20170821-corporate-governance

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CORPORATE GOVERNANCE STATEMENT 2017

>> MERCURY NZ LIMITED Mercury NZ Limited 2017 Corporate Governance Statement

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CORPORATE GOVERNANCE FRAMEWORK At Mercury we are focussed on the long term. This drives the way we do business, our investment decisions, services to customers, development of people and our partnerships with stakeholders.

The objective of our Corporate Governance framework is to give our owners the confidence to choose Mercury. It sets out how our Board is accountable to our owners for Mercury’s actions and performance, along with the delegation of responsibilities to the Chief Executive and the Executive Management Team (“EMT”). Through this framework we create the objectives and direction for the business, identify and manage our risks, strengthen our business culture and assess and continuously improve our performance.

WE ARE COMMITTED TO THE HIGHEST STANDARDS OF CORPORATE GOVERNANCE, BUSINESS BEHAVIOUR AND ACCOUNTABILITY.

(third edition) (“ASX Principles”) and the Financial Markets Authority Corporate Governance Principles and Guidelines. As at 30 June 2017, we also largely comply with the recently published NZX Corporate Governance Best Practice Code 2017 (the only two exceptions relate to Recommendations 3.3 (Remuneration Committee) and 3.6 (Takeover Offer Protocol) and are explained later in this Corporate Governance Statement). We have also reviewed guidelines from the New Zealand Corporate Governance Forum, the IFC Global Corporate Governance Forum, and the OECD and consider that our practices and procedures substantially reflect these guidelines.

Information on how Mercury remunerates fairly and responsibly is contained in the Director and Executive Employee Remuneration section of our Annual Report 2017, also available in the Investors section of our website.

Mercury’s Constitution, the Charters and the policies referred to in this Corporate Governance Statement are available in the corporate governance section of Mercury’s website.

ENGAGING WITH INVESTORS Our Investor Relations Programme

We focus on building trust and confidence from our owners by having: • • • • •

a clear purpose and responsibilities; an effective culture built on integrity, honesty and transparency; a well-balanced and experienced Board; management accountability; and effective management of current and future risks.

To ensure our owners and stakeholders have the right information to make good choices based on informed assessments of Mercury’s value, we are committed to communicating effectively and providing comprehensive relevant information. The Board has adopted a Stakeholder Communications Policy which sets out the steps Mercury takes to enable this. This Policy is available in the corporate governance section of Mercury’s website.

Shareholders

WE ARE COMMITTED TO COMMUNICATING AND LISTENING. WE ARE RICHER FOR THE DIALOGUE WITH INVESTORS AND FROM UNDERSTANDING YOUR PERSPECTIVES.

MERCURY BOARD Risk Assurance and Audit Committee

Human Resources Committee

Nominations Committee

Mercury communicates with its investors through: • • • • •

Chief Executive Executive Management Team MERCURY PEOPLE Mercury’s Board is committed to maintaining the highest standards of corporate governance, business behaviour and accountability and regularly reviews Mercury’s governance structures against national and international guidelines. Accordingly, the Board adopts corporate governance policies and practices which reflect contemporary standards in New Zealand and Australia, incorporating corporate governance recommendations issued by NZX Limited (“NZX”) and ASX Limited (“ASX”).

Over the reporting period, Mercury’s corporate governance practices complied with the NZX Corporate Governance Best Practice Code, the ASX Corporate Governance Principles and Recommendations

Mercury NZ Limited 2017 Corporate Governance Statement

the investor section of our website; Annual Shareholders’ Meetings (“ASM”) and webcasts; our annual and interim reports; regular information disclosures; and analyst and investor briefings and road shows, including our capital markets day which is held every two years.

Mercury runs a programme to build understanding and appropriate measurement of Mercury’s performance among investors and research analysts. The following principles provide the programme’s foundation: • • • •

being responsive; providing clear, accurate and timely disclosures; providing appropriate access to management and directors; and providing meaningful insight into the Company and industry.

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Specifically, this is achieved through: • dialogue with the EMT; • briefings for results and announcements that allow analysts to ask questions of the EMT; • visits to Mercury’s premises including operating assets; and • a governance roadshow by directors alongside other opportunities to meet with directors.

Summary records of the issues discussed at meetings with investors and analysts are kept, including a record of those present and the time and place of meetings. These are for internal use.

MERCURY’S BOARD Responsibilities The Board is responsible for the affairs and activities of Mercury, and has approved the delegation of certain responsibilities to the Chief Executive and other members of the EMT. The primary role of the Board is to create long-term value for shareholders by providing strategic guidance for Mercury and its related companies, and effective oversight of management. The Board is accountable to shareholders for Mercury’s performance.

Mercury believes effective engagement with investors will benefit both Mercury and investors. As a result of investor feedback, Mercury’s continued aim is to provide clearer communication of our strategic direction, including articulating Mercury’s strategic priorities and how these leverage Mercury’s competitive advantages.

We have engaged with investors at a number of levels over this reporting period. Highlights in FY2017 included introducing investors to our new brand at the ASM and via our new look annual report, and we undertook an expanded series of international and domestic investor meetings which included a governance road show by directors.

Website Mercury’s website contains a comprehensive set of investor-related information and data including stock exchange and media releases, interim and annual reports, investor presentations and webcasts, share price and dividend information, shareholder meeting materials and other material required to demonstrate best practice in investor communications.

Shareholders can direct questions and comments through the website or contact the Head of Treasury and Investor Relations.

OUR BOARD IS COMMITTED TO CREATE LONG-TERM VALUE FOR INVESTORS AND TO SAFEGUARD THE HIGHEST STANDARDS OF GOVERNANCE, CORPORATE BEHAVIOUR AND ACCOUNTABILITY. The responsibilities of the Board are set out in Mercury’s Board Charter, which is reviewed by the Board as required and at least every two years, and is available in the corporate governance section of our website. The Board’s responsibilities contained in the Board Charter include: • • •

ASMs and Webcasts ASMs are held in New Zealand at a time and location which aim to maximise in person participation by shareholders. The ASM is also webcast to allow participation by shareholders who are unable to attend in person. We enjoy the opportunity to meet our shareholders face to face at the ASM and the other investor events. Mercury’s fifth ASM since listing on the NZX Main Board and ASX will be held in Auckland on 7 November 2017.

Electronic Communications We encourage shareholders to provide email addresses to enable them to receive shareholder materials electronically. Communicating electronically is faster and more cost-effective. Almost 75% of our shareholders have told us they prefer to communicate in this way.

We understand that this does not suit everybody and so hard copy reports are provided on request to shareholders who have not opted to receive documents electronically.

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• •

• •

•

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Mercury NZ Limited 2017 Corporate Governance Statement

establishing clear strategic goals with appropriate supporting business plans and resources; ensuring there are adequate resources available to meet Mercury’s objectives; ensuring Mercury’s environmental and health and safety culture and practices comply with all legal requirements, reflect best practice in New Zealand and are recognised by employees and other stakeholders as key priorities; monitoring strategy implementation and performance; selecting and appointing the Chief Executive, determining conditions of employment and monitoring performance against established objectives; monitoring financial performance and the integrity of reporting; setting delegated authority levels for the Chief Executive and EMT to commit to new expenditure, enter contracts, or acquire or divest businesses and/or assets; approving transactions relating to acquisitions, divestments and capital expenditure above delegated policy limits; ensuring that effective audit, risk management and compliance systems are in place and monitored to protect Mercury’s assets and to minimise the possibility of Mercury operating beyond legal or regulatory requirements or beyond acceptable risk parameters as determined by the Board; approving EMT appointments, remuneration including performance remuneration and monitoring performance against objectives; reviewing succession and development plans for the Chief Executive and EMT; establishing and reviewing employment and remuneration practices to ensure that talented and motivated employees are recruited and retained for Mercury’s objectives;

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• • • • •

ensuring effective and timely reporting to investors; setting Mercury’s dividend policy; ensuring Mercury adheres to high standards of corporate behaviour, responsibility and ethics; ensuring that Board capability is reviewed and recommendations made for new directors; and ensuring that directors’ Board and committee fees are reviewed and recommendations are made to shareholders.

The Chief Executive and EMT are responsible for: • developing and making recommendations to the Board on Mercury strategies and associated initiatives; • managing and implementing strategies approved by the Board; • formulating and implementing policies and reporting procedures for management; • decision making compatible with Mercury’s Delegations Policy; • managing business risk; and • the day-to-day management of Mercury.

The Chief Executive and the EMT have employment agreements setting out their roles and conditions of employment.

The performance of the Chief Executive and the EMT is reviewed regularly against objectives and measures set by the Board in annual performance scorecards. Further details are contained in the Director and Executive Employee Remuneration section of Mercury’s 2017 Annual Report.

Performance evaluations of the Chief Executive and each EMT member took place during the reporting period in accordance with this process.

Chair Joan Withers is the Chair of Mercury’s Board and was first appointed in 2009. Mrs Withers is an independent, non-executive director. Mrs Withers’ overarching responsibilities are to provide leadership to the Board and to ensure the Board is well informed and effective. You can read more about the role of the Chair in the Board Charter in the corporate governance section of our website.

Mercury NZ Limited 2017 Corporate Governance Statement

Board Composition and Director Appointment The Board currently comprises seven directors, being Joan Withers, Prue Flacks, Andy Lark, James Miller, Keith Smith, Patrick Strange and Mike Taitoko. A brief biography of each director is available in the Leadership section of Mercury’s website.

Selection We have processes in place to undertake appropriate checks before appointing a director or putting forward any candidate for election as a director.

Nomination The number of directors is determined in accordance with the Constitution. All directors are elected by Mercury’s shareholders (other than directors appointed by the Board to fill casual vacancies, who must retire at the next meeting of shareholders) with rotation and retirement determined by the Constitution.

The Board is responsible for identifying and appointing directors to the Board through the Nominations Committee (see the Board Committees section below).

Mercury has a written letter agreement with each director setting out the terms and conditions of their appointment. A copy of the standard form of this letter is available on our website. In addition, Mercury also enters into deeds of indemnity and insurance with each director, in terms of which Mercury indemnifies, and provides insurance to, directors in accordance with the Companies Act for certain claims which may be brought against them as directors.

Diversity 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. For further information on Mercury’s view of diversity, please refer to the Diversity and Inclusion section later in this Corporate Governance Statement.

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Skills matrix The Nominations Committee has developed a Board skills matrix setting out the mix of skills and diversity of the Board. The skills matrix is used to evaluate whether the collective skills and experience of the directors meet Mercury’s requirements both currently and into the future.

If the Board determines that new or additional skills are required, training is completed or a formal recruitment process is undertaken.

The table below highlights those core skills highly correlated to executing the Company’s strategy.

Skill Attribute

Joan Withers

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 experience Senior executive or board experience in financial accounting and reporting, corporate finance and internal financial controls 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 Delivering Sustainable Growth Business strategy experience A track record of developing and implementing a successful and sustainable strategy Innovation and growth, entrepreneurialism A track record of demonstrated entrepreneurialism and/or demonstrated understanding and commitment to innovation and a clear record of achieving organisational growth

Primary Skills

Secondary Skills

Mercury NZ Limited 2017 Corporate Governance Statement

Andy Lark

James Miller

Mike Taitoko

Patrick Strange

Prue Flacks

Keith Smith

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Board Characteristics

leadership and governance and energy industry specific skills.

Directors are also encouraged to continue their own professional development by attending relevant courses, conferences and briefings.

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It is fundamental to the Board that directors have and are committing sufficient time to perform their duties properly and effectively. The Board has considered this issue during the reporting period and is satisfied that, taking into account all of their commitments, each director had sufficient time to perform their Mercury duties.

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The Board, through the Nominations Committee, strives to ensure that Mercury has the right mix of skills and experience it requires for Mercury to achieve its strategic aims in a prudent and responsible manner. The Board also recognises that while it is important to have the right mix of skills the Board is also focused on ensuring that it continues to have the right culture that takes advantage of, and benefits from, the diversity of skills, backgrounds and experiences represented on 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 of that director’s attributed skills and experience.

By applying this philosophy, the Board as a collective unit exceeds the individual contributions of its members.

Induction and Development New directors take part in a comprehensive induction programme for familiarisation with Mercury’s business and the electricity industry. The Board receives regular briefings on Mercury’s business operations from senior managers. Regular Board strategy days are held to consider matters of strategic importance to Mercury and Board and management run scenario thinking sessions for key issues. Visits to Mercury’s facilities keep the Board informed in relation to Mercury’s assets, and in particular with respect to health and safety matters. The Board runs a training programme drawing upon internal and external resources for general skills relevant to

Mercury NZ Limited 2017 Corporate Governance Statement

Mercury notifies shareholders of their right to nominate a candidate for election as a director by stock exchange notice and by publication on our website. Where any director election or reelection is to occur at a shareholder meeting, the notice of meeting includes all material information known to Mercury on candidates for director election or re-election.

The Constitution provides that the size for the Board should be between three and nine directors. At least one third of all directors must retire every year and, if desired, seek re-election. The directors who retire each year are those who have been longest in office since their last appointment or re-election or, if there is more than one of equal term, those determined by lot, unless the Board resolves otherwise.

The Mercury Board takes director tenure into account in considering the independence of directors.

Director tenure 1 0-3 YEARS 3-6 YEARS

3

6+ YEARS

3

Name

Originally Appointed

Last Reappointed/ Elected

Joan Withers (Chair) Prue Flacks Andrew Lark James Miller Keith Smith Patrick Strange Mike Taitoko

1 August 2009 1 May 2010 10 July 2014 1 May 2012 1 May 2009 4 February 2014 28 August 2015

3 November 2016 5 November 2015 6 November 2014 3 November 2016 5 November 2015 6 November 2014 5 November 2015

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Independence and conflicts

Future Directors Programme

All of the directors are considered by the Board to be “independent” directors in that they are non-executive directors who are not substantial shareholders and who are free of any business or other relationship that would materially interfere with, or could reasonably be seen to materially interfere with, the independent exercise of their judgement. No directors have been employed or retained to provide material professional services by Mercury within the previous three years, and no director is a partner, director or senior executive or material shareholder of a firm which provides professional services to Mercury or a related company. No director is a material supplier to Mercury or has any other material contractual relationship with Mercury or another group member other than as a director of Mercury. No director controls, or is an executive or other representative of an entity which controls, 5% or more of Mercury’s voting securities. The Chief Executive is not a director of Mercury.

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 second and current future director, Nicky Ashton, was selected in June 2016 and her tenure will come to an end on 31 December 2017. Nicky participates in discussions in all Board meetings but does not participate in decision making.

Directors’ Mercury shareholdings The Board supports means by which directors’ interests are aligned with those of shareholders and with Mercury’s strategic aims. To improve this alignment, the Board encourages the accumulation by directors, within a reasonable period of time after joining the Board, of shareholdings in Mercury meaningful to each individual director.

Reviewing performance Evaluations are regularly conducted to review the Board’s role, Board processes and committees to support that role and the performance of the Board and each director. This is undertaken using a variety of techniques including external consultants, questionnaires and Board discussion. The last full Board performance review, with the assistance of an external facilitator, was completed in November 2016. The Board also completed a comprehensive analysis of the skills and tenure of the Board around mid-2017.

Access to advice and Company Secretary Directors may access such information and seek such independent advice as they consider necessary or desirable, individually or collectively, to fulfil their responsibilities and permit independent judgement in decision making. In particular, they are entitled to have access to internal and external auditors without management present and, with the Chair’s consent, seek independent professional advice at Mercury’s expense.

All directors have access to the advice and services of the Company Secretary for the purposes of the Board’s affairs. The Company Secretary is appointed on the recommendation of the Chief Executive, and must be approved by the Board. The Company Secretary is accountable to the Board, through the Chair, on all governance matters. As at the date of this Corporate Governance Statement, Howard Thomas is the Company Secretary.

Mercury NZ Limited 2017 Corporate Governance Statement

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BOARD COMMITTEES OUR THREE STANDING COMMITTEES FOCUS ON PARTICULAR AREAS OF THE BOARD’S RESPONSIBILITIES AND TOGETHER STRENGTHEN THE BOARD’S OVERSIGHT OF MERCURY. Overview of the three standing Committees of the Board An overview of the role and responsibilities, membership and meetings of the Board’s three standing Committees is provided in the table below.

Committee meetings are scheduled to coordinate with the Board meeting cycle. Each Committee reports to the Board at the subsequent Board meeting and makes recommendations to the Board for consideration as appropriate.

Human Resources Committee Roles and Responsibilities

Risk Assurance and Audit Committee (“RAAC”)

Overseeing, reviewing and advising the Assisting the Board to fulfil its human resources responsibilities Board on Mercury’s: relating to: • risk management policy and processes (which includes oversight of Health & • Mercury’s human resources Safety assurance); strategy and plan;

Nominations Committee

Identifying people with the necessary expertise, experience, diversity and perspectives for selection as potential directors to be nominated for election at the next annual shareholder meeting or to fill a casual vacancy on the Board.

In particular:

• the remuneration and performance of the Chief Executive and EMT; and

• internal control mechanisms and internal and external audit functions;

• Human Resources policies and practices.

• financial information prepared by management for publication.

• providing assurance that the Board has the composition, expertise and diversity of thought to comply with the law, high standards of governance and Mercury’s strategic objectives;

Management retains responsibility for the implementation and operation of adequate risk assurance, internal control and audit systems. The Board has delegated to the RAAC the authority to oversee and monitor these activities.

• recommending to the Board an annual evaluation process of the Board and its committees;

Monitoring and providing guidance to management on human resources-related matters.

• compliance policies and processes; and

• recommending individuals qualified to become Board members and review nominations from shareholders;

• recommending appropriate remuneration of directors; • ensuring that succession plans are in place for the continued effective composition and expertise of the Board; and

Membership

Meetings

At least 3 directors, the majority of whom must be independent.

At least 3 directors, each of whom must be independent non-executives.

Current members:

Current members:

• Prue Flacks (Chair)

• Keith Smith (Chair)

• Andrew Lark

• James Miller

• Mike Taitoko.

• Patrick Strange.

Joan Withers is also a member by virtue of her position as Board Chair.

Joan Withers is also a member by virtue of her position as Board Chair.

• recommending induction and continuing education for directors.

At least 3 directors Current members: • Joan Withers (Chair) • Prue Flacks • James Miller.

The Board Chair is not eligible to Chair the Committee.

At least three times annually.

At least one member must have an accounting or financial background as that term is described in the NZX Main Board Listing Rules.

At least three times annually.

At least annually.

During the reporting period, the Committee met 4 times.

During the reporting period, the Committee met 4 times.

During the reporting period, the Committee met 3 times.

Mercury does not have a separate Remuneration Committee. The functions that would ordinarily be allocated to the Remuneration Committee are shared between the Human Resources Committee in respect of the Chief Executive and the EMT, and the Nominations Committee in respect of the Directors.

Mercury assesses on a regular basis whether additional committees are required. As at the date of this statement, Mercury has considered that no other committees are required.

Mercury NZ Limited 2017 Corporate Governance Statement

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Attendance The table below shows attendances at Board, committee and strategy meetings by directors during the year ended 30 June 2017. In addition to the usual meetings of the Board and its standing committees, additional meetings of the Board are convened as necessary to consider particular issues facing Mercury.

Number of Meetings Joan Withers Prue Flacks Andrew Lark James Miller Mike Taitoko Keith Smith Patrick Strange Michael Allen^

Board

Risk Assurance and Audit Committee

10 10 10 9 10 10 10 10 4

4 4 – – 4 – 4 4 –

Human Resources Committee

4 4 4 3 – 4 – – –

Nominations Committee

3 3 3 – 3 – – – –

Company Strategy

2 2 2 2 2 2 2 2 1

^ Mike Allen ceased to be a director on 3 November 2016.

Information on the relevant qualifications and experience of Committee members is available in the corporate governance section of our website.

Committee Charters

Internal Audit and Risk Assurance

Each Committee operates in accordance with a written Charter approved by the Board and reviewed as required and at least every two years. The Committee Charters are available in the corporate governance section of our website.

Mercury operates a comprehensive internal audit plan and risk assurance plan, which takes a holistic view of Mercury’s culture, practices and procedures and includes periodic reviews of relevant areas of Mercury’s operations. The internal audit plan is designed and approved by the RAAC each year in consultation with the Risk Assurance Officer and the Internal Auditor (currently made up of an internal team, Deloitte and a number of other internal audit and process specialists appointed on an outsourced basis) who report on progress and the results of internal audit reviews at each RAAC meeting. The Internal Auditor has access to management and the right to seek information and explanations. The RAAC meets with the Internal Auditor at least once each year without management present.

Takeover Offer Protocols Mercury has not established protocols that set out the procedure to be followed if there is a takeover offer for Mercury and has not adopted any alternative governance practices in lieu of those protocols. Mercury has made this decision because, due to the restrictions on Mercury’s ownership under the Public Finance Act 1989, no person other than the Crown may have a relevant interest in more than 10% of Mercury’s shares. As such, it is not practically possible for a takeover offer to be made in respect of Mercury for so long as the Public Finance Act 1989 includes these restrictions.

ASSURANCE AND MANAGING RISK Audit Plan and Role of Auditor The Auditor–General is the auditor of Mercury and each of its subsidiaries (together, the “Group”), under the Public Audit Act 2001. The Auditor–General appointed Simon O’Connor of Ernst & Young to carry out the FY2017 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 provision of external audit services is guided by the Audit Independence Policy which is available on our website. Consistent with the Stakeholder Communications Policy, the external auditor attends the Annual Shareholders’ Meeting and is available to shareholders to answer questions relevant to the audit.

Mercury NZ Limited 2017 Corporate Governance Statement

During FY2017, an area of focus for the RAAC’s assurance function was a comprehensive, holistic review of Mercury’s management and administration of its key commercial contracts.

Looking ahead to FY2018, a focus of the RAAC will be operational and reputational risks.

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Timely and Balanced Disclosure Shareholders and Markets Mercury is committed to maintaining a fully informed market through effective communication with the NZX and ASX, our shareholders and investors, analysts, media and other interested parties. Mercury provides all stakeholders with equal and timely access to material information that is accurate, balanced, meaningful and consistent.

The Market Disclosure Policy is designed to ensure this occurs in compliance with Mercury’s continuous disclosure obligations under the NZX Main Board and ASX Listing Rules. The Policy is available in the corporate governance section of our website.

The Board has appointed the Company Secretary as the Disclosure Officer who is responsible for administering the Policy. The Disclosure Committee (made up of the Board Chair, the RAAC Chair, the Chief Executive, the Chief Financial Officer and the Disclosure Officer) is responsible for ensuring that Mercury complies with its disclosure obligations.

The Chief Executive and EMT are responsible for providing the Disclosure Officer with all material information relating to their areas of responsibility. Information which, in the opinion of the Disclosure Officer, may require disclosure is provided to the Disclosure Committee for decision. Proposed disclosures of draft annual and interim results and accompanying news releases and presentations must be reviewed by the RAAC before finalisation by the Board.

Once approved for disclosure, the Disclosure Officer is responsible for releasing material information to the market.

Directors consider at each Board meeting whether there is any material information which should be disclosed to the market.

Integrity of Reporting The Chief Executive and the Chief Financial Officer are required each half-year and full year to provide a letter of representation to the Board confirming that the financial statements have been prepared in accordance with legal requirements, comply with generally accepted accounting practice and present fairly, in all material respects, the financial position of Mercury NZ Limited and of the results of its operations and its cash flows.

A letter of representation confirming those matters was received by the Board with respect to the Group’s FY2017 financial statements.

Risk Management Framework and RAAC responsibilities 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 Mercury’s website) supported by a suite of risk management policies appropriate for its business, including a Risk Appetite Statement, the Mercury Code, an Energy Markets Risk Management Policy, a Treasury Policy and a Delegations Policy.

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 applies to all business activities of the Group including Mercury-controlled joint ventures and is reviewed annually by the RAAC and approved by the Board.

Mercury NZ Limited 2017 Corporate Governance Statement

OUR RISK MANAGEMENT FRAMEWORK SUPPORTS GROUP-WIDE CAPABILITY IN RISK MANAGEMENT. 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. This approach is consistent with the precautionary principle.

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. As part of the current Risk Appetite Statements, Mercury targets a long-term credit rating of BBB on a stand-alone basis from Standard & Poor’s (or its equivalent).

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’s management operates a Risk Management Committee whose 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. Membership of the Risk Management Committee is made up of representatives from the EMT and is chaired by the Chief Executive. The Risk Management Committee meets at least four times each year.

In addition to these risk management processes a number of measures are employed to manage risks, including employee awareness, incident training, due diligence, financial risk mitigation tools and active involvement in the regulatory environment.

As noted above, 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 FY2017.

Oversees the framework

GOVERNANCE

Monitors implementation of framework and tests controls

Establishes, communicates and implements risk management Risk Assurance & Audit Committee Risk Assurance Officer

Risk Management Committee All Business Units

BUSINESS FUNCTIONS

Manage day to day risks and controls

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Key Risks

Power Station Availability

Key risks relate to the possibility of an incident resulting in fatality or serious harm, changes that affect Mercury’s ability to generate, buy or sell electricity and related services, develop projects, or otherwise negatively impact on its expected operational and financial performance.

Mercury’s ability to generate electricity depends upon the continued efficient operation of its power stations. The viability, efficiency or operability of its power stations could be adversely affected by a range of factors including:

Safety Mercury undertakes activities that present the potential for significant safety risks – including electrified assets, handling of iso-pentane, steam field operations, well drilling, large generation equipment, dam safety and medically dependent customer management. A key risk for Mercury is that an incident occurs causing the fatality of or serious injury to our staff, a contractor, a customer or the public.

Compliance Legislative and regulatory changes

Regulatory changes imposed on the current wholesale and retail market structure and pricing regimes may affect how Mercury is managing its integrated business model of generating and retailing electricity and could adversely impact on Mercury’s ability to create value. Legislative or regulatory changes, including Treaty of Waitangi claims or changes to consent conditions, may result in Mercury facing direct or indirect restrictions, conditions or additional costs on Mercury’s access to freshwater or geothermal resources and its hydro and geothermal generation activities.

• material failure of turbines, transformers, geothermal wells that results in unplanned power station outages which requires replacement or repair; and • catastrophic events such as major earthquake, volcanic eruption, or other natural catastrophes that could cause failure of any or several of Mercury’s power stations.

Growth and Development Risks

Growth and development projects are subject to risks that may affect expected financial returns or outcomes: • for geothermal generation development, the outcome of geothermal exploration is inherently risky with any activity highly uncertain due to relatively unknown variables, including underground geology and characteristics that are different for each reservoir; and • political and regulatory uncertainty and poor economic conditions may limit Mercury’s development choices or adversely affect the viability or costs of future developments.

Information security

Mercury’s generation depends upon the availability of water for hydro generation and geothermal fluid for geothermal generation.

The principal risks include the inability to generate expected levels of electricity due to either temporarily or permanently reduced fuel supplies, loss of access to supply, or increased costs to secure the necessary fuel, all of which may adversely affect Mercury’s earnings.

We depend on a number of key systems for our continued operations. There is a risk that the security of critical systems will be compromised and/or information accessed, deleted or corrupted, impacting on our ability to operate critical systems. Such an event could result in costs to resolve or repair; potential downtime of operations; potential breaches of our customer's privacy, including unauthorised access to their personal information; and reputational impacts from any loss of service, or resulting impacts on safety, our environment or community.

Operational

Financial Risks

Fuel Security and Supply

Electricity Market Exposure

In the short-run, Mercury’s ability to manage its electricity portfolio risk depends upon its ability to purchase and sell electricity in the wholesale electricity market which could be impacted by: • short-term changes in supply and demand; • national fuel conditions based on hydrological conditions (including extended national drought); • competitor behaviour; and • constrained transmission and distribution of electricity.

In the long-run, wholesale prices are determined by the level of national demand relative to supply from power generation and can be affected by levels of activity in the industrial sector, population size, economic conditions, competitor behaviour and generation build or retirement, technological changes or new sources of energy, and regulatory changes.

Mercury NZ Limited 2017 Corporate Governance Statement

Mercury is insured through a comprehensive programme including cover for generation property, plant and equipment and business interruption with a combined limit of $1 billion. In the event of a severe natural catastrophe, uninsured damages or uninsurable damages to Mercury’s assets may not be fully recovered under the current insurance arrangements, impacting future operational performance and the financial condition of Mercury.

A deterioration of Mercury’s financial condition or instability in capital markets could increase Mercury’s cost of capital or eliminate its ability to raise debt, impacting its financial performance and pursuit of its strategic objectives.

The Crown’s shareholding and the provisions of the Public Finance Act may limit Mercury’s ability to raise equity capital.

There is a risk that foreign currency or interest rate movements may impact Mercury’s earnings by increasing the cost for imported goods and services and the cost of debt.

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Reputational Risks Mercury’s reputation with investors, stakeholders and the broader community is one of its most significant assets. The following events could threaten that reputation and could lead to negative publicity resulting in the loss of business revenues or reduction in Mercury’s value: • errors in customer connections, billing or general customer communications; • errors by directors, management, contractors or related industry operators negatively reflecting on Mercury; • adverse environmental impact caused by, or perceived to be caused by, Mercury’s operations; • health and safety incidents under the operational control of Mercury; • a reduction in standards of how we treat the communities that we operate in, reflecting poorly on Mercury’s reputation.

Other Material Risks Other material business risks that could impact on the short, medium or long term financial performance of Mercury, including material exposure to economic, environmental or social sustainability risks include: significant reduction or ceasing of electricity consumption by the Tiwai aluminium smelter; political, regulatory, foreign exchange, accounting and other international jurisdiction risks; and catastrophic events (including dam failure causing inundation and significant reinstatement time).

Mercury. The Mercury Code can be found in the corporate governance section of our website.

HEALTH AND SAFETY IS A TEAM GAME. WE ALL NEED TO WORK TOGETHER TO MAKE SURE WE ALL GET HOME SAFE TO OUR FAMILY AND FRIENDS AT THE END OF EACH DAY. FRASER WHINERAY, CHIEF EXECUTIVE

The Mercury Code and the policy framework described below support our promises to each other and define our commitment to our customers, our people and community and our investors.

Directors are required, in the performance of their duties, to give proper attention to the matters before them and to act in the best interests of Mercury at all times.

Many of the key areas addressed in our policy framework are discussed in detail in our FY2017 annnual report. This signals the importance of these behaviours to our business. The following table shows where to find a discussion on our initiatives relating to our customers and our people and communities in our FY2017 annual report and how these areas are dealt with in our policy framework.

Customer

ACTING ETHICALLY AND RESPONSIBLY At Mercury, doing what’s right is something all our people strive to achieve. So our people know what the ‘right thing to do’ is, we have put in place the Mercury Code which, along with our Mercury Attitudes, Corporate Responsibility Policy and governance framework, sets out the standards of business culture and behaviour required to deliver our strategy and achieve our Purpose of inspiring New Zealanders to enjoy energy in more wonderful ways.

OUR PURPOSE IS TO INSPIRE NEW ZEALANDERS TO ENJOY ENERGY IN MORE WONDERFUL WAYS. Attitudes A Mercury employee is expected to apply three simple and powerful attitudes. These shape our decisions, our actions and our interactions with each other. Our Mercury attitudes align our direction to achieve our Purpose: • Commit and Own it; • Share and Connect; and • Be Curious and Original.

The Mercury Code and our Policy Framework In April 2017, the Board adopted the Mercury Code (replacing our Code of Ethics) which underpins everything we do. It requires all Mercury people, including directors and employees, to act honestly and in accordance with the highest standards of integrity and fairness at all times, and to strive to foster those standards within

Mercury NZ Limited 2017 Corporate Governance Statement

People and communities

Area of focus

Where to find out more

Area of focus

Where to find out more

Energy Freedom

Page 4

Stronger Together

Pages 50-55

Keeping our customers safe and connected

Pages 28-29

Diversity and Inclusion

Pages 34-35, The Mercury Code, our diversity and inclusion policy, and our Corporate Responsibility Policy

Enhanced Natural Resources

Pages 40-47

Wellbeing, including Health and Safety

Page 36-37

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In addition, the following areas are of fundamental importance to Mercury to ensure good governance and responsible business practices are followed:

Our Governance and Responsible Business Practices

DIVERSITY AND INCLUSION Having a team of individuals with different backgrounds, views, experience and capability working together leads to better business performance. The value we place on diversity and inclusion is explained in detail at page 34 of the FY2017 annual report.

Matter

Initiative

Conflicts

Conflicts of interest must be avoided, except with the prior consent of Mercury. Mercury people are encouraged to discuss possible conflicts with their manager. Mercury takes practical, preventative action wherever possible, for example by substituting project managers in circumstances of possible conflict with contractors and suppliers.

Our commitment to diversity and inclusion starts with our Diversity and Inclusion Policy and framework. Our Policy is available in the corporate governance section of our website.

All potential conflicts of interest are declared prior to appointment and at each Board meeting, including in relation to specific agenda items if applicable.

• 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 • leadership behaviours that reflect our belief in the value of diversity and inclusion • 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.

Bribery

The acceptance of bribes, including gifts or personal benefits of material value which could reasonably be perceived as influencing decisions, is prohibited under the Mercury Code. Under Mercury’s Delegations Policy, donations to political parties are prohibited.

Use of Mercury The Mercury Code places restrictions on the use of Assets corporate information, assets and property. All persons

covered by the Mercury Code are encouraged to report any breach or suspected breach of the Code.

Whistleblowing We provide a framework for the protection of employees

wishing to disclose serious wrongdoing. This is described in Mercury’s Employee Rights under the Protected Disclosures Act 2000 statement, which was recently reinforced to employees in August 2017. The framework is overseen by the RAAC. Mercury did not receive any reports of serious wrongdoing during the reporting period.

Employees are also encouraged to voice with their manager, the HR team, the General Counsel, other managers or directors on any concern over ethical or irresponsible behaviour, even if not reaching the threshold of serious wrongdoing.

Trading In Company Securities

Mercury’s Trading in Company Securities Policy sets out the rules and restrictions relating to trading in Mercury securities, including the prohibition on insider trading.

The Policy is closely monitored by the Company Secretary and is overseen by the RAAC. The Chief Executive and EMT members are prohibited, by the Trading in Company Securities Policy, from entering into transactions in associated products which limit the economic risk of participating in unvested entitlements under Mercury’s Long Term Incentive Plans.

Market Disclosures

Our Market Disclosure Policy ensures we maintain a fully informed market through communication with the markets, investors and stakeholders and by giving them equal and timely access to material information.

Corporate Responsibility

Our Corporate Responsibility Policy sets out the core principles and values that promote ethical and responsible decision making. Under the Policy, we commit to: being responsible; sustainable development; respecting the environment; customer experience; community and stakeholders; employment experience; and procurement and supply chain engagement.

Mercury NZ Limited 2017 Corporate Governance Statement

Mercury’s progressive approach to diversity focuses on gender, age, ethnicity, inclusion and flexibility. Activity is aligned to the following principles:

As noted on page 34, our progress against diversity and inclusion goals is measured against measurable objectives set by the Board.

These measurable 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.

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Our performance against measurable objectives set by the Board for FY2017 is set out below: Area of focus

Objective

Gender

Improve representation at senior leadership levels

Target

Actual 2017

2020

2017

Employees

37%

38% Employees

41%

Leaders

28%

33% Leaders

30%

EMT

28%

33% EMT

22%

Board

33%

33% Board

29%

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

Age

Work towards an age profile for our team that is suitable for our business taking into account the population that we work in

Benchmark against the national median age of the labour force in the New Zealand National Labour Force Projections

Ethnicity

Work towards aligning the ethnicity of our team with the population and communities that we work in

Ethnicity Benchmark against National Statistics (Census data) that show the ethnicity of the population and communities that NZ European (352) we work in Maori (34)

NZ Population 2013 Census

44%

69%

4%

13%

Pacific (64)

8%

7%

Asian (122)

16%

9%

7%

n/a

Other European (57)

Ensure that our leadership reflects the diversity of our teams

Mercury 2017 Ethnicity*

Other (69)

9%

2%

Not selected

12%

n/a

Mercury 2017 Ethnicity*

Mercury People Leaders by Ethnicity

44%

62%

Maori (34)

4%

3%

Pacific (64)

8%

3%

Asian (122)

16%

8%

Other European (57)

7%

11%

Other (69)

9%

6%

Not selected

12%

7%

Ethnicity Targeting ethnicity distribution of our Leader population equal to the ethnicity distribution of the total company

NZ European (352)

Inclusion

Targeting better performance than the Ensure that our team are supported to do their best work Average Large Organisation score for and they engage fully as part of this question of 72% our team

In response to our 2017 Employee Engagement Survey, 80% of employees confirm that they are treated fairly, regardless of age, ethnicity, gender or physical capabilities, compared to 2016 All NZ Organisations Benchmark of 77% and 2016 NZ Large Organisations Benchmark of 72%

Flexibility

Facilitate flexible workplace arrangements to enable employees to balance responsibilities appropriately

Targeting better performance than the Average Large Organisation score for this question of 80%

In response to our 2017 Employee Engagement Survey, 87% of employees confirm that they have the freedom and flexibility to do their job effectively, compared to 2016 All NZ Organisations Benchmark of 84% and 2016 NZ Large Organisations Benchmark of 80%

* Mercury 2017 Ethnicity data based on responses to Mercury’s 2017 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 2016 this was 22% or two out of nine). The proportion of women on the Board at balance date was 29% or two out of seven, including the Chair (as at 30 June 2016 this was 25% or two out of eight).

Based on the above, the Board believes that for this reporting period Mercury has made good progress towards achieving its diversity and inclusiveness objectives and against its Diversity Policy generally.

Mercury NZ Limited 2017 Corporate Governance Statement

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Other Information This Corporate Governance Statement was approved by the Board of Mercury NZ Limited on 21 August 2017.

The information contained in this Corporate Governance Statement is current as at that date. Some information in the Corporate Governance Statement is expressed to be current at another date, for example the FY2017 balance date of 30 June 2017.

This Corporate Governance Statement can be found in the corporate governance section of our website at www.mercury.co.nz, along with other information on our corporate governance framework, our Board, our Executive Management Team and our key policies.

This Corporate Governance Statement is signed on behalf of the Board by:

Joan Withers, Chair

Keith Smith, Director

Mercury NZ Limited ARBN 162804668

Mercury NZ Limited 2017 Corporate Governance Statement