MERCURY NZ LIMITED — Annual Report 2021

Aug 16, 2021

FINANCIAL RESULTS.

YEAR ENDED 30 JUNE 2021

VINCE HAWKSWORTH Chief Executive

17 August 2021

WILLIAM MEEK Chief Financial Officer

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. To the maximum extent permitted by law, 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 forwardlooking 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, which are outlined in the appendix of the 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 for the year ended 30 June 2021, which are available at www.mercury.co.nz/investors.

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.

HIGHLIGHTS

\$463m EBITDAF

Down \$27m¹ versus FY2020 reflecting lower generation on fourth-lowest inflows² and Kawerau outage with high spot prices

CONTINUOUS IMPROVEMENT

Thriving today through our focus on continuous improvement to work smarter, faster and better

HIGH SPOT PRICES

Elevated due to fuel constraints with hydro generation limited by low inflows and gas deliverability reduced by issues at major gas producers

PLATFORM FOR GROWTH

Adding five wind farms and development options through Tilt Renewables NZ assets and bringing together New Zealand's largest multi-utility business through Trustpower retail transaction

17.0cps TOTAL ORDINARY DIVIDEND

Increase of 7.6% versus FY2020; the 13th consecutive year of ordinary dividend growth

FY2022 GUIDANCE

Lifting to \$590m due to contributions from Tilt Renewables, Turitea wind farm and continuous improvement initiatives

FINANCIAL PERFORMANCE¹

• EBITDAF and NPAT down versus FY2020 reflecting 126GWh generation decrease due to low hydro inflows and Kawerau outage with elevated spot prices

• Stay-In-Business capital expenditure down with deferred activity in FY2021; Growth Investment up due to investment in Turitea wind farm, Rotokawa upgrade, EnergySource Minerals and NOW Broadband

• Operating Expenditure flat versus FY2020

• Free Cash Flow higher as lower earnings offset by reduced stay-in-business capital expenditure

SHORT EXPOSURE FROM LOW INFLOWS AND OUTAGE AMPLIFIED BY HIGH PRICES

¹ Figures do not add up exactly due to rounding

² Generation-Weighted Average Price received for hydro and geothermal generation

³ Includes both physical and financial sales

5

⁴ Includes Fixed Price Variable Volume (FPVV) sales and End User Contracts for Differences (CFDs)

$5$ Includes ancillary services $\&$ gas purchases and sales

KEY PERFORMANCE INDICATORS

(versus previous yearly periods / 12-monthly rolling unless indicated)

CUSTOMER	ፈን	Mercury brand trader churn $6.1\%$ 1	6.1% 5.9%	Net promoter score 10.4 2	13.7 10.4	Brand Strength 65%3	65% 60%
PARTNERSHIPS	${\ddot{3}}$	CCC final advice continues to heavily support electrification		Continued engagement with NZ Battery Project		Signed two relationship agreements with iwi
KAITIAKITANGA		Portfolio LWAP/GWAP 1.01	$1.02$ $1.01$	Turitea delayed, commissioning under way		Gross Generation Emissions Intensity 35kg CO 2 e/MWh 4	36kg/MWh 35kg/MWh
PEOPLE		Zero high severity health and safety incidents		Employee Engagement 65%5	65%	73% of our people say they are encouraged to be innovative
COMMERCIAL		Annual Total Shareholder Return 45.4%	45.4% 4.5%	17.0 cps total ordinary dividend, 13 th consecutive year of growth	15.8 17.0	>1,100GWh wind generation acquired from Tilt Renewables

¹ Normalised for the exit of an agreement with Fonterra Farm Source

6

² Index ranging from -100 to 100 measuring the willingness of customers within target segments to recommend Mercury, 3-monthly rolling average

³ Weighted average of five drivers of brand emotional equity, 3-monthly rolling average to April 2021 (latest available period)

⁴ For CY2020 (trendline shows FY17-20 and CY20) as reporting basis changed to calendar years to align with the New Zealand Emissions Trading Scheme, includes Scope 1 emissions only ⁵ From CultureAmp survey introduced 2019

FOCUS ON HEALTH & SAFETY

Zero high severity Health & Safety incidents in FY2021

Decreased from one incident in FY2020

• TRIFR decreased from 1.26 in FY2020 to 0.64 despite a 10% increase in on-site hours worked in FY2021

• Number of reportable injuries decreased from 14 in FY2020 to 8 in FY2021

• Identified human factors as an important part of safety performance and process safety management

• Completed independent audit in this area concentrating on improvements in processes, controls and systems relevant to the prevention of major incident events

• Continued focus on Health & Safety seen through increased safety observations and near-miss reporting in 2H-FY2021

¹ Total Recordable Injury Frequency Rate per 200,000 hours, includes employees and on-site contractors

REFRESHED STRATEGIC FRAMEWORK

SPOT PRICES REFLECT REDUCED FUEL AVAILABILITY & HIGHER COSTS

9 Source: Gas Industry Company, Comit Hydro, Enerlytica, Refinitive, Mercury ¹ HBA Indonesian FOB Coal Price

FLEXIBILITY IMPACTED AS HIGH SPOT PRICES INCENTIVISE EARLY USE OF STORAGE

Source: NZXHydro, WITS, ASX

$10^°$ ¹ Maximum Control Level ³ Monthly average since July 1927

Month End

Spot Price -

² Monthly average since July 1999 ⁴ Closing price 3 months prior

50GWh above average >50GWh below average Above \$100/MWh Above \$200/MWh

LIFT IN SALES ADDS TO SHORT-TERM PAIN FOR LONGER-TERM GAIN

C&I sales position increased in FY2021 as Mercury continued to engage with customers seeking re-contracting

• Sales locked in at historically high futures prices, but short-term out of the money against the prevailing spot price

• Elevated wholesale prices continue to pressure retail margins

Source: ASX, WITS

• 11 ¹ Two-year forward price starting three quarters ahead
• ² Adjusted for indicative average losses, profile and cost to operate
• ³ Rolling 12-monthly average

ELEVATED WHOLESALE PRICES PRESSURE RETAIL MARGINS

• Retail market remains highly competitive despite low retail margins

• National annual churn remains above 20%

• Mercury remains focussed on customer value in the high price environment

• Electricity customers declined through FY21 by 20k to 328k as acquisition activity reduced

• Success of tactics reflected in lift in reported sales yields in all segments

• Increased acquisitions/decreased retentions seen in Q4-FY2021 due to 'Move with Mercury' campaign

Source: Electricity Authority, EMI - Market share trends and switching breakdown $12 \overline{ }$ ¹ Normalised for the exit of an agreement with Fonterra Farm Source

KAWERAU OUTAGE, NORSKE SKOG EXIT AND CARBON TRANSACTIONS

• Kawerau station suffered an unplanned outage from 7 June to 20 July

• Local power supply loss led to loss of lubrication oil to generator and steam turbine resulting in equipment damage

• Availability of critical spares and the quick and safe work of the Kawerau team allowed a timely return to service

• Actions taken to prevent reoccurrence of faults of this nature in future

• Insurance settlements under discussion with insurers

• Mercury negotiated early exit of foundation hedge with Norske Skog Tasman (NST) mill closure > CFD sales down 375GWh in FY2022 and 517GWh in FY2023

• Mercury chose to exercise the ETS fixed price option for CY2020 emissions credits surrender requirements > Total cost of ~\$8m¹ in FY2021 (at \$35/unit versus current price of ~\$50/unit)

• Purchased 0.7m emissions credits through Government auctions

• Emissions credits inventory of 2.2m² units at end of FY2021

TURITEA DELAYED BUT COMMISSIONING UNDER WAY

Turitea North

• 27 turbines erected at Turitea North

• Commissioning of wind farm commenced

• Expected FY2022 EBITDAF contribution of \$35m

• EPC contract includes standard liquidated damages provisions

Turitea South

• Significant delays from contract dates; expecting completion of southern turbines in mid CY2023

• Working with contractors to find resolution and bring this date forward

• Turitea total spend of \$335m as at end of FY2021 with \$151m in FY2021

• $>$ Total project cost forecast at \$464 $m¹$ , in line with guidance

Turbines at Turitea

Access road construction

TILT RENEWABLES ASSETS BOOST WIND PORTFOLIO

• Acquisition of Tilt Renewables' New Zealand operations completed on 3 August

• Initial bid announced in March at \$7.80 per share, subsequently increased to \$8.10 per share in April

• Funded through sale of Mercury's 19.9% Tilt shareholding (cost \$144m, sold for \$608m²) and additional net debt of \$189m

• Adds over 1,100GWh of wind generation and a development pipeline

• Will make Mercury one of New Zealand's largest wind generators once Turitea northern section is commissioned

• Expected net FY2022 EBITDAF uplift of \$30m¹

• Kaiwaikawe (formerly Omamari) offtake PPA signed with Genesis

• ¹ Net of \$14m Tilt share of earnings (through Other Income) in FY2021 15 ² Comprised of \$603m share sale and \$5m special dividend

TRUSTPOWER RETAIL ACQUISITION

Trustpower retail acquisition announced in June which, if approved, would make Mercury the largest electricity multi-product retailer

$>$ \$441m¹ transaction price reflects:

• Trustpower's retail business

• 10-year electricity supply hedge agreement (CFD)

ISP network

• Restructured Tauranga Energy Consumer Trust (TECT) rebate arrangements

• Settlement following Commerce Commission approval, implementation of the TECT Deed restructure and Trustpower shareholder approval

• Forecast cost synergies of $\sim$ \$35m² per annum after transition

• $>$ Expected transition costs of $\sim$ \$50 $\mathrm{m}^3$ over 3 years

• Full-year EBITDAF contribution of \$50m, offset by \$30m transition costs in Year 1

¹ Includes normalised working capital 16 ² Forecast synergies fully realised after ~3 year transition ³ Split between opex and capex

A CULTURE OF CONTINUOUS IMPROVEMENT

• Mercury is reinvigorating its focus on continuous improvement to work smarter, faster and better, and set us up to thrive in the future

• Examples of the initiatives currently being pursued are:

• 'Digital River' better use of data and technology to inform dispatch decisions across our hydro stations

• Maraetai tail water lowering an example of the critical interrogation of operating restrictions across our assets

• Whakapuāwai our culture change programme designed to help Mercury evolve and thrive

• Strategic framework and quarterly planning a refresh of our strategy and planning frameworks to maintain cadence and alignment

• Derivatives trading leveraging our strengths with increased scope to trade electricity and other related products (e.g. carbon)

• Manual meter reads reviewing our sourcing and procurement activities

• Class 3 outage review an example of optimising our asset maintenance activities for time, cost and quality

• Targeting \$30m of sustainable benefit beginning in FY2022

• FY2022 split approximately one third opex, two thirds revenue

FY2022 GUIDANCE

• FY2022 EBITDAF guidance of \$590m on 3,900GWh of hydro generation, subject to hydrological volatility, wholesale market conditions and any material adverse events, significant one-off expenses or other unforeseeable circumstances

• Excludes any contribution from Trustpower retail acquisition, Kawerau insurance proceeds and Turitea liquidated damages

• FY2022 ordinary dividend quidance 20.0cps (up 17.6% on FY2021)

• FY2022 stay-in-business capital expenditure guidance of \$70m

² Other Costs increasing in FY2022 due to software-as-a-service costs (~\$10m) and inflationary pressures, e.g. insurance. This will be partially offset by Thrive savings (displayed separately)

APPENDIX 20

NON-GAAP MEASURES

• Energy Margin is sales from electricity generation and sales to customers and derivatives, less energy costs, line charges, other direct costs of sales, and third-party metering

• Operating Expenditure represents employee compensation and benefits, maintenance expenses and other expenses

• EBITDAF (or Operating Earnings) is earnings before net interest expense, tax expense, depreciation, amortisation, change in the fair value of financial instruments, gain on sale and impairments

• Underlying Earnings After Tax is profit for the year after removing one-off and/or infrequently occurring events (exceeding \$10 million of profit before tax, which represents material items), impairments, any change in the fair value of derivative financial instruments and gain on sale, all net of tax expense

• Free Cash Flow is net cash from operating activities less stay-in-business capital expenditure

• Stay-In-Business Capital Expenditure is the capital expenditure incurred by the company to maintain its assets in good working order

• Growth Investment is expenditure incurred by the company to create new assets and revenue

DEMAND LIFTS FOLLOWING LOCKDOWN AFFECTED PERIOD

• National demand up 1.0%¹ versus FY2020 which was affected by the COVID-19 lockdown

• Urban and rural sector demand lifted as activity returned to normal levels

• Industrial demand decreased as production remained below FY2020 levels

• Industrial load may fall by a further ~450GWh in FY22-23 due to closures/changes at Norske Skog and the Marsden Point Refinery

• Tiwai Pt smelter benefiting from lift in aluminium prices from ~\$2,500/T to ~\$3,400/T over FY2021

F IZVET NUNMALIJEV VEMANV UNUW IN DI JECTUN
Sector	GWh	Sector $% \triangle$	Total $\% \triangle$
Urban 1	$+243$	1.5%	0.6%
Rural 1	$+76$	1.1%	0.2%
Dairy processing	$+156$	2.6%	0.4%
Irrigation	$+55$	4.0%	0.1%
Industrial	$-171$	(1.9)%	$(0.4)$ %
Other	$+28$	0.1%	0.1%
Total	387		1.0%

EV2021 NODMALISED DEMAND CROWTH BY SECTOR

MERCURY'S COMPETITIVE ADVANTAGE

100% renewable generation

Three low-cost complementary fuel sources in baseload geothermal and peaking hydro with wind added

Superior asset location

North Island generation located near major load centres; rain-fed hydro catchment inflows aligned with winter peak demand

Substantial peaking capacity

The Waikato hydro system is the largest group of peaking stations in the North Island able to firm intermittent renewables

High performance teams

Dynamic company culture built on the understanding that our people, working together and in alignment, set us apart

Track record of customer engagement

Brand capital built through customer-led innovation and rewarding loyalty

ظ

Long-term commercial partnerships

With Maori landowners and other key stakeholders

ELECTRICITY SPOT PRICE REFLECTS GAS AVAILABILITY AND HYDROLOGY

DIVERSIFIED FUNDING PROFILE

DEBT MATURITIES AS AT 12 AUGUST 2021

Diversified funding sources: commercial paper, bank facilities, domestic wholesale bonds, USPP and capital bonds

• \$200m senior retail green bond (MCY040) and \$50m wholesale green bond issued in H2 FY2021 to refinance \$300m Floating Rate Notes maturity in September 2021

• Consideration being given to refinancing of \$230m Waipipi project debt assumed by acquisition of Tilt Renewables' New Zealand assets

FINANCIAL DERIVATIVES

	12 months ended 30 June 2021	12 months ended 30 June 2020
Energy Margin contribution (\$m)
Sell CFDs	(286)	(59)
Buy CFDs	106	22
Other Financial Derivatives	44	17
Total Energy Margin contribution	(136)	(19)

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