
Direct costs
Other operating expenses
Segment EBITDAF
June 2017
Total segment revenue
Direct costs
Other operating expenses
Segment EBITDAF
Energy
Markets
$M
1,773
(1,047)
(134)
592
Other
Segments
$M
Unallocated
$M
Inter–
segment
$M
53
(6)
(18)
29
2
–
(62)
(60)
(25)
25
–
–
Energy
Markets
$M
Other
Segments
$M
Unallocated
$M
Inter–
segment
$M
1,571
(881)
(133)
557
52
(6)
(19)
27
1
–
(62)
(61)
(27)
27
–
–
Total
$M
1,803
(1,028)
(214)
561
Total
$M
1,597
(860)
(214)
523
NOTE 3. NON STATUTORY MEASURE – UNDERLYING EARNINGS
Underlying earnings is presented to enable stakeholders to make an assessment and comparison of earnings after removing
one-off and/or infrequently occurring events (exceeding $10 million of net profit before tax), impairments and any changes in
the fair value of derivative financial instruments or any equity accounted share of changes in the fair value of derivative
financial instruments.
Profit for the year
Change in the fair value of financial instruments
Equity accounted share of the change in the fair value of financial instruments of associate entities
Impairments
Adjustments before tax expense
Tax expense
Adjustments after tax expense
Underlying earnings after tax
Tax has been applied on all taxable adjustments at 28%.
NOTE 4. OTHER INCOME STATEMENT DISCLOSURES
Sales
Other revenue
Total revenue
Energy costs
Line charges
Other direct cost of sales, excluding third party metering
Direct costs of other revenue
Third party metering
Employee compensation and benefits
Maintenance expenses
Other expenses
Total expenses
Interest expense
Interest income
Net interest expense
Audit fees
2018
$M
234
(49)
(1)
–
(50)
14
(36)
198
2018
$M
1,756
47
1,803
(527)
(437)
(33)
(6)
(25)
(87)
(51)
(76)
(1,242)
(92)
2
(90)
2017
$M
184
(31)
(4)
18
(17)
9
(8)
176
2017
$M
1,552
45
1,597
(358)
(440)
(32)
(6)
(24)
(83)
(48)
(83)
(1,074)
(97)
2
(95)
Fees payable to Ernst & Young, who are appointed by the Auditor General, for the audit and review of the financial statements
were $590,000 (2017: $580,000). Non audit services in relation to payroll advisory services were $71,000 (2017: $26,000).
EY (US) also provided US tax compliance services in the amount of $247,000 (2017: $198,000).
14 // 15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTE 5. SHARE CAPITAL AND DISTRIBUTION
The share capital of the Company is represented by 1,400,012,517 ordinary shares (2017: 1,400,012,517) issued and fully paid.
The weighted average number of shares on issue during the year, on both a basic and diluted basis, was 1,374,982,137 (2017:
1,376,302,303). These shares do not have a par value, have equal voting rights and share equally in dividends and any surplus
on winding up.
Treasury shares
Balance at the beginning of the year
Acquisition of treasury shares
Balance at the end of the year
Dividends declared and paid
Final dividend for 2016
Special dividend paid September 2016
Interim dividend for 2017
Final dividend for 2017
Special dividend paid September 2017
Interim dividend for 2018
2018
Number of
shares (M)
2018
$M
2017
Number of
shares (M)
24
15
39
51
50
101
Cents
per share
8.6
4.0
5.8
8.8
5.0
6.0
24
–
24
2018
$M
–
–
–
121
69
83
273
2017
$M
52
–
51
2017
$M
118
55
80
–
–
–
253
No imputation credits are available at 30 June 2018 (2017: $nil) as the imputation credit account has a deficit of $24 million.
The imputation credit account is required to have a surplus balance at 31 March each year.
NOTE 6. TAXATION
Income Tax
(i) Tax expense
Profit before tax
Prima facie tax expense at 28% on the profit before tax
Increase/(decrease) in tax expense due to:
• share of associates’ and joint ventures’ tax paid earnings
• capital gain
• non-deductible impairments
• other differences
Tax expense attributable to profit from ordinary activities
Represented by:
Current tax expense
Deferred tax recognised in the income statement
2018
$M
2017
$M
325
(91)
1
–
–
(1)
(91)
(97)
6
258
(72)
2
1
(4)
(1)
(74)
(80)
6
The tax expense charged to the income statement includes both the current year’s provision and the income tax effect of:
taxable temporary differences, except those arising from initial recognition of goodwill; and
•
• deductible temporary differences to the extent that it is probable that they will be utilised.
Deferred Tax
Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax and accounting
bases of the Group’s assets and liabilities. A deferred tax asset is only recognised to the extent that there will be future taxable
profit to utilise the temporary difference.
Property, plant and equipment is held on capital account for income tax purposes. Where assets are revalued, with no similar
adjustment to the tax base, a taxable temporary difference is created that is recognised in deferred tax. The deferred tax
liability on these revaluations is unlikely to crystallise in the foreseeable future under existing income tax legislation.
(i) Recognised deferred tax assets and liabilities
Property, plant and equipment
Financial instruments
Employee benefits and provisions
Other
Assets
2018
$M
Assets
2017
$M
Liabilities
2018
$M
Liabilities
2017
$M
–
5
2
13
20
–
29
2
14
45
(1,151)
–
–
–
(1,151)
(1,156)
–
–
–
(1,156)
Net
2018
$M
(1,151)
5
2
13
(1,131)
Net
2017
$M
(1,156)
29
2
14
(1,111)
(ii) Movement in deferred tax
Balance as at 1 July 2016
Charged/(credited) to the income statement
Charged/(credited) to other comprehensive income
Other movements
Balance as at 30 June 2017
Balance as at 1 July 2017
Charged/(credited) to the income statement
Charged/(credited) to other comprehensive income
Balance as at 30 June 2018
Property,
plant and
equipment
$M
Financial
instruments
$M
Employee
entitlements
$M
Other
$M
Total
$M
(1,158)
17
(15)
–
(1,156)
(1,156)
21
(17)
(1,152)
51
(10)
(11)
(1)
29
29
(14)
(9)
6
2
–
–
–
2
2
–
–
2
12
(1)
–
3
14
14
(1)
–
13
(1,093)
6
(26)
2
(1,111)
(1,111)
6
(26)
(1,131)
Tax deductions for building depreciation were disallowed by the Inland Revenue from 1 July 2011. Since then, the Group has
maintained the view that both hydro-electric and geothermal powerhouse assets are plant and not buildings and therefore
should not be captured by this change. Inland Revenue has accepted the Group’s view in respect of hydro-electric powerhouse
assets, but not in respect of geothermal powerhouse assets.
During the period ended 30 June 2017, the Group filed proceedings with the High Court to challenge the Inland Revenue’s
position in relation to geothermal powerhouse assets. The case is expected to be heard in the period ending 30 June 2019.
In the event the Group is unsuccessful, this could result in an additional deferred tax liability (and tax expense) of up to
$6 million at that time.
NOTE 7. INVENTORIES
Cost is determined on a weighted average basis and includes expenditure incurred in acquiring inventories and bringing them
to their final condition and location. Consumable stores of $26 million (2017: $28 million) are held to service and repair
operating plant. Meter stock of $9 million (2017: $11 million) is held in inventory until it is deployed into the field at which time
it is transferred into property, plant and equipment.
16 // 17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTE 8. PROPERTY, PLANT AND EQUIPMENT
Year ended 30 June 2017
Opening net book value
Additions
Transfers
Charged to the Income Statement
Net revaluation movement
Impairments
Depreciation charge for the year
Closing net book value
Balance at 30 June 2017
Cost or valuation
Accumulated depreciation
Net book value
Year ended 30 June 2018
Opening net book value
Additions
Transfers
Net revaluation movement
Depreciation charge for the year
Closing net book value
Balance at 30 June 2018
Cost or valuation
Accumulated depreciation
Net book value
Generation
assets at fair
value
$M
Meters at
cost
$M
Other assets
at cost
$M
Capital work
in progress
at cost
$M
5,269
60
18
–
52
(4)
(154)
5,241
5,241
–
5,241
5,241
52
25
55
(158)
5,215
5,215
–
5,215
60
5
–
–
–
–
(12)
53
172
(119)
53
53
6
–
–
(11)
48
45
1
3
–
–
–
(10)
39
131
(92)
39
39
5
3
–
(10)
37
178
(130)
48
137
(100)
37
45
32
(21)
(1)
–
–
–
55
55
–
55
55
31
(28)
–
–
58
58
–
58
Total
$M
5,419
98
–
(1)
52
(4)
(176)
5,388
5,599
(211)
5,388
5,388
94
–
55
(179)
5,358
5,588
(230)
5,358
Assets carrying values
The cost of property, plant and equipment purchased comprises the consideration given to acquire the assets plus other
directly attributable costs incurred in bringing the assets to the location and condition necessary for their intended use.
The cost of property, plant and equipment constructed by the Group, including capital work in progress, includes the cost of all
materials used in construction, associated direct labour and an appropriate proportion of variable and fixed overheads.
Financing costs attributable to a project are capitalised at the Group’s specific project finance interest rate, where these meet
certain time and monetary materiality limits. Costs of testing whether the assets are functioning properly, after deducting the
net proceeds from power generation, are also capitalised. Costs cease to be capitalised as soon as an asset is ready for
productive use.
Costs incurred in obtaining resource consents are capitalised and recognised as a non-current asset where it is probable they
will give rise to future economic benefits. These costs are depreciated over the life of the consent on a straight-line basis.
Generation plant and equipment is measured at fair value less accumulated depreciation. Any surplus on revaluation of an
individual item of property, plant and equipment is transferred directly to the asset revaluation reserve unless it offsets a
previous decrease in value recognised in the income statement, in which case it is recognised in the income statement. A
deficit on revaluation of an individual item of property, plant and equipment is recognised in the income statement in the
period it arises where it exceeds any surplus previously transferred to the asset revaluation reserve. Any accumulated
depreciation at the date of the revaluation is eliminated against the gross carrying amount of the asset and the net amount is
restated to the revalued amount of the asset. Additions to property, plant and equipment stated at valuation subsequent to the
most recent valuation are recorded at cost. All other items of property, plant and equipment are recorded at cost less
depreciation and impairments.
Capital work in progress at cost relating to intangible assets is now shown within note 9. Historic comparatives have been
restated as a result of this change.
Assets carried at fair value
All generation assets shown at valuation (except Resource Management Act consents) were revalued using a net present value
methodology by PricewaterhouseCoopers, an independent valuer, as at 30 June 2018. This resulted in an increase to the
carrying value of the Group’s geothermal generation assets of $55 million in the current year. This is in addition to the
$52 million revaluation increase recognised across the Group’s geothermal generation assets in 2017. As a consequence of the
revaluation, accumulated depreciation on these geothermal assets has been reset to nil.
The key assumptions that are used in the valuation include the forecast of the future wholesale electricity price path, volumes,
projected operational and capital expenditure, capacity and life assumptions and discount rate. In all cases there is an element
of judgement required as they make use of unobservable inputs including wholesale electricity prices of between $63/MWh
and $105/MWh (2017: $70/MWh and $104/MWh), average operational expenditure of $160 million p.a. (2017: $158 million
p.a.), net average production volumes of 6,620/GWh p.a. (2017: 6,567/GWh p.a.) and a post-tax discount rate of between 7.5%
and 7.9% (2017: 7.5% and 7.9%). The valuation also assumed the on-going operation of New Zealand Aluminium Smelters
Limited at Tiwai Point and that the current regulatory environment (including any changes to the cost of fuel) is maintained.
The discounted cash flow valuation approach assumes 100% control and consequently a control premium should be applied if
using an equity valuation technique to derive comparative asset values.
The following table outlines the valuation impact of changes to assumptions, keeping all other valuation inputs constant, that
the valuation is most sensitive to.
Future wholesale electricity price path
Discount rate
Operational expenditure
Sensitivity
Valuation impact
2018
$M
2017
$M
+/- 10%
+/- 0.5%
+/- 10%
$783 / ($790)
($496) / $592
($231) / $230
$781 / ($790)
($502) / $599
($231) / $231
The carrying amount of revalued generation assets, had they been recognised at cost, would have been $1,977 million (2017:
$1,978 million).
Depreciation
Depreciation is provided on a straight-line basis on all property, plant and equipment other than freehold land, capital work in
progress and exploration and evaluation assets, so as to write down the assets to their estimated residual value over their
expected useful lives.
The annual depreciation rates are as follows:
Office fixture and fittings, including fitout
Generation assets:
• Hydro and thermal generation
• Other generation
Meters
Computer hardware and tangible software
Other plant and equipment
Vehicles
2018
2017
2-50%
2-50%
1-33%
2-33%
3-33%
5-50%
2-50%
5-33%
1-33%
2-33%
3-33%
5-50%
2-50%
5-33%
18 // 19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTE 9. INTANGIBLE ASSETS
Year ended 30 June 2017
Opening net book value
Additions
Transfers
Charged to the Income Statement
Disposals
Impaired assets
Amortisation for the year
Closing net book amount
Balance at 30 June 2017
Cost
Accumulated amortisation
Net book value
Year ended 30 June 2018
Opening net book value
Additions
Transfers
Surrendered units
Amortisation for the year
Closing net book amount
Balance at 30 June 2018
Cost
Accumulated amortisation
Net book value
Intangible
software
$M
Rights
$M
Emissions
units
$M
Work In
Progress
$M
17
7
5
–
–
–
(12)
17
140
(123)
17
17
20
34
–
(16)
55
194
(139)
55
23
–
1
–
–
(1)
(1)
22
34
(12)
22
22
–
–
–
(2)
20
34
(14)
20
28
7
–
–
(21)
–
–
14
14
–
14
14
7
–
(5)
–
16
16
–
16
22
20
(6)
(2)
–
–
–
34
34
–
34
34
10
(34)
–
–
10
10
–
10
Total
$M
90
34
–
(2)
(21)
(1)
(13)
87
222
(135)
87
87
37
–
(5)
(18)
101
254
(153)
101
Software
Acquired computer software licenses are capitalised on the basis of the costs incurred to acquire and bring to use. These costs
are amortised over their remaining estimated useful lives of between 2 to 15 years (2017: between 2 to 15 years). As these
assets are deemed to have a finite life, impairment testing will only be performed when there is an indication that the
intangible asset may be impaired.
Rights
Rights, of which land access rights are the most significant, acquired to further the Group’s generation development
programme are stated at cost less accumulated amortisation and any accumulated impairment losses. Rights, which have a
finite life, are amortised over the life of the rights, which range from 3 to 25 years (2017: 3 to 25 years). Testing for impairment
will only arise when there is an indication that the asset may be impaired.
Emissions units and emissions obligations
Emissions units that have been allocated by the Government under the Projects to Reduce Emissions scheme are recorded at
nominal value (nil value). Purchased emissions units are recorded at cost (purchase price). Emissions units, whether allocated
or purchased, are recorded as intangible assets. Emissions units are not revalued subsequent to initial recognition.
Emissions units that are surrendered to creditors in compensation for their emissions obligations are recognised as an
expense in the income statement and a reduction to intangible assets in the balance sheet, based on the weighted average
cost of the units surrendered.
Emissions obligations are recognised as a current liability as the obligation is incurred. Up to the level of units held, the liability
is recorded at the carrying value of those units intended to settle the liability. Forward contracts for the purchase of emissions
units are recognised when the contracts are settled.
NOTE 10. INVESTMENT AND ADVANCES TO ASSOCIATES AND JOINT ARRANGEMENTS (JOINT
VENTURES AND JOINT OPERATIONS)
The Group financial statements include the following:
Name of entity
Principal activity
Type
2018
2017
Country
Interest held
TPC Holdings Limited
Rotokawa
Nga Awa Purua
EnergySource LLC
EnergySource Minerals LLC
Hudson Ranch I Holdings LLC
Investment holding
Steamfield operation
Electricity generation
Investment holding
Mineral extraction
Electricity generation
Associate
Joint operation
Joint operation
Joint venture
Joint venture
Joint venture
Balance at the beginning of the year
Share of earnings
Share of movement in other comprehensive income
Distributions received during the year
Impaired advance to joint venture
Balance at the end of the year
25.00%
64.80%
65.00%
20.86%
20.84%
75.00%
25.00% New Zealand
64.80% New Zealand
65.00% New Zealand
20.86% United States
United States
75.00% United States
–
Associates
Joint ventures
2018
$M
76
2
14
(4)
–
88
2017
$M
77
6
(2)
(5)
–
76
2018
$M
–
–
–
–
–
–
2017
$M
15
–
(12)
(2)
(1)
–
At the end of the year the Group had outstanding advances to its Rotokawa joint venture partner in the amount of $7 million
(2017: $8 million) and its associate TPC Holdings Limited of $4 million (2017: $4 million). For terms and conditions of these
related party receivables refer to note 17.
Due to the nature of the contractual arrangements that surround the joint venture entities, which allow for a reduction in the
Group’s economic interest once prescribed preferred returns have been achieved, the share of movements in earnings and
reserves has been calculated based on the Hypothetical Liquidation at Book Value method. This method more closely aligns
the recognition of earnings through time with the expected contractually agreed economic outcomes compared to the
recognition of earnings based on a strict percentage of ownership.
In compliance with the equity method under NZ IAS 28 - Investments in Associates and Joint Ventures, the Group has yet to
recognise its share of losses relating to Energy Source LLC amounting to US$3 million (2017: US$3 million).
During the period, the Group acquired a 19.99% shareholding in Tilt Renewables Limited for $144 million or $2.30 per share.
Tilt is a listed company on the NZSX and ASX. The shareholding is recognised as an available for sale investment, and had a
market value of $2.07 per share or $130 million at 30 June 2018 (refer to note 20 for further information).
NOTE 11. RECEIVABLES, PAYABLES AND ACCRUALS
Receivables
Trade receivables and accruals
Allowance for impairment loss
Net trade receivables and accruals
Prepayments
2018
$M
219
(2)
217
9
226
2017
$M
233
(2)
231
9
240
Revenue accruals for unread gas and electricity meters at balance date involves an estimate of consumption for each unread
meter, based on the customer’s past consumption history.
Trade receivables are non-interest bearing and are generally on 30 day terms. For terms and conditions of related party
receivables refer to note 17.
20 // 21
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTE 11. RECEIVABLES, PAYABLES AND ACCRUALS (CONTINUED)
The Group recognises an allowance for impairment loss when there is objective evidence that the Group will not be able to
collect amounts due according to the original terms of the receivable. An allowance charge of $3 million (2017: $3 million) was
recognised during the year. Receivables of $3 million (2017: $3 million) which were deemed uncollectable were written off.
Receivables past due but not considered impaired:
Less than one month past due
Greater than one month past due
Payables and accruals
Trade payables and accruals
Employee entitlements
Sundry creditors
Trade payables are non-interest bearing and are normally settled on 30 to 60 day terms.
NOTE 12. PROVISIONS
Balance at the beginning of the year
Provisions made during the year
Provisions used during the year
Provisions reversed during the year
Discounting movement
Balance at the end of the year
Current
Non-current
2018
$M
2017
$M
6
2
8
2018
$M
179
8
17
204
2018
$M
54
1
(2)
(3)
1
51
–
51
51
7
2
9
2017
$M
194
7
5
206
2017
$M
54
1
(4)
–
3
54
1
53
54
Provisions have been recognised for the abandonment and subsequent restoration of areas from which geothermal resources
have been utilised. The provision is calculated based on the present value of Management’s best estimate of the expenditure
required, and the likely timing of settlement. Changes in these estimates made during the year are reported as an increase in
provisions and a reduction in revaluation reserves. The increase in provision resulting from the passage of time (the discount
effect) is recognised as an interest expense.
NOTE 13. BORROWINGS
Bank facilities
Commercial paper programme
Wholesale bonds
Wholesale bonds
USPP – US$125m
Wholesale / credit wrapper
USPP – US$30m
Wholesale bonds
USPP – US$45m
Capital bonds
Deferred financing costs
Fair value adjustments
Carrying value of loans
Current
Non-current
Borrowing
currency
denomination
NZD
NZD
NZD
NZD
USD
NZD
USD
NZD
USD
NZD
Maturity
Coupon
Various
Floating
< 3 months Floating
Mar–2019
5.03%
Feb–2020 8.21%
Dec–2020 4.25%
Sep–2021
Dec–2022
Mar–2023
Dec–2025
Jul–2044
Floating
4.35%
5.79%
4.60%
6.90%
2018
$M
91
170
76
31
163
300
39
25
59
305
(5)
51
1,305
345
960
1,305
2017
$M
–
75
76
31
164
301
39
25
58
305
(6)
39
1,107
83
1,024
1,107
The Group has entered into a Master Trust Deed and Supplementary Trust Deeds for all its NZD denominated Senior Fixed
and Floating Rate Bonds with the New Zealand Guardian Trust Group Limited, acting as trustee for the holders. The Group has
agreed, subject to certain exceptions, not to create or permit to exist a security interest over or affecting its assets to secure
indebtedness, and to maintain certain financial covenants. There has been no breach of the terms of these deeds.
The Group has entered into a negative pledge deed in favour of its bank financiers in which the Group has agreed, subject
to certain exceptions, not to create or permit to exist a security interest over or affecting its assets to secure its indebtedness,
and to maintain certain financial ratios in relation to the Group. These undertakings and covenants also apply to the US Private
Placement terms and conditions. There has been no breach of the terms of this deed or the terms and conditions of the US
Private Placement.
The Group has $650 million of committed and unsecured bank loan facilities as at 30 June 2018 (30 June 2017:
$350 million) of which $100 million was not available for drawdown until August 2018. Subsequent to the reporting period,
the Company has cancelled $100 million of facilities and had $100 million of facilities mature. Of the loan facilities of
$450 million available in August 2018, $50 million expires in September 2019, $100 million expires in June 2021, $100
million expires in August 2022 and a rolling bank loan of $200 million currently expires in December 2019.
The Group has a $200m Commercial Paper programme which is fully backed by committed and undrawn bank facilities.
Notes issued under the programme are short-term money market instruments, unsecured and unsubordinated and targeted
at professional investors. The programme is rated A2 by S&P.
22 // 23
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTE 14. FINANCIAL RISK MANAGEMENT
The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to proactively
manage these risks with the aim of protecting shareholder wealth. Exposure to price, credit, foreign exchange, liquidity and
interest rate risks arise in the normal course of the Group’s business. The Group’s principal financial instruments comprise
cash and cash equivalents, trade receivables and accruals (not prepayments), advances, payables and accruals, borrowings
and derivative financial instruments.
(A) MARKET RISK
Price risk – energy contracts
The Group enters into energy contracts that establish a fixed price at which future specified quantities of electricity are
purchased and sold. The energy contracts are periodically settled with any difference between the contract price and the spot
market price settled between the parties. At balance date, the principal value of energy contracts, including both buy and sell
contracts, with remaining terms of up to 13 years (2017: 14 years), were $1,520 million (2017: $1,674 million).
Foreign exchange risk
The Group is exposed to foreign exchange risk as a result of transactions denominated in a currency other than the Group’s
functional currency. The currencies giving rise to this risk are primarily US Dollar, Japanese Yen and Euro.
Foreign exchange risk arises from future commercial transactions (including the purchase of capital equipment and
maintenance services), recognised assets and liabilities (including borrowings) and net investments in foreign operations. It is
the Group’s policy to enter into forward exchange contracts to hedge its committed expenditure programme. At balance date
the principal or contract amounts of foreign currency forward exchange contracts were $21 million (2017: $42 million).
Interest rate risk
The Group has exposure to interest rate risk to the extent that it borrows for fixed terms at floating interest rates. The Group
uses interest rate swaps and interest rate options to manage this exposure. At balance date, the contract principal amount of
interest rate swaps outstanding (including forward starts) was $2,466 million (2017: $2,976 million).
Sensitivity analysis
The following summarises the potential impact of increases or decreases in the relevant market risk exposures of the Group
on post tax profit and on other components of equity. The analysis does not take into account dynamic market response over
time, which could be material.
Price risk
Sensitivity analysis is based on an assessment of the reasonably possible movements in forward price.
Group
Electricity forward price increased by 10%
Electricity forward price decreased by 10%
Impact on post tax profit
Impact on equity
2018
$M
2017
$M
(8)
8
(6)
6
2018
$M
(26)
21
2017
$M
(34)
33
Foreign exchange risk
Sensitivity analysis is based on the impact of the New Zealand Dollar weakening or strengthening against the most significant
currencies for which the Group has foreign exchange exposure, allowing for reasonably possible movements in foreign
exchange rates over a one year period based on the average actual movements experienced over the prior 10 years.
New Zealand Dollar – Euro
Currency strengthens by 10%
Currency weakens by 10%
Impact on post tax profit
Impact on equity
2018
$M
2017
$M
2018
$M
–
–
–
–
(1)
1
2017
$M
(2)
2
Interest rate risk
Sensitivity analysis is based on an assessment of the reasonably possible movement in the 10 year swap rate over a one year
period based on actual movements over the last 10 years. The movement in post tax profits are due to higher/lower interest
costs from variable rate debt and cash balances combined with the result of fair value changes in interest rate swaps and
options that are valid economic hedges but which do not qualify for hedge accounting under NZ IAS 39. The movements in
other components of equity result from fair value changes in interest rate swaps and options that have qualified for hedge
accounting.
Interest rates higher by 100 bps
Interest rates lower by 100 bps
Impact on post tax profit
Impact on equity
2018
$M
(13)
14
2017
$M
(2)
2
2018
$M
20
(21)
2017
$M
19
(20)
(B) CREDIT RISK
The Group manages its exposure to credit risk under policies approved by the Board of Directors. The Group performs credit
assessments on all electricity customers and normally requires a bond from commercial customers who have yet to establish
a suitable credit history. Customer bonds are held in a separate bank account.
It is the Group’s policy to only enter into derivative transactions with banks that it has signed an ISDA master agreement with,
and which have a minimum long-term S&P (or Moody’s equivalent) credit rating of A- or higher.
With respect to energy contracts, the Group has potential credit risk exposure to the counterparty dependent on the current
market price relative to contracted price until maturity.
In the event of a failure by a retailer to settle its obligations to the Energy Clearing House, following the exhaustion of its
prudential security, a proportionate share of the shortfall will be assumed by all generator class market participants. The Group
consequently will be impacted in the event that this occurs.
The carrying amounts of financial assets recognised in the balance sheet best represent the Group’s maximum exposure to
credit risk at the reporting date without taking account of any collateral held by way of customer bonds.
(C) LIQUIDITY RISK
The Group manages its exposure to liquidity risk under policies approved by the Board of Directors. Policies require that
prescribed headroom is available in undrawn and committed facilities to cover unanticipated needs and that a limited amount
of facilities mature over the immediate 12 month forward-looking period. The Group’s objective is to maintain a balance
between continuity of funding and flexibility through the use of various funding sources.
Non-derivative financial liabilities
The following liquidity risk disclosures reflect all contractually fixed payoffs, repayments and interest from recognised non-
derivative financial liabilities. The timing of cash flows for non-derivative financial liabilities is based on the contractual terms
of the underlying contract. It should be noted that the amounts presented are contractual undiscounted cash flows,
consequently the totals will not reconcile with the amounts recognised in the balance sheet.
24 // 25
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTE 14. FINANCIAL RISK MANAGEMENT (CONTINUED)
While the tables below give the impression of a liquidity shortfall, the analysis does not take into account expected future
operating cash flows or committed and undrawn debt facilities that will provide additional liquidity support.
Less than 6
months
$M
6 to 12
months
$M
1 to 5
years
$M
Later than
5 years
$M
June 2018
Liquid financial assets
Cash and cash equivalents
Receivables
Financial liabilities
Payables and accruals
Loans
Net inflow/(outflow)
June 2017
Liquid financial assets
Cash and cash equivalents
Receivables
Financial liabilities
Payables and accruals
Loans
Net inflow/(outflow)
Total
$M
5
226
231
Total
$M
30
240
270
5
226
231
(198)
(285)
(483)
(252)
–
–
–
–
(98)
(98)
(98)
–
–
–
–
–
–
(6)
(668)
(674)
–
(770)
(770)
(204)
(1,821)
(2,025)
(674)
(770)
(1,794)
Less than 6
months
$M
6 to 12
months
$M
1 to 5 years
$M
Later than 5
years
$M
30
240
270
(202)
(99)
(301)
(31)
–
–
–
–
(24)
(24)
(24)
–
–
–
–
–
–
(4)
(724)
(728)
–
(905)
(905)
(206)
(1,752)
(1,958)
(728)
(905)
(1,688)
The comparative liquidity risk disclosures for 1 to 5 years and later than 5 years have been amended to reflect the contracted
maturity date of the capital bonds, and an estimate of associated interest on the capital bonds to maturity. The future interest
cost is based on the forecast floating rate plus the contracted margin. The company has the option to redeem all or some of
the bonds on the reset date, July 2019.
Derivative financial liabilities
The table below details the liquidity risk arising from derivative liabilities held by the Group at balance date. Net settled
derivatives include interest rate derivatives and electricity price derivatives. Gross settled derivatives relate to foreign exchange
derivatives that are used to hedge future purchase commitments. Foreign exchange derivatives may be rolled on an
instalment basis until the underlying transaction occurs. While the maturity of these derivatives are short-term the underlying
expenditure is forecast to occur over different time periods. The table also summarise the payments that are expected to be
made in relation to derivative liabilities. The Group also expects to receive funds relating to derivative asset settlements. The
expectation of cash receipts in relation to derivative assets should also be considered when assessing the ability of the Group
to meet its obligations.
June 2018
Derivative liabilities – net settled
Derivative liabilities – gross settled
Inflows
Outflows
Net maturity
June 2017
Derivative liabilities – net settled
Derivative liabilities – gross settled
Inflows
Outflows
Net maturity
Less than 6
months
$M
6 to 12
months
$M
1 to 5 years
$M
Later than 5
years
$M
Total
$M
(15)
(106)
(27)
19
(19)
(27)
(12)
1
(1)
(12)
(52)
–
–
(52)
–
–
(15)
Less than 6
months
$M
6 to 12
months
$M
1 to 5 years
$M
Later than 5
years
$M
20
(20)
(106)
Total
$M
(54)
41
(42)
(55)
(31)
–
–
(31)
(62)
(25)
(172)
–
–
(62)
–
–
(25)
41
(42)
(173)
(D) FAIR VALUE ESTIMATION
Fair values
The carrying amount of financial assets and liabilities recorded in the financial statements approximates their fair values
except for: (i) the Fixed Rate Bonds, the Floating Rate Bonds and the US Private Placement, the fair values for which have been
calculated at $138 million (2017: $140 million), $293 million (2017: $287 million) and $301 million (2017: $289 million)
respectively; and (ii) the Capital Bonds, the fair value for which has been calculated at $313 million (2017: $317 million). Fair
values are based on quoted market prices and inputs for each bond issue.
Valuation techniques
The Group uses various methods in estimating the fair value of a financial instrument. The methods comprise:
• Level 1 – the fair value is calculated using quoted prices in active markets;
• Level 2 – the fair value is estimated using inputs other than quoted prices included in Level 1 that are observable for the
asset or liability, either directly (as prices) or indirectly (derived from prices); and
• Level 3 – the fair value is estimated using inputs that are not based on observable market data.
As at 30 June 2018 all of the Group’s financial instruments carried at fair value were categorised as level 2, except for
electricity price derivatives. Electricity price derivative assets of $21 million were categorised as level 1 (2017: $8 million) and
$63 million were categorised as level 3 (2017: $63 million). Electricity price derivative liabilities of $1 million were categorised as
level 1 (2017: $6 million) and $9 million were categorised as level 3 (2017: $55 million).
Financial instruments that are measured using a valuation technique with only observable market inputs, or unobservable
inputs that are not significant to the overall valuation, include interest rate derivatives and foreign exchange derivatives not
traded on a recognised exchange.
Financial instruments that use a valuation technique which includes non-market observable data include non-exchange
traded electricity contracts which are valued using a discounted cash flow methodology using a combination of ASX market
prices for the first three years, combined with Management’s internal view of forward prices for the remainder of the contract’s
term. Management’s internal view of forward prices incorporates a minimum price of $63/MWh and a maximum price of
$105/MWh (2017: minimum price of $70/MWh and a maximum price of $104/MWh) over the period in question (in real
terms) and is determined by a demand supply based fundamental model which takes account of current hydrological
conditions, future inflows, an assessment of thermal fuel costs, anticipated demand and supply conditions and future
committed generation capacity.
Where the fair value of a derivative is calculated as the present value of the estimated future cash flows of the instrument
there are two key inputs being used: the forward price curve and the discount rate. Where the derivative is an option, then the
volatility of the forward price is another key input. The selection of inputs requires significant judgement, and therefore there is
a range of reasonably possible assumptions in respect of these inputs that could be used in estimating the fair values of these
derivatives. Maximum use is made of observable market data when selecting inputs and developing assumptions for the
valuation technique.
26 // 27
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTE 14. FINANCIAL RISK MANAGEMENT (CONTINUED)
Level 3 sensitivity analysis
The following summarises the potential impact of increases or decreases in price risk exposures of the Group on post tax
profit. Sensitivity analysis is based on an assessment of the reasonably possible movements in forward price.
Group
Electricity forward price increased by 10%
Electricity forward price decreased by 10%
Reconciliation of level 3 fair value movements
Opening balance
New contracts
Matured contracts
Gains and losses
Through the income statement
Through other comprehensive income
Closing balance
Impact on post tax profit
2018
$M
2017
$M
(1)
1
1
(1)
2018
$M
2017
$M
7
2
8
(7)
44
54
(12)
(4)
–
(1)
24
7
Level 3 fair value movements recognised within the income statement of the Group are recognised within ‘change in the fair
value of financial instruments’. Comparative movements have been reclassified to reflect new and matured contracts that do
not qualify for hedge accounting.
Deferred ‘inception’ gains/(losses)
There is a presumption that when derivative contracts are entered into on an arm’s length basis, fair value at inception would
be zero. The contract price of non exchange traded electricity derivative contracts are agreed on a bilateral basis, the pricing
for which may differ from the prevailing derived market price curve for a variety of reasons. In these circumstances an
inception adjustment is made to bring the initial fair value of the contract to zero at inception. This inception adjustment is
amortised over the life of the contract by adjusting the future price path used to determine the fair value of the derivatives by
a constant amount to return the initial fair value to zero.
The table below details the movements in inception value gains/(losses) included in the fair value of derivative financial assets
and liabilities as at 30 June.
Electricity price derivatives
Opening deferred inception gains/(losses)
Deferred inception gains (losses) on new hedges
Deferred inception losses realised during the year
Closing inception gains/(losses)
2018
$M
(6)
(6)
(16)
(28)
2017
$M
(4)
3
(5)
(6)
(E) CAPITAL RISK MANAGEMENT
Management seeks to maintain a sustainable financial structure for the Group having regard to the risks from predicted short
and medium-term economic, market and hydrological conditions along with estimated financial performance. Capital is
managed to provide sufficient funds to undertake required asset reinvestment as well as to finance new generation
development projects and other growth opportunities to increase shareholder value at a rate similar to comparable private
sector companies.
In order to maintain or adjust the capital structure, changes may be made to the amount paid as dividends to shareholders,
capital may be returned or injected or assets sold to reduce borrowings.
Consistent with other companies in the industry, the Group monitors capital on the basis of its gearing ratio. This ratio is
calculated as net debt divided by total capital. Net debt is calculated as total borrowings (both current and non-current) less
cash and cash equivalents. Total capital is calculated as shareholders’ equity plus net debt. The gearing ratio is calculated
below:
Borrowings at carrying value
Fair value adjustments US Private Placement
Less cash and cash equivalents
Net debt
Total equity
Total capital
Gearing ratio
2018
$M
1,305
(51)
(5)
1,249
3,286
4,535
2017
$M
1,107
(39)
(30)
1,038
3,308
4,346
27.5%
23.9%
Under the negative pledge deed in favour of its bank financiers the Group must, in addition to not exceeding its maximum
gearing ratio, exceed minimum interest cover ratios and a minimum shareholder equity threshold.
The Group seeks to maintain a debt to EBITDAF ratio of less than 3.0 times, on average through time, to maintain credit
metrics sufficient to support its credit rating on an on-going basis. For the purpose of calculating this ratio and consistent with
the rating agency treatment, the calculation of debt is deemed to be all senior debt and 50% of subordinated debt. For the
year ended 30 June 2018, the Group had a debt to EBITDAF ratio of 2.0 times (2017: 1.8 times).
NOTE 15. DERIVATIVE FINANCIAL INSTRUMENTS
The fair values of derivative financial instruments together with the designation of their hedging relationship are summarised
below, based on maturity date:
CURRENT ASSETS
Interest rate derivative
Electricity price derivative
Cross currency interest rate derivative
CURRENT LIABILITIES
Interest rate derivative
Electricity price derivative
Foreign exchange derivative
Cross currency interest rate derivative
NON-CURRENT ASSETS
Interest rate derivative
Electricity price derivative
Cross currency interest rate derivative
NON-CURRENT LIABILITIES
Interest rate derivative
Cross currency interest rate derivative – margin
Electricity price derivative
2018
$M
2017
$M
11
19
1
31
18
5
–
1
24
11
64
35
110
65
3
5
73
8
10
–
18
29
18
1
1
49
27
61
23
111
90
5
44
139
28 // 29
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTE 15. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
The majority of interest rate derivatives, short-term low value foreign exchange derivatives, and short-term low value exchange
traded energy contracts, while economic hedges, are not designated as hedges under NZ IAS 39 but are treated as at fair
value through profit and loss. All other interest rate derivatives (predominantly forward starting derivatives), foreign exchange
and electricity prices derivatives (except those described below) are designated as cash flow hedges under NZ IAS 39.
Cross currency interest rate swaps, which are used to manage the combined interest and foreign currency risk on borrowings
issued in foreign currency, have been split into two components for the purpose of hedge designation. The hedge of the
benchmark interest rate is designated as a fair value hedge and the hedge of the issuance margin is designated as a cash
flow hedge.
Electricity contracts not designated as hedges for accounting purposes
The Group has an electricity hedge contract with the Tuaropaki Power Company. The contract settles against a moving hedge
index rather than wholesale electricity prices.
Basis swaps: The Group has entered into a number of contracts to hedge wholesale electricity price risk between North and
South Island generically called basis swaps. The most significant is a contract with Meridian Energy which has a remaining life
of 7 years.
The changes in fair values of derivative financial instruments recognised in the income statement and other comprehensive
income are summarised below:
Income statement
Other comprehensive
income
Cross currency interest rate derivatives
Borrowings – fair value change
Interest rate derivatives
Cross currency interest rate derivatives – margin
Electricity price derivatives
Foreign exchange rate derivatives
Ineffectiveness of cash flow hedges recognised in the income statement
Total change in fair value of financial instruments
Movement in cash flow hedge reserve
Opening balance
The effective portion of cash flow hedges recognised in the reserve
Amortisation of fair values1
The amount transferred to balance sheet
Equity accounted share of associates’ movement in other comprehensive income
Tax effect of movements
Closing balance
1 Amounts reclassified to the income statement recognised in amortisation.
2018
$M
12
(12)
–
40
–
12
–
(3)
49
2017
$M
(23)
24
1
38
–
(9)
–
1
31
2018
$M
–
–
–
(18)
2
49
–
–
33
2018
$M
(53)
33
(1)
5
2
(10)
(24)
2017
$M
–
–
–
13
1
23
(1)
–
36
2017
$M
(76)
36
(1)
1
(2)
(11)
(53)
NOTE 16. RECONCILIATION OF PROFIT FOR THE YEAR TO NET CASH FLOWS
FROM OPERATING ACTIVITIES
Profit for the year
Items classified as investing or financing activities
• Foreign exchange movements
• Net interest accrual
Adjustments for:
Depreciation and amortisation
Carbon costs
Dividend income received from the investment in Tilt Renewables
Net (gain)/loss on sale of property, plant and equipment
Net gain on disposal of emission units
Change in the fair value of financial instruments
Impaired assets
Movement in effect of discounting on long-term provisions
Share of earnings of associates and joint ventures
Other non-cash items
Net cash provided by operating activities before change in assets and liabilities
Change in assets and liabilities during the year:
• Decrease/(increase) in trade receivables and prepayments
• (Increase)/decrease in consumable inventories
• (Decrease)/increase in trade payables and accruals
• (Decrease)/increase in provision for tax
• Decrease in deferred tax
Net cash inflow from operating activities
2018
$M
234
–
1
197
4
(1)
(2)
–
(49)
–
(3)
(2)
(1)
378
12
(1)
(6)
(6)
(6)
371
2017
$M
184
–
1
189
–
–
2
(5)
(31)
18
2
(6)
(1)
353
(42)
3
40
26
(8)
372
30 // 31
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTE 17. RELATED PARTY TRANSACTIONS
Majority shareholder
The majority shareholder of Mercury NZ Limited is the Government. All transactions with the Government and other entities
wholly or partly owned by the Government are on normal commercial terms. Transactions cover a variety of services including
trading energy, postal, travel and tax.
Transactions with related parties
Mercury NZ Limited has investments in subsidiaries, associates and joint arrangements, all of which are considered related parties.
As these are consolidated financial statements, transactions between related parties within the Group have been eliminated.
Consequently, only those transactions between entities which have some owners external to the Group have been reported below:
Associates
Management fees and service agreements received
Energy contract settlements received/(paid)
Joint operations
Management fees and service agreements received
Energy contract settlements received/(paid)
Interest income
Payments for inventory
Transaction value
2018
$M
2017
$M
14
6
11
2
1
–
12
(1)
15
(9)
1
(1)
Energy contracts, management and other services are made on normal commercial terms.
An advance to TPC Holdings Limited of $4 million (2017: $4 million) is interest free and repayable on demand subject to
certain conditions being met.
The long-term advance to our Rotokawa Joint Venture partner carries a floating interest rate. Repayments under the advance
are linked to the level of receipts under the geothermal energy supply agreement. There is no fixed repayment date, the
agreement will terminate on full payment of the outstanding balance.
No related party debts have been written off, forgiven, or any impairment charge booked.
Key management personnel compensation (paid and payable) comprised:
Directors’ fees
Benefits for the Chief Executive and Senior Management:
Salary and other short-term benefits
Share-based payments
Transaction value
2018
$000
2017
$000
960
885
6,275
553
7,788
6,175
430
7,490
The year-on-year increase in directors’ fees is due to the appointment of an additional director to bring the Board to its full
complement.
Other transactions with key management personnel
Key management personnel are those people with responsibility and authority for planning, directing and controlling the
activities of the entity. Key management personnel for the Group are considered to be the Directors and Senior Management.
Directors and employees of the Group deal with Mercury NZ Limited as electricity consumers on normal terms and conditions,
with staff discounts for employees, within the ordinary course of trading activities. A number of key management personnel
also provide directorship services to other third party entities. A number of these entities transacted with the Group, in all
circumstances on normal commercial terms during the reporting period.
A number of key management personnel provide directorship services to direct subsidiaries and other third party entities as
part of their employment without receiving any additional remuneration. Again, a number of these entities transacted with the
Group, in all circumstances on normal commercial terms in the reporting period.
The Group purchases directors and officers insurance for the benefit of key management personnel in relation to the services
they provide to the Group.
NOTE 18. COMMITMENTS AND CONTINGENCIES
Commitments
Within one year
One to five years
Later than five years
Capital
Operating lease
Other operating
commitments
2018
$M
40
42
24
106
2017
$M
46
54
28
128
2018
$M
7
33
63
103
2017
$M
6
31
73
110
2018
$M
7
17
63
87
2017
$M
7
9
64
80
Capital commitments include both commitments to purchase property, plant and equipment as well as intangible
commitments. Intangible commitments include commitments to purchase emissions units. In the event the New Zealand
emissions trading scheme (NZ ETS) is terminated, the existing forward purchase agreements for the acquisition of emissions
units which cover the 9 year period from the end of the reporting period, will also terminate.
Operating leases are of a rental nature and are on normal commercial terms and conditions. The majority of the lease
commitments are for building accommodation, the leases for which have remaining terms of between 1 and 17 years and
include an allowance for either annual, biennial or triennial reviews. The remainder of the operating leases relate to vehicles
and plant and equipment.
Contingencies
The Group holds land and has interests in fresh water and geothermal resources that are subject to claims that have been
brought against the Government. On 29 August 2014, the Supreme Court gave its decision in Paki v Attorney-General and
dismissed the claimants’ action seeking a declaration that the Government holds those parts of the bed of the Waikato River
which adjoin former Pouakani land on trust for the Pouakani people on the basis it was incorrectly advanced. The Supreme
Court decision has left open the possibility of further litigation in respect of ownership of that land currently held by the Group.
The Group has received advice that it may proceed with a high degree of confidence that future decisions on the matter will
not impair the Group’s ability to operate its hydro assets. A separate claim by the New Zealand Maori Council relating to fresh
water and geothermal resources was lodged in 2012 with the Waitangi Tribunal. The Tribunal concluded that Maori have
residual (but as yet undefined) proprietary rights in fresh water and geothermal resources and it will be for the Government to
determine how any such rights and interests may best be addressed. The impact of this claim on the Group’s operations is
unknown at this time.
From time to time the Group will issue letters of credit and guarantees to various suppliers in the normal course of business.
However, there is no expectation that any outflow of resource relating to these letters of credit or guarantees will be required as
a consequence.
The Group has no other material contingent assets or liabilities.
NOTE 19. SHARE-BASED PAYMENTS
Long-term incentive plan
The Group operates an equity-settled share based long-term incentive (LTI) plan for senior executives. The plan is designed to
enhance the alignment between shareholders and those executives most able to influence the performance of the Group.
Under the plan the senior executives purchase shares at market value funded by an interest free loan from the Group, with the
shares held on trust by the Trustee of the LTI plan until the end of the vesting period. Vesting of shares is dependent on
continued employment through the vesting period and the Group’s relative total shareholder return. If the shares vest,
executives are entitled to a cash amount which, after deduction for tax, is equal to the initial loan balance for the shares which
have vested. That cash amount must be applied towards repayment of their loan balance and the corresponding shares are
released by the trustee to the individual. The vesting periods for the plan are June 2018, June 2019 and June 2020. Under the
plan, a relative total shareholder return measure is used. Performance is measured against a combination of: i) other electricity
generators who are listed on the NZSX; and (ii) all NZX50 companies, both as at the start of the vesting period.
The LTI plan represents the grant of in-substance nil-price options to executives. During the year the Group expensed
$552,990 in relation to equity-settled share based payment transactions (2017: $430,375).
32 // 33
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTE 19. SHARE-BASED PAYMENTS (CONTINUED)
Movements in the number of share options are as follows:
Balance at the beginning of the year
Options granted
Options expired
Options exercised
Balance at the end of the year
2018
2017
668,810
260,118
(3,660)
(179,297)
745,971
493,912
286,118
(24,468)
(86,752)
668,810
199,735 options were exercisable at the end of the year (2017: 182,957) with the remaining options under the plan having a
weighted average life of 1.5 years (2017: 1.6 years).
NOTE 20. SUBSEQUENT EVENTS
On 15 August 2018, the Company announced it would be partnering with majority shareholder Infratil in a takeover offer for all
shares in Tilt Renewables. If successful, Mercury would retain its 19.99% share in Tilt, and secure the right to appoint a director
to the Board of Tilt. This would result in the investment being reclassified from available for sale to being equity accounted.
The Board of Directors has approved a fully imputed final dividend of 9.1 cents per share to be paid on 28 September 2018.
There are no other material events subsequent to balance date that would affect the fair presentation of these financial
statements.
GOVERNANCE AT MERCURY
At Mercury, we are focussed on safeguarding our assets and
securing long term value for our shareholders. We are
committed to maintaining the highest standards of corporate
governance and accountability. Mercury’s Board adopts
corporate governance policies and practices that reflect
contemporary standards in New Zealand and Australia,
incorporating the corporate governance recommendations
of the NZX and the ASX.
Our corporate governance practices comply with the ASX
Corporate Governance Principles (third edition) (ASX Principles)
and are in substantial compliance with the NZX Corporate
Governance Code 2017: the only two exceptions relate to
Recommendation 3.3 (Remuneration Committee) and
Recommendation 3.6 (Takeover Protocol). These exceptions
are explained in our full Corporate Governance Statement,
available in the Corporate Governance section of our website
at www.mercury.co.nz.
In this section we give an overview of our Board composition and
experience, how we manage risks, our commitment to acting
ethically and responsibly and our approach to inclusion and
diversity.
Shareholders
MERCURY BOARD
Risk Assurance &
Audit Committee
People & Performance
Committee
Nominations
Committee
Chief Executive
Executive Management Team
MERCURY PEOPLE
Mercury’s Board
Composition and characteristics
The Board currently comprises eight directors: Joan Withers
(Chair), Prue Flacks, Andy Lark, James Miller, Keith Smith, Scott
St John, Patrick Strange and Mike Taitoko. Each of the Directors
is non-executive and independent. Details of our Directors are
available in the Leadership section of our website.
The Board supports the Institute of Directors’ Future Directors
Programme which offers candidates valuable experience sitting
at the Board table of a New Zealand company for 12 or more
months. The programme is designed to increase the pipeline of
board-ready younger directors through giving them exposure to
real-life governance in action along with valuable mentorship.
Our third and current future director, Anna Lissaman,
commenced on 1 July 2018 and her tenure will conclude on
31 December 2019. Anna participates in discussions in all Board
meetings but does not participate in decision-making.
The Board is structured to ensure that as a collective group it has
the skills, experience, knowledge, diversity and perspective to
fulfil its purpose and responsibilities. The responsibilities of the
Board are set out in Mercury’s Board Charter. The Board Charter
is available in the Corporate Governance section of our website.
Our Board characteristics are set out in the diagram on page 34.
Committees
The Board has three standing Committees: the Risk Assurance
& Audit Committee (RAAC), the People & Performance
Committee (formerly the Human Resources Committee)
(PPC), and the Nominations Committee. Each Committee
focusses on specific areas of governance. Together they
strengthen the Board’s oversight of Mercury. As an exception
to Recommendation 3.3 of the NZX Corporate Governance
Code 2017, the Board does not have a separate Remuneration
Committee; rather the functions which would ordinarily be
allocated to that committee are shared between the PPC in
respect of the Chief Executive and the Executive Management
Team (EMT), and the Nominations Committee in respect of the
Directors. The current members of the Committees are as follows:
Committee
Members
Risk Assurance &
Audit Committee
People &
Performance
Committee
Nominations
Committee
Keith Smith (Chair), James Miller and
Patrick Strange. Joan Withers is also a
member by virtue of her position as Board
Chair.
Prue Flacks (Chair), Andy Lark, Mike
Taitoko and Scott St John*. Joan Withers
is also a member by virtue of her position
as Board Chair.
Joan Withers (Chair), Prue Flacks and
James Miller.
* Scott St John joined the People & Performance Committee during the reporting
period. His first meeting on this Committee was on 25 June 2018.
34 // 35
GOVERNANCE AT MERCURY
(CONTINUED)
Board Characteristics
G
o
v
e
r
n
a
n
c
e
R
e
t
a
i
l
,
m
a
r
k
e
t
i
n
g
D
i
g
i
t
i
s
a
t
i
o
n
/
T
e
c
h
n
o
l
o
g
y
s
r
a
e
3 y
-
0
100%
75%
50%
25%
T
E
N
U
R
E
3- 6 ye ars
6+ years
0%
Male
Female
S
co
m
I
w
i
r
e
l
a
G
o
v
e
r
n
m
t
i
o
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s
h
i
p
m
u
hareholder/investm
nity relationships
s
/
ent
l
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c
o
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c
t
i
v
i
t
y
n
t
r
e
l
a
t
i
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s
h
i
p
s
25%
A
u
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t
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a
50%
i
a
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E
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e
g
x
y
p
75%
e
M
r
i
a
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r
n
k
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t
100%
l
a
i
c
n
a
n
fi
r
o
y
t
i
d
o
m
m
o
C
g
n
i
d
a
r
t
s
t
e
k
r
a
m
Large co
m
e
x
p
e
ri
e
n
a
n
d
b
r
a
c
d
n
e
pany leadership experience
Electricity industry operational
experience
e
x
p
e
r
i
e
n
c
e
Finance/Accounting/Audit Committee
experience
e
y
R e g u l a t o r
S
L
L
I
K
S
a
n r e s o
p
m
x
s a f e t y e
u
H
i e n c
r
x p e
d
n
k n o w l e d g e a n d e
a lt h a
e s, h
e
c
n
e
u r c
e rie
Business strategy experience
entrepreneurialism
wth,
d gro
n
n a
ovatio
n
In
D
G
I
V
E
E
N
R
D
SIT
E
R
Y
WE ARE COMMITTED
TO MAINTAINING THE
HIGHEST STANDARDS
OF CORPORATE
GOVERNANCE AND
ACCOUNTABILITY.
Each standing Committee operates in accordance with a written
Charter approved by the Board. The Committee Charters are
available in the Corporate Governance section of our website.
Mercury assesses whether additional committees are required
on a regular basis. During the past financial year, the Board
established two temporary committees for discrete projects.
Skills and reviewing performance
The Nominations Committee has developed a matrix
setting out the ideal mix of skills and diversity of the Board.
The matrix is used to evaluate whether the collective skills and
experience of the Directors meets Mercury’s current and future
requirements. If the Board determines that new or additional
skills are required, training is completed or a formal recruitment
process is undertaken. In addition to having the right mix of
skills, the Board is focused on ensuring that it has the right
culture that takes advantage of, and benefits from, the
diversity of skills, background and experiences of the Board.
The Board fosters a culture of collaborative and open discussion
where each Director as a high performing individual is expected
to make a valuable contribution and to provide an alternative
perspective, even where the topic is outside that Director’s
attributed skills and experience. By applying this philosophy, the
Board as a collective group exceeds the individual contributions
of its members.
Evaluations are regularly conducted to review the performance
of the Board and each Director, and the effectiveness of Board
processes and committees. This is undertaken using a variety of
techniques including external consultants, questionnaires and
Board discussion. The last full Board review, with the assistance
of an external facilitator, was completed in June 2018. The
review found that Mercury’s Board remains in the top tier and
continues to hold many strong attributes identified in 2014 and
2016 reviews, including holding highly relevant board capability
and governance processes. Some opportunities were identified
for Board focus to maintain and extend that performance.
The Board also completed a comprehensive analysis of the skills
and tenure of the Board in mid-2018.
The table below highlights those skills which the Board considers to be connected with the governance of Mercury’s strategy.
Joan
Withers
Andy
Lark
James
Miller
Mike
Taitoko
Patrick
Strange
Prue
Flacks
Keith
Smith
Scott
St John
Skill Attribute
Delivering Customer Advocacy
Digitisation/technology
A detailed understanding of ICT and disruptive
technologies and their potential impact to provide
our customers with choice and freedom
Retail, marketing and brand experience
Senior experience in retail, marketing and brand
development as we seek to positively differentiate
our offering
Leveraging Core Strengths
Governance experience
Commitment to the highest standards of
governance and an ability to assess the
effectiveness of senior management
Large company leadership experience
Sustainable success in business at a senior
executive level
Electricity industry operational experience
Senior executive experience within the electricity
industry together with a deep understanding of
operational excellence
Finance/accounting/audit committee/risk
management experience
Senior executive or board experience in financial
accounting and reporting, corporate finance and
internal controls, and developing and overseeing
an appropriate risk framework and culture
Regulatory knowledge and experience
An understanding of the evolving regulatory
environment in which we operate and the role that
plays in ensuring sustainable custodianship of our
assets and providing benefit to our customers
Human resources, health and safety experience
Familiarity with people and performance issues to
provide an environment for personal and business
growth and an appropriate understanding of
health and safety and wellness concerns
Primary Skills
Secondary Skills
Table continued on next page.
Joan
Withers
Andy
Lark
James
Miller
Mike
Taitoko
Patrick
Strange
Prue
Flacks
Keith
Smith
Scott
St John
36 // 37
GOVERNANCE AT MERCURY
(CONTINUED)
Skill Attribute
Delivering Sustainable Growth
Business strategy experience
A track record of developing and implementing a
successful and sustainable strategy
Innovation and growth, entrepreneurism
A track record of demonstrated entrepreneurialism
and/or demonstrated understanding and
commitment to innovation and a clear record of
achieving organisational growth
Commodity or financial markets trading
Experience and understanding of commodity and
financial markets
Australian Energy Market experience
Familiarity with the Australian energy market and
the opportunities and challenges of doing
business in that market
Building and maintaining relationships
Government relationships
An understanding of the functioning of
Government and experience developing and
maintaining constructive relationships and
interactions with Government and regulators
Iwi relationships/connectivity
An understanding and appreciation of Maori
culture, the ability to build and foster deep trusting
relationships with iwi and a deep connection with
iwi concerns and aspirations
Shareholder/investment community relationships
Experience in and understanding of shareholder
and investment community concerns and
developing constructive relationships
Primary Skills
Secondary Skills
Acting Ethically and Responsibly
At Mercury, doing what’s right is something all our people strive
to achieve. We strive to ensure that our people know what the
‘right thing to do’ is. We have put in place the Mercury Code
which establishes our culture and the behaviours we consider
are required for the successful delivery of our strategy and the
achievement of our Purpose of inspiring New Zealanders to
enjoy energy in more wonderful ways. The Mercury Code
requires all Mercury people, including Directors and employees,
to act honestly and with integrity and fairness at all times. The
Mercury Code and associated policy framework underpin our
ethical and behavioural standards. They support our promises to
each other and define our commitment to our customers, our
people and communities, and our investors. The Mercury Code
is available in the Corporate Governance section of our website.
We also want to ensure that we work with suppliers who
share our commitment to acting ethically and doing the
right thing. We have therefore introduced our Supplier Guiding
Principles which describe the way we will work with our suppliers
and what we expect in return. Our Supplier Guiding Principles
set out our commitments to treating people fairly, wellbeing,
protecting our business and our reputation, protection of
personal information and sustainability. Our Supplier Guiding
Principles are available in the Corporate Governance section of
our website.
Managing Risk and Assurance
Risk management is an integral part of Mercury’s business.
Mercury has in place an overarching Risk Management Policy
(available in the Corporate Governance section of our website)
supported by a suite of risk management policies appropriate for
its business which together form our Risk Management
framework.
The purpose of the Risk Management Policy is to embed
a comprehensive, holistic, Group-wide capability in risk
management which provides a consistent method of identifying,
assessing, controlling, monitoring and reporting existing and
potential risks to Mercury’s business and to the achievement of
its plans. The Policy sets out the risk management objectives and
requirements of Mercury within which management is expected
to operate. The Policy is reviewed annually by the RAAC and
approved by the Board.
The Risk Management framework supports a comprehensive
approach to risk, encompassing financial, strategic,
environmental, operational, regulatory, reputational, social and
governance risks. The framework involves actively identifying
and managing risk and taking measures to reduce the likelihood
of risk, contain potential hazards and take mitigating action to
reduce impacts in line with risk tolerances.
Mercury has a Risk Assurance Officer who has the independence
to determine the effectiveness of risk management, assurance
and internal audit. The Risk Assurance Officer has a dual reporting
line to the Chief Financial Officer and the RAAC Chair. The RAAC
tasks the Risk Assurance Officer to ensure healthy and robust
debate and interaction between management, risk assurance
and audit providers.
Mercury operates a Risk Management Committee, comprised
of representatives from the EMT and chaired by the Chief
Executive. Its mandate is to promote risk awareness and
appropriate risk management to all employees, and to monitor
and review risk activities as circumstances and our strategic and
operational objectives change. The Committee meets at least
four times each year.
Mercury must accept some risks in order to achieve its strategic
objectives and to deliver shareholder value. These are embodied in
Mercury’s Risk Appetite Statements which are set and regularly
reviewed by the Board and are set out in more detail in Mercury’s
Corporate Governance Statement, available in the Corporate
Governance section of our website.
The RAAC is responsible for overseeing, reviewing and providing
advice to the Board on Mercury’s risk management policies and
processes. The Risk Assurance Officer reports regularly to the
RAAC on the effectiveness of Mercury’s management of material
business risks. In addition, the RAAC annually reviews the Risk
Management framework. The last review of the Risk Management
framework took place in FY2018. The Auditor–General is the
external auditor of Mercury and each of its subsidiaries (together,
the “Group”), under the Public Audit Act 2001. The Auditor–
General has appointed Simon O’Connor of Ernst & Young to carry
out the FY2018 audit on his behalf.
The NZX Main Board Listing Rules require rotation of the lead
audit partner at least every five years. The next rotation is for the
FY2019 audit. The Auditor–General has appointed Lloyd Bunyan
of Ernst & Young as Mercury’s next lead audit partner. The
provision of external audit services is guided by the Audit
Independence Policy which is available on our website. The
external auditor attends all RAAC meetings and consistent with
the Stakeholder Communications Policy, attends the Annual
Shareholders’ Meeting and is available to shareholders to answer
questions relevant to the audit.
Our progress against inclusion and diversity goals is measured
against objectives set by the Board. These objectives are made
up of a mixture of targets and benchmarks. Generally, targets
exist where we believe that achieving diversity in that area is
aided by us working towards a specific measure. In other areas
we use benchmarks where comparison against those identified
data points will help inform our view of how our work towards
diversity in that area is progressing.
38 // 39
GOVERNANCE AT MERCURY
(CONTINUED)
Inclusion and Diversity
Mercury embraces and celebrates diversity in all its forms. A key
pillar of the Mercury Attitude is that we encourage our people to
share and connect. We believe that the best way to create value
in our business and deliver the best customer experience is
through high performance teams. We aim to make Mercury a
great and safe place to work, where our employees feel engaged
and motivated to live up to their full potential, and also the full
potential of their teams. Being part of a team that celebrates
different backgrounds, views, experience and capability helps
create an inclusive workplace where our people grow and thrive,
leading to better business performance.
Our commitment to inclusion and diversity starts with our
Inclusion and Diversity Policy and framework. Our Policy is
available in the Corporate Governance section of our website.
Mercury’s approach to inclusion and diversity focuses on gender,
age, ethnicity and flexibility. Activity is aligned to the following
principles:
•
•
increasing the diversity of our workforce at senior levels
creating a flexible and inclusive work environment that
values difference and enhances business outcomes
• harnessing diversity of thought and capitalising on
individual differences
• promoting leadership behaviours that reflect our belief in
the value of inclusion and diversity
•
retaining and attracting a talented workforce through
increasing the diversity of the candidate pool and
maintaining a recruitment strategy that is attractive to
all candidates.
Our performance against measurable objectives set by the Board is set out below:
Area of focus
Objective
Target
Employees
Leaders
EMT
Board
Gender
Age
Ethnicity
Improve representation
of women at senior
leadership levels
Work towards an age
profile for our team
that is suitable for our
business taking into
account the population
that we work in
Work towards aligning
the ethnicity of our
team with the
population and
communities that we
work in
Actual
2020
38%
Employees
33%
Leaders
33%
EMT
33%
Board
2017
41%
30%
22%
29%
2018
41%
30%
22%
25%
Benchmark against the national
median age of the labour force in the
New Zealand National Labour Force
Projections
Our average age across the workforce is
41, which is consistent with the national median
age of the labour force in the New Zealand
National Labour Force Projections
Benchmark against National Statistics
(Census data) that show the ethnicity of
the population and communities that
we work in
Ethnicity
Mercury
2018
Ethnicity*
NZ
Population
2013
Census
Ensure that our
leadership reflects the
diversity of our teams
Targeting ethnicity distribution of our
Leader population equal to the ethnicity
distribution of the total company
Inclusion
Flexibility
Targeting better performance than the
Average Large Organisation score for
this question of 72%
Targeting better performance than the
Average Large Organisation score for
this question of 80%
Ensure that our team
are supported to do
their best work and
they engage fully as
part of our team
Facilitate flexible
workplace
arrangements to
enable employees to
balance responsibilities
appropriately
NZ European (364)
Maori (32)
Pacific (55)
Asian (137)
Other European (53)
Other (77)
Not selected
Ethnicity
NZ European (364)
Maori (32)
Pacific (55)
Asian (137)
Other European (53)
Other (77)
Not selected
45%
4%
7%
17%
7%
10%
10%
69%
13%
7%
9%
n/a
2%
n/a
Mercury
2018
Ethnicity*
Mercury
People
Leaders by
Ethnicity
45%
4%
7%
17%
7%
10%
10%
62%
3%
3%
3%
5%
8%
5%
In response to our 2018 Employee Engagement
Survey, 80% of employees confirmed that they
are treated fairly, regardless of age, ethnicity,
gender or physical capabilities, compared to
2017 All NZ Organisations Benchmark of 78%
In response to our 2018 Employee Engagement
Survey, 85% of employees confirm that they
have the freedom and flexibility to do their job
effectively, compared to 2017 All NZ
Organisations Benchmark of 84%
* Mercury 2018 Ethnicity data based on responses to Mercury’s 2018 Employee Engagement Survey.
At the balance date, the proportion of women on the EMT (including the Chief Executive) was 22%, or two out of nine (as at 30 June
2017 this was 22% or two out of nine). The proportion of women on the Board at balance date was 25% or two out of eight, including
the Chair (as at 30 June 2017 this was 29% or two out of seven).
The Board believes that for this reporting period Mercury has made progress towards achieving its inclusiveness and diversity
objectives and against its Inclusion and Diversity Policy generally. However, the Board notes that continued focus is required over the
next two financial years in order for Mercury to achieve its 2020 gender diversity targets.
40 // 41
DIRECTOR AND EXECUTIVE EMPLOYEE REMUNERATION
Dear Shareholder
As Chair of the People & Performance Committee (PPC)
of the Board, it is my pleasure to present our Remuneration
Report for the year ending 30 June 2018 (FY2018).
This report outlines Mercury’s approach and strategy to
remuneration and in particular for its executives. It sets out
remuneration information for the Chief Executive, direct reports
to the Chief Executive and Directors.
Mercury’s Board is committed to a remuneration
framework that promotes a high performance culture and
aligns executive reward to the achievement of strategies and
objectives to create sustainable value for shareholders.
The Board is committed to demonstrating transparency in
its remuneration policy and practice.
The Board is supported by the PPC for these activities.
The role and membership of the PPC is set out in the Corporate
Governance section.
Mercury’s remuneration approach aims to retain, attract,
develop and motivate high calibre employees at all levels of the
organisation. It is based on a practical set of guiding principles
that provide for consistency, fairness and transparency. This
strategy aligns with Mercury’s strong focus on high performance
teams and growing a human capital advantage, as well as
promoting behaviours and values to support customer centricity
and sustainable growth in shareholder value.
Mercury’s long term incentive (LTI) scheme is currently under
review to determine its continuing effectiveness to motivate,
retain and align the effort of executives, in line with the
company’s priorities. The review of the long term incentive
scheme will also consider the Government’s new taxation rules
for employee share schemes and how this will impact on any
future LTI grants. Any key long term incentive plan changes will
be summarised in next year’s Annual Report.
Finally, I would like to recognise Mercury’s achievement of
winning the Best Enterprise Workplace (750+ employees)
in the 2017 IBM Best Workplaces Awards and also winning the
Workplace Engagement Programme of the Year at the NZ HR
awards. Both awards recognise Mercury’s commitment to its
people and aligning them under one brand purpose: to inspire
New Zealanders to enjoy energy in more wonderful ways.
PRUE FLACKS
CHAIR, PEOPLE & PERFORMANCE COMMITTEE
Executive remuneration
Mercury’s remuneration policy for the Executive Management
Team (EMT) provides the opportunity for them to receive, where
performance has been exceptional, a total remuneration
package in the upper quartile for equivalent market-matched
roles.
The PPC reviews the annual performance appraisal outcomes
for all members of the EMT and approves the outcomes for
all EMT members other than the Chief Executive. The Chief
Executive’s remuneration is approved by the Board on the
recommendation of the PPC. The review takes into account
external benchmarking from PwC to ensure competitiveness
with comparable market peers, along with consideration of an
individual’s performance, skills, expertise and experience.
External benchmarking is commissioned by the PPC from an
expert independent party, PwC, and PwC is required to declare
independence of any management influence in the collation of
the information provided. External benchmarking for non-
Executive remuneration is requested by Mercury management
and provided by Ernst and Young.
Total remuneration is made up of three components: fixed
remuneration, short-term performance incentives and long-term
performance incentives. Short and long-term performance
incentives are deemed ‘at-risk’ because the outcome is
determined by performance against a combination of pre-
determined financial and non-financial objectives.
Fixed remuneration
Fixed remuneration consists of base salary and benefits.
Mercury’s policy is to pay fixed remuneration with reference
to the fixed pay market median.
Short term performance incentives
Short term incentives (STIs) are at-risk payments designed
to motivate and reward for performance typically in that
financial year.
The target value of an STI payment is set annually, usually
as a percentage of the executive’s base salary. For FY2018 the
relevant target percentage for the Chief Executive was 50% and
for all the other executives it was 25% to 35%.
A proportion (80% for the Chief Executive in FY2018, 70% from
FY2019; 50% for other EMT members) of the STI is related to a
shared set of KPIs based on business priorities for the next 12
months, with the objective of aligning the EMT’s focus to the
company’s priorities.
The shared KPIs in FY2018 covered the areas of finance,
customer, wellbeing, people and long-term platform with
respective weightings applied across areas as outlined below.
The financial KPI is normalised for positive and negative annual
variations in hydrology as these are beyond management’s
control. The criteria are selected to closely align with Mercury’s
strategic objectives, purpose and goal and Mercury’s five key
pillars. For FY2019 the weightings have been adjusted as shown.
Target Area
Financial: EBITDAF1
People
Wellbeing
Customer
Long term platform
Partnerships
Kaitiakitanga
FY2018 Weighting %
FY2019 Weighting %
30
20
20
20
10
N/A
N/A
30
302
20
N/A
10
10
Key Pillar
Leading Economic
Performance
High Performance Teams
Growing Customer Loyalty
N/A
Stronger Together
Enhanced Natural Resources
Note 1: EBITDAF is normalised for positive and negative annual variations in Waikato hydro generation.
Note 2: People and Wellbeing have been combined in FY2019 to be People.
For the FY2018 grant commencing 1 July 2017 the value
represents between 27% - 35% of an executive’s base salary.
LTI payments are made in shares rather than cash.
The maximum number of shares which an executive may
receive for each grant is determined by dividing the value of
the grant less tax by the market value of one Mercury share as
at the date of the grant.
The Board retains discretion over the final outcome, to allow
appropriate adjustments where unanticipated circumstances
may impact performance, positively or negatively, over a three
year period.
For FY2018 there are three performance levels within each
target area, ‘threshold’, ‘on-plan’ and ‘stretch’, except for
long term platform, with 100% of the amount allocated
to that target area being payable when the on-plan level is
achieved. The stretch performance levels allow employees
to be rewarded for exceptional performance. The maximum
amount of a STI payment for an EMT member is 178% of
the STI on-plan amount for that EMT member.
The balance of the STI is related to individual (in the case of
the Chief Executive) or business unit and individual (in the case
of other EMT members) performance measures.
In the event all five performance thresholds are not met,
no STI payment will be made.
Long term performance incentives
LTIs are at-risk payments designed to align the reward of certain
executives with the enhancement of shareholder value over a
multi-year period.
The current LTI plan commenced on 1 July 2015 under
which grants are made annually with performance measured
over a three year period. The face value less tax is used to
determine the number of shares held in trust for each grant and
is set at the date of the grant. The plan’s performance is
measured based on Mercury’s total shareholder return (TSR)
relative to two performance hurdles designed to ensure an
appropriate long term performance comparison.
Each grant under the current LTI plan is divided into two
tranches having different performance hurdles:
• 50% of the grant is based on Mercury’s TSR relative to
the NZX 50 and is subject to a gate that Mercury’s TSR
over that period must be at least positive;
• 50% of the grant is based on Mercury’s TSR relative
to the performance of an industry peer group (comprising
Meridian Energy, Genesis Energy, Contact Energy and
Trustpower). There is no positive TSR performance gate
on this tranche but Mercury’s TSR must be at the 50th
percentile of the comparator group for any award to be
made on this component of the LTI plan.
42 // 43
DIRECTOR AND EXECUTIVE EMPLOYEE REMUNERATION (CONTINUED)
Chief Executive remuneration
Chief Executive remuneration (FY2018 and FY2017)
Salary $
Benefits1 $
Subtotal $
Pay for performance $
Total
remuneration
$
FY2018
FY2017
1,108,655*
1,058,779*
62,100
50,455
1,170,755
1,109,234
STI
632,528
575,960
LTI
0
195,998
Subtotal
632,528
771,958
1,803,283
1,881,192
*Actual salary paid includes holiday pay paid as per NZ legislation. The base salary for FY2018 was $1,054,212.50 and for FY2017 $1,028,500.
Five year summary – Chief Executive remuneration
Chief Executive –
Fraser Whineray
Chief Executive –
Doug Heffernan
Total
remuneration
paid2 $
Percentage STI
against maximum
4 %
Percentage
vested LTI against
maximum %
Span of LTI
performance
period
FY2018
FY2017
FY2016
FY2015
FY2015
FY2014
1,803,283
1,881,192
1,501,434
1,427,932
1,985,791
1,302,7543
67
63
57
47
87
N/A3
0
98
78
100
100
N/A3
2015 – 2018
2014 – 2017
2013 – 2016
2013 – 2015
2011 – 20143
2011 – 20143
Explanation of above items
Note 1: Benefits include KiwiSaver, insurance and carpark.
Note 2: Total remuneration paid including Salary, Benefits, STI and LTI payments.
Note 3: LTI and STI payments for FY2014 are included in the FY2015 year as schemes ended 31 August 2014.
Note 4: Maximum STI is 178% of ‘on-plan’ performance pay.
Breakdown of Chief Executive pay for performance (FY2018)
STI1
LTI1
Description
Performance measures
Set at 50% of base salary. Based on a
combination of key financial and
non-financial performance measures.
80% based on the five Company Shared KPIs (see table
above for weightings).
20% based on individual measures.
Shares issued and rewarded under the
long term incentive scheme. Shares
issued 1 July 2015 at $200,000 gross.
50% weighting relative TSR performance against NZX 50
(fixed at date of grant) with 50% vesting at 50th percentile
and 100% at 75th percentile; pro rata vesting in between.
50% weighting relative TSR performance against industry
peer group (comprising Meridian Energy, Genesis Energy,
Contact Energy and Trustpower) with 50% vesting at 50th
percentile and 100% at 75th percentile; pro rata vesting in
between.
Note 1: The above STI and LTI payments for FY2018 were paid in FY2019.
Percentage
achieved %
117.5
130
0
Five year summary – TSR Performance (company vs peer)
MERCURY
PEER
NZX 50
%
R
S
T
40
35
30
25
20
15
10
5
0
30 June 2014
30 June 2015
30 June 2016
30 June 2017
30 June 2018
KiwiSaver
The Chief Executive is a member of KiwiSaver. As a member of this scheme, the Chief Executive is eligible to contribute and receive
a matching company contribution of 3% of gross taxable earnings (including short and long term incentives). For FY2018 the
Company’s contribution was $56,418.
FY2019 Chief Executive remuneration structure
The Board has elected, in the interests of transparency, to disclose in advance the structure and package that will apply for FY2019.
FY2019
Base Salary $
Benefits1 $
Subtotal $
Pay for performance “on-plan” $
Total remuneration $
Chief Executive
1,054,212
37,308
1,091,521
Note 1: Benefits include KiwiSaver, insurance and carpark.
STI
527,106
LTI granted2
421,685
Subtotal
948,791
2,040,312
Note 2: This LTI is granted in FY2019 and if hurdles are met, paid in shares in 2021. The LTI tranche which has the potential to vest in FY2019 is $359,975 and dates from
FY2017-FY2019.
Chief Executive remuneration performance pay for FY2019
LONG TERM INCENTIVES
GRANTED (2021 VESTING)
ANNUAL VARIABLE
BASE SALARY & BENEFITS
2,500
2,000
0
0
0
$
1,500
1,000
500
0
Fixed
On-plan
Maximum
Chief Financial Officer remuneration
In the interests of providing greater transparency of executive remuneration, the Board has elected to provide details regarding
total remuneration paid to the Chief Financial Officer.
In FY2018, the Chief Financial Officer received remuneration totalling $823,978. This amount included a $170,165 STI payment and
$137,196 LTI payment for FY2017 paid in FY2018, with the remaining $516,617 being a combination of fixed remuneration and benefits.
44 // 45
DIRECTOR AND EXECUTIVE EMPLOYEE REMUNERATION (CONTINUED)
Share ownership
The Chief Executive and Chief Financial Officer’s ownership of shares as at 30 June 2018 are:
Executive
Chief Executive
Chief Financial Officer
Balance of EMT2
Number of shares owned (excludes
shares held in Trust for the LTI scheme)
Change in shares owned
from 30 June 2017
233,3511
245,475
152,305
54,085
37,859
87,353
Note1: The Chief Executive’s shares are held in family trust.
Note2: Balance of shares owned by other EMT members and excludes shares owned by Chief Executive and Chief Financial Officer.
Employee remuneration
The Group paid remuneration in excess of $100,000 including
benefits to 363 employees (not including directors) during the
FY2018 year in the following bands:
Remuneration Band
$100,001-$110,000
$110,001-$120,000
$120,001-$130,000
$130,001-$140,000
$140,001-$150,000
$150,001-$160,000
$160,001-$170,000
$170,001-$180,000
$180,001-$190,000
$190,001-$200,000
$200,001-$210,000
$210,001-$220,000
$220,001-$230,000
$230,001-$240,000
$240,001-$250,000
$250,001-$260,000
$260,001-$270,000
$270,001-$280,000
$280,001-$290,000
$290,001-$300,000
$310,001-$320,000
$320,001-$330,000
$490,001-$500,000
$500,001-$510,000
$550,001-$560,000
$590,001-$600,000
$660,001-$670,000
$670,001-$680,000
$820,001-$830,000
$1,940,001-$1,950,000
Total
Currently
employed
58
63
42
41
39
23
17
10
9
11
7
8
1
2
3
1
5
6
1
2
3
2
1
1
2
1
1
1
1
1
363
No longer
employed
3
8
2
1
1
15
Total
61
71
44
42
39
23
17
10
9
11
7
8
2
2
3
1
5
6
1
2
3
2
1
1
2
1
1
1
1
1
378
Note: The remuneration bands above include 3 employees who
received redundancy payments in FY2018.
The total remuneration ratio for FY2018 between Employee (median)
and Chief Executive was 1:28. The ratio of Employee (median)
remuneration and Chief Executive base salary was 1:15. Note: These
ratios are based on actual remuneration paid in FY2018.
Directors’ remuneration
The directors’ remuneration is paid in the form of directors’ fees. Additional fees are paid to the Chair and in respect of work carried
out by directors on various Board committees to reflect the additional time involved and responsibilities of these positions.
The total pool of fees able to be paid to directors is subject to shareholder approval and currently stands at $991,000. Mercury meets
directors’ reasonable travel and other costs associated with Mercury business. The following people held office as directors during the
year to 30 June 2018 and received the following remuneration during the period. The number of meetings and attendance rate by
director during the year to 30 June 2018 was as follows:
Director
No. of meetings
Board
12
Risk Assurance
& Audit Committee
People &
Performance
Committee
4
4
Joan Withers
(Chair)
Prue Flacks
Andrew Lark
James Miller
Keith Smith
Patrick Strange
Mike Taitoko
Scott St John4
Total
Fees$
180,000
(Chair)3
98,000
98,000
98,000
98,000
98,000
98,000
81,667
849,667
Meetings
Attended
Fees$
Meetings
Attended
Fees $
Meetings
Attended
12
12
12
12
11
12
12
10
4
4
4
4
10,000
26,000
(Chair)
10,000
46,000
4
4
4
4
1
20,000
(Chair)
8,000
8,000
–
36,000
Nominations
Committee
3
Meetings
Attended
3
3
3
Fees $
(Chair)
4,000
4,000
8,000
Other1
Total2
23
Fees
Fees$
180,000
124,750
106,000
117,500
124,000
110,750
106,000
84,417
953,417
2,750
5,500
2,750
2,750
13,750
Note 1: Two temporary committees were established during the reporting period. The fees listed in this column are aggregate fees. James Miller participated in both committees.
Note 2: Disclosure Committee is not reported on as these occur as adhoc and on an as required basis.
Note 3: Joan Withers’ fees cover attendance at all Committee meetings.
Note 4: Scott St John was appointed director effective from 1 September 2017 and his first meeting on the People & Performance Committee was on 25 June 2018.
Scott’s attendance rates are based on attendance at meetings during his directorship and appointment to the Committee only. Scott’s fee of $667 for June
attendance at the People & Performance Committee was paid after the end of the reporting period.
Note 5: Future Director Nicky Ashton was paid $10,000 in FY2018.
46 // 47
DIRECTORS’ DISCLOSURES
Interests Register
Disclosure of Directors’ Interests
Section 140(1) of the New Zealand Companies Act 1993 requires a director of a company to disclose certain interests. Under
subsection (2) a director can make disclosure by giving a general notice in writing to the Company of a position held by a director in
another named company or entity. The following are particulars included in the Company’s Interests Register as at 30 June 2018:
Chair
Director
Trustee
Joan Withers
The Warehouse Group Limited
ANZ Bank New Zealand Limited
The Louise Perkins Foundation
(Sweet Louise)
Pure Advantage2
Trustee
Economic Development Challenge Group Member
Director
On Being Bold Limited
Auckland Mayoral Advisory Group1
Member
Prue Flacks
Bank of New Zealand Limited
Planboe Limited
Chorus Limited
Queenstown Airport Corporation Limited1 Chair
Andy Lark
SLI Systems Limited
Group Lark
Simple2
Director
Director
Director
Director
Chair
Director and
Interim Chair
Chief Marketing and
Digital Officer
Chair/Shareholder
Director
Director/Shareholder
Trustee
Chair
Chair
Chair
Chair
Deputy Chair
Chair
Director
Director
Director
Director
Director/Shareholder
Director/Shareholder
Foxtel Limited1
James Miller
NZX Limited
ACC
Auckland International Airport Limited
St Cuthbert’s College Trust Board
Keith Smith
Healthcare Holdings Ltd and
subsidiaries and associates
Enterprise Motor Group Ltd and
subsidiaries
Mobile Surgical Services Limited and
subsidiaries
Goodman (NZ) Limited and subsidiaries
The Warehouse Group Limited and
subsidiaries
H J Asmuss & Co Limited
Community Financial Services Limited
Electronic Navigation Limited
and subsidiaries
K One W One Limited and subsidiaries2
Westland Dairy Cooperative Limited
Harpers Gold Limited and subsidiaries
James Raymond Holdings Limited
(private family investment company)
Gwendoline Holdings Limited
(private family investment company)
Director
Director
Director
Director
Chair
Director
Trustee
Member
Shareholder
Trustee
Trustee
Director
Director
Chancellor
Trustee
Tilt Renewables Limited
Cornwall Park Trust Board
Sir John Logan Campbell
Residuary Estate
The Selwyn Trust
Advisory board of Tax Traders Limited
(formerly The New Zealand Tax Trading
Company)
Anderson & O’Leary Limited
The Warehouse Financial
Services Limited2
Tree Scape Limited
Scott St John
Fisher & Paykel Healthcare Corporation
Limited1
Fonterra Cooperative Group Limited
(and Fonterra Shareholders Fund)1
Next Foundation (and associated
entities)1
Te Awanga Terraces Limited1
First NZ Capital Holdings Limited1
University of Auckland1
Butland Medical Foundation1
Patrick Strange
Chorus Limited
Essential Energy, NSW
NZX Limited
New Zealand Clearing and Depository
Corporation Limited2
Auckland International Airport Limited
Waitahoata Farms Limited
Mike Taitoko
Waiora Consulting Limited
Takiwa Health Limited2
Takiwa Limited (formerly Waiora
Pacific Limited)
Cognition Education Limited2
Committee for Auckland Limited2
Bioresource Processing Alliance
Auckland Tourism Events and Economic
Development Limited (ATEED)
Maratini Holdings Limited
Canvasland Holdings Limited
Digital Economy and Digital Inclusion
Ministerial Advisory Group1
1 Entries added by notices given by the directors during the year ended
Director
Director
Director
Director
Chair
Director
Director
Director
Director
Director
Director/Shareholder
Director
Director/Shareholder
Director/Shareholder
Director/Shareholder
Member
Director/Shareholder
30 June 2018
2 Entries removed by notices given by the directors during the year ended
30 June 2018
Directors’ and Officers’ Indemnities
Indemnities have been given to, and insurance has been effected for, directors and senior managers of the Group to cover acts or
omissions of those persons in carrying out their duties and responsibilities as directors and senior managers.
Disclosure of Directors’ Interests in Share Transactions
Directors disclosed, pursuant to section 148 of the New Zealand Companies Act 1993, the following acquisitions and disposals of
relevant interests in Shares during the period to 30 June 2018:
Name of director
Date of
acquisition/disposal
of relevant interest
Nature of
relevant interest
Consideration
NZD
Shares in which a
relevant interest was
acquired/(disposed)
Scott St John
4 September 2017
On market purchase of shares
Scott St John
28 February 2018
On market purchase of shares
Scott St John
28 February 2018
Off market purchase of shares
Scott St John
28 May 2018
On market acquisition of shares
17,199.00
5,383.84
10,716.16
9,600.00
5,000
1,672
3,328
3,000
Disclosure of Directors’ Interests in Mercury’s Securities
Directors disclosed the following relevant interests in
Mercury’s securities as at 30 June 2018:
Director
Joan Withers
Prue Flacks
Andy Lark
James Miller
Keith Smith
Scott St John
Patrick Strange
Mike Taitoko
Number of Shares
Number of Bonds
39,900
23,474
3,300
40,320
27,868
13,000
14,160
2,200
–
40,000
–
–
–
–
8,600
–
48 // 49
SHAREHOLDER INFORMATION
Twenty largest registered shareholders as at 30 June 2018
Name
Her Majesty The Queen In Right Of New Zealand
New Zealand Central Securities Depository Limited
Mercury NZ Limited
HSBC Custody Nominees (Australia) Limited
Forsyth Barr Custodians Limited
Custodial Services Limited
FNZ Custodians Limited
JBWere (NZ) Nominees Limited
New Zealand Depository Nominee Limited
Citicorp Nominees Pty Limited
Custodial Services Limited
Custodial Services Limited
Investment Custodial Services Limited
JP Morgan Nominees Australia Limited
Custodial Services Limited
Richard Wallace Shapero
National Nominees Limited
Deutsche Securities Australia Limited
Custodial Services Limited
Forsyth Barr Custodians Limited
Total
Number
of shares
716,140,528
287,402,525
37,988,585
17,384,838
12,001,801
8,198,715
7,132,167
6,759,578
6,128,420
4,867,589
4,237,455
3,769,944
3,418,179
3,085,677
2,565,782
2,015,000
1,520,229
1,442,730
1,205,669
910,928
% of shares1
51.15
20.52
2.71
1.24
0.85
0.58
0.50
0.48
0.43
0.34
0.30
0.26
0.24
0.22
0.18
0.14
0.10
0.10
0.08
0.06
1,128,176,339
80.48
1. Percentage calculated on the basis of Mercury having 1,400,012,517 ordinary shares on issue as at 30 June 2018, which included 37,988,585 ordinary shares held as
treasury shares.
New Zealand Central Securities Depository Limited (NZCSD) provides a custodian depository service that allows electronic trading of
securities to its members and does not have a beneficial interest in these shares. As at 30 June 2018, the largest shareholdings in the
Company held through NZCSD were:
Shareholder
HSBC Nominees (New Zealand) Limited
Citibank Nominees (New Zealand) Limited
HSBC Nominees (New Zealand) Limited A/C State Street
JPMorgan Chase Bank NA NZ Branch-Segregated Clients Acct
Accident Compensation Corporation
HSBC Nominees A/C NZ Superannuation Fund Nominees Limited
National Nominees New Zealand Limited
BNP Paribas Nominees (NZ) Limited
BNP Paribas Nominees (NZ) Limited
ANZ Wholesale Australasian Share Fund
Number
of shares
% of NZCSD
holding
% of total
Mercury shares1
97,030,982
39,770,855
33,517,868
25,291,100
24,879,419
15,642,062
12,516,803
8,576,432
6,939,367
4,040,953
33.76
13.84
11.66
8.80
8.66
5.44
4.36
2.98
2.41
1.41
6.93
2.84
2.39
1.81
1.78
1.12
0.89
0.61
0.50
0.29
1. Percentage calculated on the basis of Mercury having 1,400,012,517 ordinary shares on issue as at 30 June 2018, which included 37,988,585 ordinary shares held as
treasury shares.
Substantial product holders of the Company as at 30 June 2018
Class of
securities
Number of
securities in
substantial
holding
Total number
of securities
in class
Her Majesty The Queen in Right of New Zealand
Ordinary shares
731,850,5901
1,400,012,5172
1. This comprises (a) 716,140, 528 shares held by the Crown on its own account; (b) 15,642,062 shares forming part of the New Zealand Superannuation Fund which are
the property of the Crown; and (c) $68,000 shares held by Public Trust on trust for the Crown and certain iwi.
2. As at 30 June 2018, Mercury had 1,400,012,517 ordinary shares on issue, which included 37,988,585 ordinary shares held as treasury shares.
Distribution of shareholders and holdings as at 30 June 2018
Size of holding
1 to 1,000
1,001 to 5,000
5,001 to 10,000
10,001 to 100,000
100,001 and above
Total
Number of
shareholders
30,826
42,302
7,126
3,845
106
84,205
Distribution of bondholders and holdings as at 30 June 2018
Size of holding
1,001 to 5,000
5,001 to 10,000
10,001 to 100,000
100,001 and above
Total
Number of
bondholders
365
789
2,354
170
3,678
%
36.61
50.24
8.46
4.57
0.13
100
%
9.92
21.45
64
4.62
100
Number of
shares
21,530,853
98,601,799
52,381,385
78,564,752
1,148,933,728
1,400,012,517
Number of
capital bonds
1,819,000
7,538,000
84,066,000
206,577,000
300,000,000
Holding
quantity %
1.54
7.04
3.74
5.61
82.07
100
Holding
quantity %
0.61
2.51
28.02
68.86
100
50 // 51
COMPANY DISCLOSURES
Stock Exchange Listings
Mercury NZ Limited is listed on both the New Zealand and
Australian stock exchanges.
In New Zealand, the Company is listed with a “non-standard”
(NS) designation. This is due to particular provisions of the
Constitution, including the requirements regulating ownership
and transfer of Ordinary Shares.
ASX approved a change in Mercury NZ Limited’s ASX admission
category from an ASX Listing to an ASX Foreign Exempt Listing,
effective from the commencement of trading on 19 February
2016.
The Company continues to have a full listing on the NZX Main
Board, and the Company’s shares are still listed on the ASX. The
Company is primarily regulated by the NZX, complies with the
NZX Listing Rules, and is exempt from complying with most of
the ASX Listing Rules (based on the principle of substituted
compliance).
Mercury NZ Limited
The following persons held office as Directors of Mercury NZ
Limited as at the end of the 2017/2018 financial year, being
30 June 2018: Joan Withers, Prue Flacks, James Miller, Mike
Taitoko, Keith Smith, Patrick Strange, Andy Lark and Scott
St John. Scott St John was appointed as a Director on
1 September 2017 and was elected as a Director by shareholders
on 7 November 2017.
Subsidiary Companies
The following persons held office as directors of subsidiaries of
Mercury NZ Limited during FY2018:
Company name
Bosco Connect Limited
Glo-Bug Limited
Kawerau Geothermal Limited
Mercury Energy Limited
Metrix Limited
Mighty Geothermal Power International
Limited
Mighty Geothermal Power Limited
Directors
Fraser Whineray
William Meek
Tony Nagel
Fraser Whineray
William Meek
Tony Nagel
Fraser Whineray
William Meek
Tony Nagel
Fraser Whineray
William Meek
Tony Nagel
Fraser Whineray
William Meek
Tony Nagel
Fraser Whineray
William Meek
Tony Nagel
Fraser Whineray
William Meek
Tony Nagel
Company name
Mercury ESPP Limited
Mercury Geothermal Limited
Mercury LTI Limited
Ngatamariki Geothermal Limited
Rotokawa Generation Limited
Rotokawa Geothermal Limited
Rotokawa Joint Venture Limited (50%)
Special General Partner Limited
Mighty River Power Limited
Blockchain Energy Limited
MRP NRI-Chile Holdings Limited1
MRP NRI-Peru Holdings Limited1
MRP NRI-Germany Holdings Limited1
Mercury Solar Limited
What Power Crisis (2016) Limited
1 Company dissolved during FY2018
2 Directors who have been appointed during FY2018
3 Directors who have resigned during FY2018
Directors
William Meek
Tony Nagel
Marlene Strawson
Fraser Whineray
William Meek
Tony Nagel
Prue Flacks
Mike Taitoko
Howard Thomas
Fraser Whineray
William Meek
Tony Nagel
William Meek
Nicholas Clarke
Michael Stevens
Fraser Whineray
William Meek
Tony Nagel
Michael Stevens
Aroha Campbell
Kevin McLoughlin3
William Meek3
Nicholas Clarke
Mana Newton2
Mark Thompson
Michael Stevens
Natasha Strong2
Fraser Whineray
William Meek
Tony Nagel
Fraser Whineray
William Meek
Tony Nagel
Fraser Whineray
William Meek
Tony Nagel
Samuel Moore
John Carbone
Nikolai de Giorgio
Samuel Moore
John Carbone
Nikolai de Giorgio
Samuel Moore
John Carbone
Nikolai de Giorgio
Fraser Whineray
William Meek
Tony Nagel
Fraser Whineray
William Meek
Tony Nagel
OTHER DISCLOSURES
Waivers from the New Zealand and Australian
Stock Exchanges
ASX
ASX has granted waivers in respect of the ASX Listing Rules to
allow the Constitution to contain provisions reflecting the
ownership restrictions imposed by the Public Finance Act and to
allow the Crown to cancel the sale of shares to applicants who
acquire shares under the General Offer and are not New Zealand
Applicants.
The majority of the waivers that ASX previously granted to the
Company are no longer relevant following the change to the
Company’s admission category to an ASX Foreign Exempt
Listing. The waivers from ASX Listing Rules 8.10 and 8.11
continue to apply. These waivers permit the Constitution to
contain provisions:
•
•
allowing the Crown and the Company to enforce the 10%
limit; and
enabling the Company to prevent shareholders who
acquired shares under the General Offer and are not New
Zealand applicants from transferring those shares and to
enable the Company to sell those shares.
Information about Mercury NZ Limited Ordinary Shares
This statement sets out information about the rights, privileges,
conditions and limitations, including restrictions on transfer, that
attach to shares in the Company.
Rights and privileges
Under the Constitution and the Companies Act 1993
(“Companies Act”), each share gives the holder a right to:
•
attend and vote at a meeting of shareholders, including the
right to cast one vote per share on a poll on any resolution,
such as a resolution to:
– appoint or remove a director;
– adopt, revoke or alter the Constitution;
– approve a major transaction (as that term is defined in
the Companies Act);
– approve the amalgamation of the Company under
section 221 of the Companies Act; or
– place the Company in liquidation;
receive an equal share in any distribution, including
dividends, if any, authorised by the Board and declared and
paid by the Company in respect of that share;
receive an equal share with other shareholders in the
distribution of surplus assets in any liquidation of the
Company;
•
•
• be sent certain information, including notices of meeting
and Company reports sent to shareholders generally; and
•
exercise the other rights conferred upon a shareholder by
the Companies Act and the Constitution.
Restrictions on ownership and transfer
The Public Finance Act 1989 (“Public Finance Act”) includes
restrictions on the ownership of certain types of securities issued
by the Company and consequences for breaching those
restrictions. The Constitution incorporates these restrictions and
mechanisms for monitoring and enforcing them.
A summary of the restrictions on the ownership of shares under
the Public Finance Act and the Constitution is set out below. If
the Company issues any other class of shares, or other securities
which confer voting rights, in the future, the restrictions
summarised below would also apply to those other classes of
shares or voting securities.
51% Holding
The Crown must hold at least 51% of the shares on issue.
The Company must not issue, acquire or redeem any shares if
such issue, acquisition or redemption would result in the Crown
falling below this 51% holding.
10% Limit
No person (other than the Crown) may have a ‘relevant interest’
in more than 10% of the shares on issue (“10% Limit”).
The Company must not issue, acquire or redeem any shares if it
has actual knowledge that such issue, acquisition or redemption
will result in any person other than the Crown exceeding the
10% Limit.
Ascertaining whether a breach has occurred
If a holder of shares breaches the 10% Limit or knows or
believes that a person who has a relevant interest in shares held
by that holder may have a relevant interest in shares in breach
of the 10% Limit, the holder must notify the Company of the
breach or potential breach.
The Company may require a holder of shares to provide it with a
statutory declaration if the Board knows or believes that a
person is, or is likely to be, in breach of the 10% Limit. That
statutory declaration is required to include, where applicable,
details of all persons who have a relevant interest in any shares
held by that holder.
Determining whether a breach has occurred
The Company has the power to determine whether a breach of
the 10% Limit has occurred and, if so, to enforce the 10% Limit.
In broad terms, if:
•
•
the Company considers that a person may be in breach of
the 10% Limit; or
a holder of shares fails to lodge a statutory declaration when
required to do so or lodges a declaration that has not been
completed to the reasonable satisfaction of the Company,
then the Company is required to determine whether or not the
10% Limit has been breached and, if so, whether or not that
breach was inadvertent. The Company must give the affected
shareholder the opportunity to make representations to the
Company before it makes a determination on these matters.
52 // 53
OTHER DISCLOSURES
(CONTINUED)
Effect of exceeding the 10% Limit
A person who is in breach of the 10% Limit must:
•
•
comply with any notice received from the Company
requiring them to dispose of shares or their relevant interest
in shares, or take any other steps that are specified in the
notice, for the purpose of remedying the breach; and
ensure that they are no longer in breach within 60 days
after the date on which they became aware, or ought to
have been aware, of the breach. If the breach is not
remedied within that timeframe, the Company may arrange
for the sale of the relevant number of shares on behalf of
the relevant holder. In those circumstances, the Company
will pay the net proceeds of sale, after the deduction of any
other costs incurred by the Company in connection with the
sale (including brokerage and the costs of investigating the
breach of the 10% Limit), to the relevant holder as soon as
practicable after the sale has been completed.
If a relevant interest is held in any shares in breach of the
10% Limit then, for so long as that breach continues:
• no votes may be cast in respect of any of the shares in
which a relevant interest is held in excess of the 10% Limit;
and
•
the registered holder(s) of shares in which a relevant interest
is held in breach of the 10% Limit will not be entitled to
receive, in respect of the shares in which a relevant interest
is held in excess of the 10% Limit, any dividend or other
distribution authorised by the Board in respect of the shares.
However, if the Board determines that a breach of the 10% Limit
was not inadvertent, or that it does not have sufficient
information to determine that the breach was not inadvertent,
the registered holder may not exercise the votes attached to,
and will not be entitled to receive any dividends or other
distributions in respect of, any of its shares.
An exercise of a voting right attached to a share held in breach
of the 10% Limit must be disregarded in counting the votes
concerned. However, a resolution passed at a meeting is not
invalid where votes exercised in breach of the voting restriction
were counted by the Company in good faith and without
knowledge of the breach.
The Board may refuse to register a transfer of shares if it knows
or believes that the transfer will result in a breach of the 10%
Limit or where the transferee has failed to lodge a statutory
declaration requested from it by the Board within the prescribed
timeframe.
Crown directions
The Crown has the power to direct the Board to exercise certain
of the powers conferred on it under the Constitution (for
example, where the Crown suspects that the 10% Limit has
been breached but the Board has not taken steps to investigate
the suspected breach).
Trustee corporations and nominee companies
Trustee corporations and nominee companies (that hold
securities on behalf of a large number of separate underlying
beneficial holders) are exempt from the 10% Limit provided that
certain conditions are satisfied.
Share Cancellation
In certain circumstances, shares could be cancelled by the
Company through a reduction of capital, share buy back or
other form of capital reconstruction approved by the Board and,
where applicable, the shareholders.
Sale of less than a Minimum Holding
The Company may at any time give notice to a shareholder
holding less than a Minimum Holding of shares (as that term is
defined in the NZX Main Board Listing Rules) that if, at the end
of 3 months after the date the notice is given, shares then
registered in the name of the holder are less than a Minimum
Holding, the Company may sell those shares through the NZX
Main Board or in some other manner approved by NZX Limited,
and the holder is deemed to have authorised the Company to
act on behalf of the holder and to sign all necessary documents
relating to the sale.
For the purposes of the sale and of Rule 5.12 of the ASX
Settlement Operating Rules, where the Company has given a
notice that complies with Rule 5.12.2 of the ASX Settlement
Operating Rules, the Company may, after the end of the time
specified in the notice, initiate a Holding Adjustment to move
the relevant shares from that CHESS Holding to an Issuer
Sponsored Holding (as those terms are defined in the ASX
Settlement Operating Rules) or to take any other action the
Company considers necessary or desirable to effect the sale.
The proceeds of the sale of any shares sold for being less than
a Minimum Holding will be applied as follows:
• first, in payment of any reasonable sale expenses.
•
•
second, in satisfaction of any unpaid calls or any other
amounts owing to the Company in respect of the shares.
the residue, if any, must be paid to the person who was the
holder immediately before the sale or his or her executors,
administrators or assigns.
Cancellation of sale of shares
The Crown may cancel the sale of shares to an applicant under
the offer of shares by the Crown (the Offer) in the Mighty River
Power Share Offer Investment Statement and Prospectus if the
applicant misrepresented its entitlement to be allocated shares
under the Offer as a ‘New Zealand Applicant’ (as that term is
defined in the Share Offer Investment Statement and
Prospectus). If the Crown cancels a sale of shares on those
grounds:
•
the Company must sell shares held by that applicant, up to
the number of shares sold to it under the Offer, irrespective
of whether or not those shares were acquired by the
applicant under the Offer (unless the applicant had
previously sold, transferred or disposed of all of its shares
to a person who was not an associated person of the
applicant); and
•
the applicant will receive from the sale the lesser of:
–
–
the sale price for the shares less the costs incurred by
the Crown and the Company; and
the aggregate price paid for the shares less those costs,
with any excess amount being payable to the Crown.
If an applicant who misrepresented their entitlement to shares
has sold, transferred or otherwise disposed of shares to an
associated person, then the power of sale will extend to shares
held by that associated person, up to the number of shares
transferred, sold or otherwise disposed of to the associated
person by the relevant applicant.
Donations
Donations of $203,069 were made by the Group during the
year ended 30 June 2018 ($126,090 during the year ended
30 June 2017). Under Mercury’s Delegation Policy, donations
to political parties are prohibited.
Other Disclosures
Mercury NZ Limited is incorporated in New Zealand and is not
subject to Chapters 6, 6A, 6B and 6C of the Corporations Act
2001 (Australia). Mercury will not acquire any classified assets in
circumstances in which the ASX Listing Rules would require the
issue of restricted securities, without the written consent of ASX.
On 21 August 2018 the Board declared a fully imputed final
dividend of 9.1 cents per share to all shareholders who are on
the Company’s share register at 5.00pm on the record date
of 13 September 2018. The dividends will be imputed at a
corporate tax rate of 28% which amounts to an imputation
credit of $3.54 cents per share for the final dividend. The
Company will also pay a supplementary dividend of 1.61 cents
per share relating to the final dividend to non-resident
shareholders. The Company will receive from the New Zealand
Inland Revenue Department a tax credit equivalent to
supplementary dividends.
These dividends together with the interim dividend of
$82.6 million (6.0 cents per share) paid to shareholders on
3 April 2018 brings total declared dividends to $206.6 million
(or 15.1 cents per share).
As at the date of this annual report, the Company has a S&P’s
BBB+ rating with a stable outlook. The Company benefits from a
one notch uplift due to the Crown’s majority ownership.
The Company’s Net Tangible Assets per Share (excluding
treasury stock) as at 30 June 2018 was $2.34, compared
with $2.34 at 30 June 2017.
54 // 55
SHAREHOLDER INFORMATION
Shareholder enquiries
Changes in address, dividend payment details and
investment portfolios can be viewed and updated online:
www.investorcentre.com/nz. You will need your CSN and FIN
numbers to access this service.
Enquiries may be addressed to the Share Registrar
(see Directory for contact details).
Investor information
Our website at www.mercury.co.nz is an excellent source of
information about what’s happening within the company.
Our Investor Centre allows you to view all regular investor
communications, information on our latest operating and
financial results, dividend payments, news and share price history.
Electronic shareholder communication
It is quick and easy to make the change to receiving your reports
electronically. This can be done either:
• Online at www.investorcentre.com/nz by using your CSN
and FIN numbers (when you log in for the first time). Select
‘View Portfolio’ and log in. Then select ‘Update My Details’
and select ‘Communication Options’; or
• By contacting Computershare Investor Services Limited by
email, fax or post.
GLOSSARY
Free Cash Flow
Is net cash flow from operating
activities less stay-in-business capital
expenditure
Smart meters
Generation-
weighted Average
Price (GWAP)
Generation Weighted Average Price of
electricity generated and sold to the
wholesale electricity market
Spot market/
wholesale market
GWh
Gigawatt hour. One gigawatt hour is
equal to one million kilowatt hours
Load-weighted
Average Price
(LWAP)
Load Weighted Average Price of
electricity purchased from the
wholesale electricity market
Lost-time Injury
Frequency Rate
(LTIFR)
A measure of the number of injuries
resulting in lost time per 200,000
hours worked, including employees
and on-site contractors
MWh
Megawatt hour. One megawatt hour is
equal to 1,000 kilowatt hours. A
megawatt hour is the metering
standard unit for the wholesale
market
Advanced electricity meters that are a
replacement for analogue meters, and
send electronic meter readings to
your energy retailer automatically
The buying and selling of wholesale
electricity is done via a ‘pool’, where
electricity generators offer electricity
to the market and retailers bid to buy
the electricity. This market is called
the spot or physical wholesale market
Total Recordable
Injury Frequency
Rate (TRIFR)
A record of the number of reported
medical treatment, restricted work,
lost time and serious harm injuries
per 200,000 hours, including
employees and on-site contractors
DIRECTORY
Board of Directors
Joan Withers, Chair
Prue Flacks
Andy Lark
James Miller
Keith Smith
Scott St John
Patrick Strange
Mike Taitoko
Executive Team
Fraser Whineray,
Chief Executive
Kevin Angland,
General Manager Digital Services
Nick Clarke,
General Manager Geothermal & Safety
Phil Gibson,
General Manager Hydro & Wholesale
Julia Jack,
Chief Marketing Officer
William Meek,
Chief Financial Officer
Tony Nagel,
General Manager Corporate Affairs
Matthew Olde,
Metrix Chief Executive
Marlene Strawson,
General Manager People & Performance
Company Secretary
Howard Thomas
Investor Relations & Sustainability Enquiries
Tim Thompson
Head of Treasury & Investor Relations
Mercury NZ Limited
P O Box 90399
Auckland 1142
New Zealand
Phone: +64 27 517 3470
Email: investor@mercury.co.nz
Registered Office in New Zealand
Level 3, 109 Carlton Gore Road, Auckland 1023
Registered Office in Australia
c/– TMF Corporate Services
(Australia) Pty Limited
Level 16, 201 Elizabeth Street
Sydney NSW 2000
Phone: +61 2 8988 5800
Legal Advisors
Chapman Tripp
Level 35, ANZ Centre
23-29 Albert Street, Auckland 1010
PO Box 2206, Auckland
Phone: +64 9 357 9000
Bankers
ANZ Bank
ASB Bank
Bank of New Zealand
MUFG Bank
Mizuho Bank
Westpac
Credit Rating (reaffirmed December 2017)
Long term: BBB+
Outlook: Stable
Share Register – New Zealand
Computershare Investor Services Ltd
Level 2, 159 Hurstmere Road, Takapuna,
Auckland 0622
Private Bag 92119
Auckland 1142
New Zealand
Phone: +64 9 488 8777
Email: enquiry@computershare.co.nz
Web: www.investorcentre.com/nz
Share Register – Australia
Computershare Investor Services Pty Ltd
Yarra Falls, 452 Johnston Street, Abbotsford, VIC 3067
GPO Box 3329
Melbourne, VIC 3001
Australia
Phone: 1 800 501 366 (within Australia)
Phone: +61 3 9415 4083 (outside Australia)
Email: enquiry@computershare.co.nz
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