Governance Roadshow Presentation – December 2017

Mercury
Governance Roadshow

JAMES MILLER
Director
JOAN WITHERS
Chair
12 December 2017

DISCLAIMER
This presentation has been prepared by Mercury NZ Limited and its group of companies (“Company”) for informational purposes. This disclaimer
applies to this document and the verbal or written comments of any person presenting it.
Information in this presentation has been prepared by the Company with due care and attention. However, neither the Company nor any of its
directors, employees, shareholders nor any other person gives any warranties or representations (express or implied) as to the accuracy or
completeness of this information. None of the Company, its directors, employees, shareholders or any other person shall have any liability
whatsoever to any person for any loss (including, without limitation, arising from any fault or negligence) arising from this presentation or any
information supplied in connection with it.
This presentation may contain projections or forward-looking statements regarding a variety of items. Such projections or forward-looking
statements are based on current expectations, estimates and assumptions and are subject to a number of risks, and uncertainties, including
material adverse events, significant one-off expenses and other unforeseeable circumstances, such as, without limitation, hydrological conditions.
There is no assurance that results contemplated in any of these projections and forward-looking statements will be realised, nor is there any
assurance that the expectations, estimates and assumptions underpinning those projections or forward-looking statements are reasonable. Actual
results may differ materially from those projected in this presentation. No person is under any obligation to update this presentation at any time after
its release or to provide you with further information about the Company.
A number of non-GAAP financial measures are used in this presentation. You should not consider any of these in isolation from, or as a substitute
for, the information provided in the audited consolidated financial statements, which are available at www.mercury.co.nz.
The information in this presentation is of a general nature and does not constitute financial product advice, investment advice or any
recommendation. The presentation does not constitute an offer to sell, or a solicitation of an offer to buy, any security and may not be relied upon in
connection with the purchase or sale of any security. Nothing in this presentation constitutes legal, financial, tax or other advice.
DISCLAIMER
2

3
MERCURY AT A GLANCE
Market Capitalisation of
$4.6b
1

2
nd
largest NZ gentailer
10
th
largest NZX50 company by market
capitalisation

100% RENEWABLE GENERATOR,
RETAILER AND METERING PROVIDER
~7,000GWh generation per annum from
flexible hydro and baseload geothermal
~390,000 customers
2nd largest NZ meter data and services
provider
85,000
OWNERS WITH CROWN AS
MAJORITY OWNER
Minimum 51% legislated government
ownership
Corporate credit rating from S&P of
BBB+/Stable
Debt of $1.1b

FY2018 EBITDAF guidance of
$515m
Based on above-average hydrology and
flat operating expenditure


FY2018 ordinary dividend guidance of
$15.0c
Cash ordinary dividend yield of 4.4%
1

(6.1% gross
2
)
12 month total net dividend yield
including special dividend of 5.9%
1

(8.2% gross
2
)


MERCURY
1
At 1 December 2017
2
Including full imputation

OUR MISSION
4

OUR BUSINESS
5
HOW MERCURY SUSTAINS AND GROWS VALUE

DELIVERING CUSTOMER ADVOCACY
>Below market customer churn
>Trader churn
1
of 5.7%
2
versus market at 7.1%
>Increasing customer satisfaction
>Customer satisfaction
3
of 64%, up 4% from FY2016
>Award winning ‘Energy Made Wonderful’ campaign
>Innovative loyalty product offerings
>147,000 customers rewarded with Airpoints Dollars™
>157,000 Free Power Days enjoyed in FY2017
>GEM, our usage monitor, is one of our most popular services with
~100,000 customers engaging every week
STRATEGIC DRIVERS & FY2017 OUTCOMES
FY2017 OUTCOMES
6
1
Switching where a customer changes retailer without moving house

2
12-monthly rolling trader churn rate (all Mercury brands) as at 30 June 2017
3
Based on Mercury’s monthly survey of residential customers, 3-monthly
rolling average to 30 June for Mercury brand (excludes Bosco and GLOBUG)

LEVERAGING CORE STRENGTHS
>Goal of zero-harm
>95% of employees agreed that Mercury is committed to the Health
and Safety of its people
1
>One serious injury incident in FY2017 due to office-based stair fall
>Increasing employee engagement
>Employee engagement
1
at 81%, up 2% from FY2016
>89% of employees confirm that ‘Mercury has a clear vision of where
it’s going and how it’s going to get there’
2
>Nominated as a finalist in the Best Enterprise Workplaces category
of the IBM Best Workplaces awards
>Maximised value from renewable resources
>High geothermal availability maintained at 96%
>Ongoing hydro refurbishment with the rehabilitation of the first of 4
units at Whakamaru Hydro Station

STRATEGIC DRIVERS & FY2017 OUTCOMES
FY2017 OUTCOMES
7


1
As measured by the 2017 IBM Employee Engagement Survey Engagement Index
2
2017 IBM Employee Engagement Survey

DELIVERING SUSTAINABLE GROWTH
>Managing cost
>Operating costs flat for the 4
th
consecutive year
>Investing in growth
>Strategic review of future growth options
>Generation development options ready
>Minimal growth capex in FY2017
>Growing returns to shareholders
>Record earnings through capitalising on wet hydrological conditions
and strong pan-company execution
>9
th
consecutive year of ordinary dividend growth
STRATEGIC DRIVERS & FY2017 OUTCOMES
FY2017 OUTCOMES
8

FINANCIAL TRACK RECORD
9
MERCURY’S FINANCIAL TRACK RECORD

1x
2x
3x
4x
20082009201020112012201320142015201620172018
Financial Year
DEBT/EBITDAF
DEBT/EBITDAF
0
100
200
300
400
500
600
20082009201020112012201320142015201620172018
$m

Financial Year
DISTRIBUTIONS
Interim dividendFinal dividend
Special dividendShare buyback
0
100
200
300
400
500
600
20082009201020112012201320142015201620172018
$m

Financial Year
CAPEX
Stay-In-BusinessGrowth
0
100
200
300
400
500
600
20082009201020112012201320142015201620172018
$m

Financial Year
EBITDAF
0
200
400
600
20082009201020112012201320142015201620172018
$m

Financial Year
OPEX
Operating ExpenditureOne-off costs
CAGR: ~5%
Flat from FY2014
Generation development
Proud record of active capital management
9 years of ordinary dividend growth
-10000
-5000
0
5000
10000
20082009201020112012201320142015201620172018
GWh

Financial Year
GENERATION VS SALES
GeoHydro
ThermalSales

CAPITAL MANAGEMENT
10






FREE CASH FLOW (FCF)
Net Cash Flow from Operating Activities less normalised stay-in-business capital expenditure
BALANCE SHEET ORDINARY DIVIDENDS INVESTMENT IN GROWTH SPECIAL DISTRIBUTIONS
Key ratio for stand alone S&P
rating of ‘bbb’ is Debt/EBITDAF
between 2.0x and 3.0x
Dividend Policy is to make
distributions with a pay-out ratio
of 70-85% of FCF on average
through time
Investment in growth evaluated against all other
competing uses of capital
Debt/EBITDAF 1.8x at
30 June 2017
1

FY2017 fully imputed ordinary
dividends of 14.6cps
Minimal FY2017 new investment
capital expenditure
5.0cps special dividend declared
to distribute excess FY2017 FCF
plus the proceeds of the carbon
credit sales
>
>
>
>
CAPITAL MANAGEMENT
1
Adjusted for S&P treatment of Mercury’s Capital Bond
1
2
3 4

11
BOARD OF DIRECTORS

BOARD STRUCTURE AND FUNCTION
BOARD OF DIRECTORS
>Committed to maintaining the highest standards of business
behaviour and accountability
>Key governance focus for 2017 included:
>Board skills and experience
>Enhanced sustainability reporting
>Appointment of Scott St John made to complement skills of
existing directors after a comprehensive evaluation of company
requirements
>Voluntary early adoption of the NZX Corporate Governance
Best Practice Code 2017
>Developing the pipeline – on-going support for the Institute of
Directors Future Directors Programme
12

BOARD STRUCTURE AND FUNCTION
BOARD OF DIRECTORS
13
>Detailed skills requirements developed against
business strategies and future direction

>Balancing industry knowledge with that of
management
>Ensuring diversity of skills/approach

>Assessed to hold highly relevant capability
>External reviews (last completed November 2016)
combined with internal reviews
>Focus on developing optimal dynamic
>Managing workload and independence
>Keeping up to date on core skills and emerging
trends through ongoing training, e.g.
Cambridge Institute for Sustainability Leadership
>Continuing and extending learning agenda
>Tailored to address gaps identified in skills matrix
>Consider appropriate tenure and orderly transition
>Clear pathway being laid for cohesive Chair and
Committee chair transitions
Skills matrix / gaps and strengths
1
Ongoing professional development
Comprehensive review process
Succession planning
1
Refer Corporate Governance Statement 2017, p. 5

14
LEADERSHIP TEAM

>Composition of Leadership Team aligned with strategic
priorities
>Range of tenures across Leadership Team balances
retention of institutional knowledge with diverse
perspectives and capabilities
>HRC provides thought partnership on Leadership Team
appointments and performance measurement
LEADERSHIP TEAM
15
LEADERSHIP TEAM
45%
22%
33%
8+ years
4 - 8 years
0 - 4 years
LEADERSHIP TEAM TENURE IN COMPANY

KEY GOVERNANCE MATTERS
RISK MANAGEMENT
>Comprehensive approach encompassing financial,
strategic, environmental, operational, regulatory,
reputational, social and governance risks from
internal and external sources
>Board insurance committee formed in FY2018 for:
>Deep dive into key risks facing the business
>Comprehensive review of the appropriateness of
insurance programme
>Audit provider considers that, based on their
experience with similar New Zealand organisations,
Mercury is on par or better in terms of its risk
management framework
16

>Board and management committed to developing reporting on factors material
to the business, its ultra-long-term sustainability and prosperity
>Approach to embedding sustainability reflected in the foundations of the
business: wellbeing (of our people and customers), kaitiakitanga (custodianship
of our environment) and commercial (making commercially astute decisions)
>Embedding integrated thinking into our strategy, governance and operations,
and how we manage sustainability risks and opportunities
>High standards of disclosure reporting maintained through:
>Incorporation of principles from the Integrated Reporting <IR> Framework
>Implementation of Global Reporting Initiative (GRI) standards
>Voluntary early adoption of the NZX Corporate Governance Best Practice Code 2017
>Actively involved in national discussions on key environmental issues material
to our business – water and emissions



KEY GOVERNANCE MATTERS
ESG
17

>Executive short-term incentive KPIs are aligned with
our strategy and What Matters Most
>Scorecard for variable component covers:








>Long-term incentives are aligned with the enhancement
of shareholder value over a multi-year period
>New Zealand REM incorporates balanced incentives at
an order of magnitude different to international markets

KEY GOVERNANCE MATTERS
REMUNERATION
18
Target area FY2018 Weighting %
Financial: EBITDAF 30
People 20
Customer 20
Wellbeing 20
Long-term Platform 10

52%
26%
13%
9%
Crown
New Zealand Retail
International Institutions
New Zealand Institutions
51%
22%
20%
5%
2%
Crown
New Zealand Retail
International Institutions
New Zealand Institutions
Treasury Stock
OWNERSHIP
19
>Listed on NZX and ASX in May 2013
>Currently more than 85,000 shareholders with Crown as majority owner
>Public Finance Act and Company’s constitution require at least 51% Crown ownership
>No other person may hold more than 10% of shares
>Eight independent Directors - no direct Crown Board representation


MERCURY SHARE REGISTER
May 2013
MERCURY SHARE REGISTER
October 2017
KEY GOVERNANCE MATTERS

FOR FURTHER INFORMATION >> TIM THOMPSON | HEAD OF TREASURY & INVESTOR RELATIONS T. +64 275 173 470 E. INVESTOR@MERCURY.CO.NZ