Mercury NZ : 2022 Interim Report

MERCURY NZ LIMITED

onlyuse2022 personalINTERIM

REPORT.

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CONTENTS.

1. CHAIR & CHIEF EXECUTIVE UPDATE

1. OUR FINANCIALS
2. INDEPENDENT REVIEW REPORT
3. FINANCIAL STATEMENTS

1. SHAREHOLDER INFORMATION

1. DIRECTORY

CHAIR

& CHIEF EXECUTIVE UPDATE.

VINCE HAWKSWORTH // CHIEF EXECUTIVE PRUE FLACKS // CHAIR

As we assess the challenges that lie ahead for New Zealand's journey to Net Zero, it can be difficult to see past the immediate hurdles. However, we must not lose sight of the significant gains to be made beyond the pressing need to clean up our world - a more equitable society, a resilient economy and a better future for the generations who follow.

Both in New Zealand and globally, the growing urgency to decarbonise has understandably put a spotlight on electricity as the industry underpinning much of this activity. In New Zealand, the sector will play a critical role in ensuring we deliver on our climate change commitments, and it needs to be up for the challenge.

We believe we are. We recognise the growing need for a more unified approach to secure the best possible outcomes for all. Mercury has a role to play in enabling this call for unity, as well as delivering meaningful actions that contribute to our lower carbon future.

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EBITDAF: Earnings before net interest expense, tax expense, depreciation and amortisation, change in the fair value of financial instruments, gain on sale and impairments.

BALANCING THE TRILEMMA

Ensuring that the transition to a renewable future is equitable is essential. Balancing affordability and security remains a key consideration for the electricity sector's contribution to the decarbonisation challenge.

only	Regulatory stability essential
Regulatory uncertainty facing the sector

remains elevated. We agree with the Government's position that climate change must be a priority for New Zealand and Mercury

	is supportive of the climate change targets set.
	However, we are increasingly concerned about
the potential for policy or regulatory change
that unintentionally undermines this position
useand jeopardises New Zealand's decarbonisation
personalr	goals. There is a need for joined up policy that
recognises that the electricity sector is the
platform many other industries will depend
	on to decarbonise.

The electricity market has delivered 85% renewable electricity for New Zealand and will reach 90% renewable within the first emissions budget period. However, the market must continue to evolve for the next phase of the transition, keeping what is good but adapting to address new challenges including the need for rapid response peaking capacity. Mercury welcomes the opportunity to participate in this transition.

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Intense retail competition

At the same time, the retail electricity market remains extremely competitive. Amid these high levels of competition, it was pleasing to see Mercury customer numbers hold steady at 327,000 connections, ending a period

of declining market share. A clear focus on delivering value to customers, including our 'Move with Mercury' campaign, contributed to this outcome.

Challenging operating conditions

Sustained dry conditions across the Waikato catchment remain a key challenge, with a continuation of conditions that shaped FY21. Prudent lake management is critical, and our teams are planning accordingly.

As a result, hydro generation was 91 GWh down on the prior comparable period.

The 44-day unplanned outage at Kawerau geothermal power station continued into the start of the financial year (ending on 20 July) and coincided with higher spot prices impacted by low national hydrological conditions.

The electricity forward curve is indicating that higher spot prices will persist over the near-term, reflecting higher thermal generation fuel prices and gas supply constraints.

FINANCIAL PERFORMANCE

The challenging operating conditions, along with careful storage management in Lake Taupō, have impacted Mercury's financial

results in the first half for FY22. Mercury's operating earnings (EBITDAF1) were down $48 million to $242 million.

This result was only partially offset by increased scale following the completion in August

of the acquisition of Tilt Renewables' New Zealand wind farms (representing 482 GWh of new wind generation for the period), as well as the Turitea North wind farm starting to come on stream (adding another 105 GWh over the period).

Our continued focus on Thriving Today and Shaping Tomorrow - operational excellence as a mindset - continues to build resilience in our business. Despite challenges through the year and with limited ability to collaborate effectively during lockdowns, Thrive is tracking well against the $30 million EBITDAF benefit signalled

for FY22.

Operational expenditure was up $15 million on the prior comparable period, while total stay-in- business capital expenditure for the period was $20 million (down $3 million).

Net profit after tax was up $297 million to $427 million due to the $367 million net gain on sale of our 19.9% Tilt Renewables shareholding.

Mercury's full year EBITDAF guidance remains at $570 million reflecting impacts of the Tilt Renewables and Trustpower retail acquisitions and excludes likely interim insurance payment arising from Kawerau station unplanned outage.

$242Mp

EBITDAF

$106Mo

OPERATING

EXPENDITURE

$427Mo

NET PROFIT

AFTER TAX

MERCURY INTERIM REPORT 2022

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THE CHALLENGING OPERATING CONDITIONS, ALONG WITH CAREFUL STORAGE MANAGEMENT IN LAKE TAUPŌ, HAVE IMPACTED MERCURY'S FINANCIAL RESULTS IN THE FIRST HALF FOR FY22.

INTERIM DIVIDEND

Your Board has declared a fully imputed interim dividend of 8.0 cents per share payable to our 75,000 owners including the Crown. This represents an increase of 18% on the HY21 dividend and reflects a significant period of growth for Mercury, outlined in more detail below. The dividend will be paid on 1 April 2022.

PEOPLE AND WELLBEING

The first six months of FY22 has been characterised by a sustained lockdown for many in New Zealand. This has been an extremely challenging time for our communities, our stakeholders and our customers. Our people are not immune.

Mercury is monitoring wellbeing carefully and thinking hard about how we can support our people. A range of measures have been implemented; including access to wellbeing tools and workshops, the gifting of extra time off, one-off payments for staff to purchase equipment and efforts to boost collaboration and communication virtually.

Mercury has also been involved in the successful pilot of rapid antigen testing. Our generation sites continue regular rapid antigen testing of our employees and contractors as an added control against COVID-19 along with the introduction across the business of our vaccination policy.

In a trying year, our employees and contract workforce remained committed to health

8.0CPSo

INTERIM DIVIDEND

DECLARED

and safety as a priority. This continues to be reflected in a sustained low TRIFR (Total Reportable Incident Frequency Rate) - ending the six-month period with a TRIFR of 0.25. There were no serious harm injuries over the period, despite significant works at some of our generation sites. Our goal remains zero harm, and we continue to review and improve our systems and processes to meet this goal.

THRIVING TODAY, SHAPING TOMORROW

We expect an ever-accelerating pace of change in our sector, and we have developed our strategic framework to best position us to thrive in a rapidly changing environment.

Our strategic themes of 'Thriving Today' and 'Shaping Tomorrow' reflect our view that purposeful action today influences and will build measurable success in the future. Diversification to strengthen our resilience characterised much of our activity in the first six months of FY22.

This strengthened focus on continuous improvement through Thrive has connected our people more closely to the role they play in delivering our strategy and fulfilling our purpose.

Increasing value; options for growth

In August we completed the addition of Tilt Renewables' New Zealand wind assets into our portfolio, and the Turitea North wind farm became operational in the last quarter of

2021. Together these significantly diversify our revenue streams.

We are now focussed on the Turitea South wind farm, which is scheduled for completion in mid-2023 and will make Turitea New Zealand's largest wind farm. We have also commenced early work to advance the consented 53-turbine wind farm at Puketoi.

At the same time, we continue to progress the consents for the 19-turbine Kaiwaikawe wind farm. This project has been a tangible demonstration of how the absence of joined up policy settings is hampering the delivery of new renewable generation by undervaluing the decarbonisation benefits. We continue to engage closely with all relevant parties including the Department of Conservation.

Mercury's focus on enhancing its existing generation also continues. We have completed $30 million of rebalancing works at the Rotokawa geothermal field, projected to deliver an additional 7MW on average each year. In addition, a successful trial of CO2 reinjection at Ngātamariki shows promising signs for reducing emissions associated with geothermal generation.

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MERCURY INTERIM REPORT 2022

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we see Trustpower's deep expertise in this area adding material value to Mercury's customers. The acquisition also significantly grows our retail book, and the increased scale allows us to make meaningful investment in our underlying IT systems to drive greater innovation.

The High Court's approval of the Tauranga Energy Consumer Trust restructure in December was a significant milestone to celebrate, and an exciting step towards bringing these two complementary businesses together. We anticipate remaining conditions will be satisfied and the transaction will complete in the last quarter of FY22. A further update will be provided in our full year results.

Our team continues to look at other opportunities to deepen our connection to customers beyond energy. We have now completed an initial pilot of a broadband product in partnership with NOW NZ, and plan to launch to Mercury's customer base later in the year.

Mercury is focused on ensuring all New Zealanders have access to affordable and reliable electricity. While we are proud of the progress made on customer care, there is much more that can be done to improve how we engage with customers experiencing hardship. Hardship is a complex issue requiring a multi-facetedapproach. Continuing to build collaborative relationships with community, social and government agencies is fundamental to our success.

Leading the low-carbon transition

The issues associated with New Zealand's transition to a decarbonised economy are complex. Successful transition will require working across different sectors and with Government and public agencies. Policy settings will be critical. The electricity sector

onlyis ready to participate and can contribute expertise, financing and consumer knowledge to support informed decisions.

Initiatives such as the Aotearoa Circle Low Carbon Energy Roadmap, of which Mercury is part, show how Government, regulators and the sector can collaborate on the energy transition and secure the best possible outcomes.

The Government's final Emissions Reduction usePlan, due in May, is another key milestone in

New Zealand's decarbonisation journey. Mercury welcomed the opportunity to contribute to this important document and we are looking forward to engaging on the finalised plan.

Mercury is also focused on progressing a whole- of-energy-sector approach to decarbonisation. This includes working on a collective

commitment to the Government to support personalNew Zealand's emission reduction goals.

Value for customers

The acquisition of Trustpower's retail business will accelerate Mercury's retail strategy, which is centred on the right product mix and value for customers. We know customers value the convenience and ease of bundled products and

2 Index ranging from -100 to 100 measuring willingness of customers within target segment to recommend Mercury (three-month rolling average).

A THANK YOU

The challenges we are facing are unprecedented, but Mercury is well placed to thrive. On behalf of the Board and Executive Management Team, we recognise and thank the talented team of people who underpin Mercury's results and the continued growth of our business.

We also thank the many groups and individuals we partner with across the business. A special mention goes to the Starship Foundation - we are currently celebrating 20 years together and a year of record donations from our customers. We look forward to Mercury's continued path of thriving in the second half of the year.

Ngā mihi nui ki a koutou katoa.

VINCE HAWKSWORTH // CHIEF EXECUTIVE

PRUE FLACKS // CHAIR

ZERO

HIGH SEVERITY

HEALTH AND

SAFETY INCIDENTS

12.0o

NET PROMOTER

SCORE2

$20Mp

OF STAY-IN-

BUSINESS CAPEX

MERCURY INTERIM REPORT 2022

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