20170822-Mercury-annual-results-analyst-briefing-transcript

Mercury NZ Limited Annual Results 22 August 2017 Start of Transcript Fraser Whineray: Kia ora koutou. My name is Fraser Whineray, the Chief Executive of Mercury. Welcome to the Mercury annual results briefing for the year ended 30 June 2017. This briefing is for investors and analysts, including non-institutional investors and we're delighted to have a couple of you on the call today as well. I'm joined here by William Meek, our Chief Financial Officer, who will be familiar to you and strongly supported by Tim Thompson who is the Head of Treasury and Investor Relations.

The format is per previous years. We'll go through the slide deck highlights which have been posted on the NZX this morning and we'll have some follow up Q&A after that and there's some specific questions which I'm sure you can all follow from our meeting organisers. Thanks to them. So we'll just flick through some of these slides. We'll cover off some highlights. It will take about 20 or so minutes.

[Slide] three, after the disclaimer. This page here which is our direction, headed with our mission, Energy Freedom, this was in last year's annual report and it's also repeated in this year's annual report. This is the hardest part of a rebrand to determine, before you get into designing neat logos and things, because this has to connect employees and customers and communities and consequently deliver performance for our owners.

Whilst mentioning the annual report, in which you'll see this picture, there is a huge lift in that for integrated reporting and GRI standards. If that matters to you those aspects of the ESG, this report that we've done this year should tick the boxes and please let us know what you think in respect of that framework.

Lastly on this picture and it's not accidental, I'll just emphasise it. The customer and the country on the left hand side are the pieces that come first and then we work all the way back to the energy from the natural resources, as opposed to thinking about this from the electron forward which would be more traditional infrastructure thinking.

In terms of slide 4, Mercury's Competitive Advantage, this is a very similar or same slide to what we've had in previous investor decks. In a nutshell it is high cashflow, renewable complementary fuel systems, the location of those close to population, rain-fed hydro and their flexibility come together to make a very strong portfolio of sales and generation. We are very focused in our customer-led innovation not just on what is technically possible but is commercially probable. As you will see later on many of the things we've commercialised aren't touching 500 or 1000 customers, they're touching north of 100,000 DOCUMENT TITLE

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Mercury NZ Limited Annual Results 22 August 2017 customers and that's when you can get some pretty meaningful results as we've seen.

William will elaborate on this year for our front end mass market part of the business.

We are of course focused on the ultra-long term which is the last part of the Mercury Competitive Advantage. We have many long term arrangements, 38 years with the Waikato Catchment Ecological Enhancement Trust in terms of a commitment that started in the early 2000s. An 82 year partnership with the Tauhara North No2 Trust with respect to the Rotokawa geothermal field. These are the timeframes over which we do consider our commercial, our people, our customer and our community engagement.

Now not shown there is human capital and I just want to emphasise the Company is really lifting its game in that regard in terms of our team performance and there's much more to go there and we're really excited about that.

The next slide which is the picture of the people on the bikes. This is a snapshot from the second story in our e-bike campaign and it's had some great feedback via social media.

It's only recently launched. If you want to see more of it you can look at the, or join, the Ride Wonderful Facebook page if you're into electric bikes and also we've got a Twitter handle #ridewonderful as well. This really - the second one is about a movement being created. E-bike sales are up from our data that we can glean, more than 100% in New Zealand.

Talking to the 2017 highlights here. We did relaunch our brand on 29 July and it feels like it was much longer than just over a year ago. We have achieved record customer satisfaction, record employee engagement and a record financial performance this year and so we are delighted with those three things and they are covered off in particular squares, well two of those are covered off in particular squares on the page.

This is our ninth consecutive year of ordinary dividend growth and we have also added on a $0.05 per share fully-imputed special dividend which reflects the gains in EBITDAF which we've had heavily backed by strong hydro generation and also the liquidation of some surplus carbon credits following the mothballing of the Southdown Power Station in 2015.

Some of the challenges this year related to that strong hydrology with the three cyclones likely within a month or maybe slightly longer than a month, Debbie, Donna and Cook.

That is a serious challenge for us to manage with the Waikato Regional Council as flood manager. We did so and that produced an extra 724 gigawatt hours of hydro production above average, but it also meant that we were very strongly engaged with ensuring the

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Mercury NZ Limited Annual Results 22 August 2017 community impacts of that natural event were minimised and we're delighted to say that they were.

In terms of industry supply and demand, the bottom box in the middle there which is a critical construct for the overall sector outlook, we think that's in a much better position, though we are sort of seeing some struggle with regards to the ASX futures prices and swap rates there. William will elaborate on that in terms of what our thesis is on the market and where it's heading.

We've got three strategic drivers on the Our Direction slide, slide 3. So I'm on slide 7 now.

Those three strategic angles, the first of which is on slide 7, are to deliver customer advocacy, leverage our core strength and deliver sustainable growth. On customer advocacy there are three things. Inspiring our customers, making it easier for our customers and rewarding our customers. They are our three promises. You can read all of those but like I mentioned earlier on the rewarding our customers, all of those things we were talking about rewarding our customers, they are six figures. They're north of 100,000. There are smaller ones as well but we are really hitting major impacts which the customers want and enjoy and are certainly voting with their feet.

For Starship I just want to emphasis this started 18 years ago. It's now past $10 million cumulatively. It is donated by more than 25,000 of our own customers and it's probably New Zealand's longest and largest crowd funding campaign and started before the word crowd funding was probably even invented. That's very important. It's very important for inspiring our customers.

On making it easier for our customers, that doesn't happen by accident. We have the only one in the sector of an NZQA accredited contact centre. We've had 39 people graduate from that. I've been delighted to be the one, like the Chancellor of a University, handing out the graduation certificates. That is a nine month program and you can really see the impact on that on the tone of voice and the engagement we're having with our consumers.

Indeed that was reflected in an article in the newspaper on Sunday.

With rewards, well I've already covered that off, but we do view innovation through the customer's eyes. There's a lot of stuff which is technically possible. We're a small subscale market in New Zealand, quite advanced as far as electricity markets and customer delivery is concerned, but we've got to remember that if you can only amortise investments over a few customers you have to pick your innovations pretty carefully. So we focus on what's very customer led and what they want and try to introduce new DOCUMENT TITLE

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Mercury NZ Limited Annual Results 22 August 2017 technologies and approaches to that which we know will actually be something customers desire and satisfy those three promises.

In terms of leveraging core strength, the second pillar, having made very good strides in alignment and prioritisation resources, where do we spend the next dollar, where do we spend our next hour? One of the key things in leveraging our core strengths in the top left there is about engaged teams. It's about our people and it's about how they relate to team performance. One of the programs there in the top left was called the Step Up Management Fundamentals Training Program. Every people manager including the executive did this Management Fundamentals. Let's go back to the basics, get a common language in terms of how we're going to engage together and that has been phenomenal in terms of getting teams to work better together and management standards.

We have had strong project execution. Not all of it is perfect but it's a real lift and you can see by the amount of CapEx we spent this year we had a lot of activity on and most of it has gone very well. International geothermal development exited. We got out of Chile at about two minutes to midnight and that's a key part of what that bullet point is about.

That resulted in some impairments and William will be able to talk to those. Most of those impairments with respect to Chile were already signalled previously.

Then taking opportunities, we sold some carbon at good prices and as I said that translated into a material proportion of our special dividend. Again a range of things on that page for leveraging our core strength. In terms of delivering sustainable growth, the traction in the EV market is really starting to kick in though of course 4000 EVs only consumes so much electricity. It's not very much at the moment but it is starting to grow strongly. The 4000 target, which the government set at the end of this year, was achieved in July and it is making strong growth.

There's also some other comments in the election cycle of further commitments to growing electric vehicle fleets. We've tried to stimulate that. We've got New Zealand's electric highway which you can get access to that by downloading the free PlugShare app and we'd recommend that you do that and you can see just how many and what variety of charging stations there are out there to deal with everyone's range anxiety.

We are doing a lot in core business growth. When you've got OPEX of $214 million, which is the fourth year in a row it's been held flat nominal and we're repurposing within that to get more customer centric. There is still more opportunities for growth in adding up those very modest pieces that we do work on every day. So we'll explore and judicially DOCUMENT TITLE

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Mercury NZ Limited Annual Results 22 August 2017 implement those throughout the year backed by better team engagement which I talked about earlier. We've talked about continuing to look at commercialising things in the small scale market but through a customer led innovation approach.

In terms of our core business we do have wind options in Turitea and Puketoi in the Manawatu which we think are the best placed wind options in New Zealand given the location and also wind intensity. They've also got a fully accessed transmission corridor to hook those fields up to the national grid.

There's a range of other opportunities on there. Growth is still the key focus but one of the key things underpinning growth is of course of the supply demand balance and that flowing through into commercial industrial yields and William will spend some time talking about those dynamics.

In terms of wellbeing and this slide focuses predominantly on safety but we put that under the banner of wellbeing. This has been a slightly frustrating year. There have been a number of low-severity incidents which has pushed TRIFR the wrong way. The number of moderate-severity incidents has reduced and we had one stair fall in an office location in Greenlane which caused a high-severity incident. We're pleased that that person is fully recovered but it just goes to show it doesn't necessarily have to be on a generation site for some serious harm to occur.

TRIFR, which is total recordable incident frequency rate, that is not a good precursor to serious harm or worse. So we see it in the last bullet point there, our focus on resources is on low probability high consequence events and that's why we're heavily putting our mental investment and some financial investment into process safety to keep our focus on those larger events not happening.

In terms of financial performance, high rainfall plus carbon sales underpin most of those step-ups year-on-year, and we've already talked to those. We said we've also had high stay-in-business reinvestment CapEx, though that has come in under guidance - original guidance, and there's been a lot of activity in that regard, across geothermal, hydro and also in technology. We have our progressive dividend came in on guidance at $0.146 per share. That was up on $0.143, and that is the ninth year of dividend growth - ordinary dividend growth in a row. We've talked about the fully imputed special that we're paying out as well, so you can see a lift there.

In terms of FY18 guidance, this is coming in at $500 million. The caveats on that should be reasonably obvious to everybody, and they consist of what we put in there last year.

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Mercury NZ Limited Annual Results 22 August 2017 That $500 million is based off 4150 gigawatt hours of hydro, that is 150 gigawatt hours above the long-run average of 4000. That's driven by a strong July, plus there's been some fairly inclement weather through August which has increased the amount in storage.

Operating expenditure we're predicting as flat relative to FY17, and that is the fifth consecutive year of flat operating expenditure, and it's certainly well down on its peak in 2012.

Ordinary dividend guidance we're pushing to $0.15, which is more than 2% up on FY17's ordinary dividend. Stay-in-business CapEx is elevated at $115 million as we continue to do reinvestment in renewables, particularly in hydro. A significant amount of activity at both Whakamaru and Aratiatia this year, lifting the performance of those stations. A spare turbine steam path rotor at Kawerau that reduces outage durations, and we're also completing two significant ICT projects related to Metrix and SAP, and the Cloud and the like.

We had changes to the guidance methodology, I think just over a year ago. We get good feedback on those. They seem to be working well. We provide quarterly updates to our full year midpoint hydro forecast, which removes some guess work from the sector. It's not prediction of the future, but it certainly standardises people's views. Whilst we don't provide monthly detail retrospectively, like some of our competitors, we provide - we prefer to provide a forward on view on real value drivers, which we do.

Guidance is $500 million EBIT there, $0.15 a share on the ordinary dividend, $115 million on CapEx, and all of - and that will be - that $0.15 per share ordinary dividend will be the tenth year of growth in ordinary dividend.

So, with that I'll hand over to William to talk through market dynamics and financials, before I come back and wrap up.

William Meek: Thank you Fraser. Certainly a warm welcome to all our shareholders and analysts on the phones, and our webcast today. We're now on slide 13. You can see a great aerial shot of - well you can't see it on there - Whakamaru. Anyway, I'll move forward.

As Fraser said, I'll talk to the market dynamics and the more balanced supply and demand.

So, Mercury, for a number of years, has been forecasting the tighter demand and supply balance, largely driven by thermal rationalisation a year or so ago, tightening that supply curve and then feeding through into the market. Our operating thesis would be that DOCUMENT TITLE

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Mercury NZ Limited Annual Results 22 August 2017 wholesale price volatility and levels would increase as that supply demand balance tightened.

This is the first year, FY16, particularly at the tail end, so from May and June, we did see inflows much lower in the South Island, albeit being quite wet in the North Island. So, we saw a tightening in the market there with prices elevating through June, and also July and into the FY18 financial year. So, the next few slides, we're really going to do a deep dive into how those dynamics are playing out across our sector.

The dynamic is important. Wholesale prices clearly influence futures pricing for electricity.

That's demonstrated most acutely through the Electricity Futures contracts traded on the Australian Stock Exchange. Those are - represent effectively a good proxy for what commercial industrial contracts for two or three years will be sold for by most retailers in New Zealand. They also form an important back-stop in terms of forming the cost of electricity for independent retailers and for retailers generally across New Zealand. So, the flow-on effects of wholesale prices through contract pricing is very, very important.

Moving to slide 15. On the demand - so just some key demand drivers here. We've really got a tug-of-war happening with some offsetting trends vying for ascendency in the market. Net demand actually reduced slightly in 2017, relative to 2018. We can see some quite different drivers in the histogram on the right of this slide.

We saw strong urban growth largely driven by high population increases. We saw growth across the rural sector. That excludes dairy processing and irrigation, which you can see fell off. Dairy and Tiwai - so Tiwai, we'll get to Tiwai shortly. Relatively flat year-on-year, and what we do see is though that steady decline in industrial load. That's been a long-run impact for the sector, and that's really the - that's really the big negative pull in the sector for demand growth.

Irrigation, somewhat seasonal. So, we did have a relatively wet start in the winter of last year, so again irrigation load down slightly on the year before. It was drier coming into the winter of 2017, not a lot of dairy cows milking at that time of year, so not really driving the irrigation load at all.

So now slide 16, in terms of some of that dynamic. So, you can see here the effect of industrial load and its decay across a number of years this decade. It's been a mediumterm trend. It's been happening since the mid-2000s. It's largely a function of multinationals owning aged plant in New Zealand and making decisions not to reinvest here, and typically move production to other countries, versus investing here in New DOCUMENT TITLE

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Mercury NZ Limited Annual Results 22 August 2017 Zealand. So, you can see closures there across steel, in mining, and then the Holcim Cement on the West Coast also shutting down. So, again all those pulling demand lower.

The New Zealand Aluminium Smelter at Tiwai, certainly it's their largest demand risk. That is 13% of total demand. Their exit in the short term appears unlikely. Certainly Aluminium prices are well above the historic lows we saw back in 2015, so quite elevated. They're definitely in the black. There is a large remediation provision if they did decide to close, and certainly versus what's happening in Australia around the LNG prices bleeding into their power market, the South Australian power failures and the government intervention there, the uncertainty around their renewable electricity investment, all driving quite significant uncertainty and significant price increases into the Aussie sector. That too is affecting smelting in the Australian market.

Certainly looking here in New Zealand, where we've got reliable energy, more than 80% renewable, we're certainly in a very strong position relative to certainly our neighbours across the Tasman.

We did emphasise that the eventual closure of the Tiwai Point aluminium smelter, though unlikely in the short term, is a key overhang for the industry. Certainly when this happens, Mercury believes we are in the relatively best-placed position out of the large electricity generators in New Zealand, due to our stations’ location and renewable fuel mix.

So, moving to slide 17. We can see a reasonably complex chart here. This chart comes from Transpower, the system operator. It actually shows the hydro risk curves across time, based on normal supply into the market. They make an estimate of demand, they make estimates about what thermal capacity - how much energy that can supply to the market over time, and therefore graphs the storage level required to ensure a level of risk, in terms of running out energy, through the year.

When we can - when we look at this chart, we go back into the earlier parts of this decade, you can see those curves are closer to the X axis. They're lower. So, that really indicates an over-supply scenario in the market. That's largely a consequence of a number of wind and geothermal developments coming into the market, creating a whole lot of headroom in gas and coal plants, and so - and therefore an over-supply. Demand over that period too falling slightly, so again creating that over-supply.

If we move forward to 2016, you see significant step-up in those curves, those dotted black lines and the red line reflecting thermal closures. So us, Mercury, mothballing the Southdown plant in Auckland, and Contact Energy making the decision to close the DOCUMENT TITLE

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Mercury NZ Limited Annual Results 22 August 2017 Otahuhu Power Station. That took thermal capacity out of the market, therefore more storage was required to ensure a security standard for the market.

The red line represents the 10% curve, so a 10% chance of running out of energy, and that would be where effectively retail compensation mechanisms would knock in for the market.

When we look at the storage line in blue, we can see quite an acute decline from the start and storage levels from the start of 2017, and really falling right down into late July, where it reaches the peak.

The interesting thing about these curves is just - is the shape of them. So, you get to about the end of June or July, and you really go over the top of the curve. That's the maximum risk you have, in terms of holding security the highest. Then you run down into the spring month. As you approach summer, demand falls off and also you typically get the seasonal snow melt in the South Island lakes, which then replenish those, and you see their inflows step up.

The curves show that the chance of running out of power in the late-spring, early-summer months is next to zero. There's no chance given the way the inflow conditions work across the country.

What we saw, we saw - we're inside those minimum risk curves, 1%, 2% risk around the June, July period of this calendar year.

Moving to the next slide. Again we've got a number of charts, the first showing the scatter plot, which is really plotting the monthly prices going over a whole lot of years, going all the way back to 1999, and then fitting a curve to it. We can see quite a strong fit there between the difference between the average storage level at that time of the year, versus the actual storage level. What we can see is when storage is below average, prices tend to rise. When storage is above average, prices tend to be relatively flat and more muted. It's quite a strong fit.

We can see June there in the black dot, that's the second-highest black dot. That's around about $105. We saw July peak up to about $130. So again, strong correlation with that fitted curve, really reflecting that as the South Island dries, electricity prices move higher.

On the right-hand side, we can see the cumulative inflow chart. This is really just showing how much water didn't turn up because of rainfall over the past year. Certainly, you're seeing quite a significant difference between South Island fortunes and the North Island.

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Mercury NZ Limited Annual Results 22 August 2017 Certainly in the North Island, it was very wet from about March, April, of the financial year.

You saw a significant lift, and you saw cumulative inflows actually across the North Island catchments reaching about 1500 gigawatt hours above average levels.

In the South Island we almost got - we go the opposite. We saw inflow deficits accumulate to around 2000 gigawatt hours by July, August of this year. Then we've seen an uptick with some unseasonal rainfall.

Very different fortunes between the North Island and the South Island, again reinforcing Mercury being in the North Island. It's not a snow catchment, it's a rainfall catchment, and as we've all noticed it's been fairly wet, pretty uncomfortable up there if you're a farmer.

There's really quite different outcomes between the North and the South Island, which is certainly a strength in terms of our fuel position relative to the South Island hydro operators.

Now we're saying, there's the wholesale price environment. We saw some elevated prices.

Prices getting into the hundreds of dollars in June and July. What did that do to the futures and contracts prices?

So, this is where the thesis really didn't happen. The fear didn't happen enough, so I've called this the ‘Shining’ curve, and the shining didn't happen for long enough. So, Jack Nicholson's ‘here's Johnny’, he came, but he went away too quickly. So, we really didn't see a lot of movement in the futures prices.

So, we saw futures prices, you can see them in this first line chart. They started to rise from January. A bit faster in the South Island, really reflecting of starting to dry up. So, effectively the basis between North and South Island closed. You saw prices tick up by about $5 a megawatt hour.

We got to the top of that risk curve, and then the risk effectively running out of water went away, and then effectively prices came back again. So, you've seen prices fall back, and you can look at the histogram on the right and you can really see that that actually the two-year futures price is now lower than it was at the start of this calendar year. Next year is about flat and, we're looking at calendar 2020, is up slightly.

So, not a lot of movement in futures prices. What that means is there's not going to be a lot of movement in commercial and industrial pricing, and the cogs for retail have actually haven't really moved as a consequence of those slightly elevated wholesale prices.

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Mercury NZ Limited Annual Results 22 August 2017 So, it was a little bit of a party, but we didn't really get out of our pyjamas and it was all over again. So, slightly disappointing in that regard.

Now we'll move to the customer end of the market. Fraser has touched on, and our annual report does too, around our focus on customer loyalty. So, the next few slides are really just going to dive into what does that mean in terms of outcomes.

Again, we're got some familiar charts here which really just shows national switching data.

This is data from the EA. So, it's not massaged in any way. We can see our switching in 2017 relative to what it was in 2016.

So, the white line on the bottom of the first histogram, you can see show is effectively representing what our losses were. So, when you're below the X axis that's effectively you've switched the customer out, versus the orange bars being the customer switched in and you acquire the customer.

So, what we can see is that effectively our 16,000-customer gain is largely driven by better retention in the market. So, again their loyalty and focussed on loyalty that connects meaningfully to a lot of our customers is where we're aiming. So, Airpoints.

117,000 customers on Airpoints. Free power days, more than 150,000. Gym, 140,000.

You know simple bills, all our customers, our call centre training, all those things really feeding in to saying we're focussed on making a difference to a meaningful set of our customers rather than focussed on things that are going to touch 1000 or 2000 of our customers. So, loyalty means you don't churn customers as much as that focus on acquisition.

The second chart looks at trader switchers. A trader switch is where a customer doesn't move house, but switches a retailer. Again, it's a good rule measure of how is your business performing. What we can see here again is that Mercury, you know significant declines in the switching away from Mercury versus the market.

So, again testament and proof of the loyalty program is working in the New Zealand electricity sector.

Now, on slide 21. This breaks the customer loyalty down a little bit deeper. It focusses on both trader switches across the country by retailer, and it does it in Auckland too. So, we'll start with Auckland. This is the Auckland area here is actually the old Vector incumbency, so essentially from the CBD out to Avondale, and then out to Papakura. So,

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Mercury NZ Limited Annual Results 22 August 2017 it doesn't include the North Shore. That's where effectively Mercury's retail business started from.

We're still about 50% of the market in the Vector incumbency. So, where we can see here, it's actually relatively consistent around the 5% mark in terms of trader churn. We can see some of our competitors, and how they are trending.

Some of them are actually doing fairly well. You're seeing some quite big churns. You can see some others actually doing less well with their trader churns actually starting to kick up.

We move to our national picture, this is right across New Zealand from particularly Invercargill right up to the top of Northland. We get quite a big difference here. Where Mercury back in early 2016 actually was one of the worst performers. So, our focus on loyalty has seen effectively those trade churns dip significantly. Now they're actually the same as they are in Auckland. So, we've had an equalisation.

So, it's not an Auckland sense of brand. It's actually a national brand where we're getting the same results both in our historic incumbency in Auckland, but also outside across New Zealand.

Again, we're seeing some of the breakdowns there across our competitors. We've split Trustpower out across at Tauranga because it's got the Tauranga Energy Consumer Trust arrangements there. So, you can see some differences there between how they perform in Tauranga. So, a very strong performance versus how they're performing across the wider New Zealand.

Again, just on demonstration of how the loyalty construct actually feeding to and to better market and commercial outcomes for Mercury.

Just touching now on some of the financials. So, we're on slide 23. Again, just reiterating Fraser's earlier comments. Record operating earnings at $523 million. Free cashflow at almost $260 million as a consequence of those higher operating earnings, and lower cash taxes. NPAT at $184. $0.196 fully imputed dividend including our specials and a gearing ratio of 1.8 times, which I will get to shortly.

So, this is just a bridge to say how do we get from the $493 million we printed last year, to the $523 million this year? Again, just working it through, a lot more generation quantity. So, record generation levels, but largely offset by lower wholesale prices at $6 million. The energy cost, clearly wholesale prices $5 or $6 down on where they were the DOCUMENT TITLE

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Mercury NZ Limited Annual Results 22 August 2017 year before. So, you're seeing a saving in terms of buying energy for your customers. So, a saving of almost $30 million.

Similarly, in terms of contracts for difference or electricity swaps, lower prices will typically give you a better outcome on a short book, and then customer sales revenue is broadly unchanged from where they were a year ago.

Other revenue was down $8 million. So, last year we had quite a lot of land sales worth $13 million, and carbon credits again on sale was just $5 million, so that gives us an $8 million negative variance there.

OPEX flat on the year before. There are no accounting policy changes adopted that affect the accounting between those years. We did restate OPEX for both this and the prior year to reflect the direct costs of effectively buying solar panels and pulling those into direct costs. So, that relates to our solar business.

Our LWAP/GWAP, it's an important ratio in terms of what it's costing you to actually buy power for your customers, giving the nodal pricing system we run in New Zealand, and what we're earning for the sale from our generating plant which are all in that central North Island area.

So, a higher ratio is actually a worse outcome. So, you can see our GWAP ratio is on the right-hand chart, on the break line you can see those lifting. Sorry, the orange bars lifting.

For example, the closure of the two gas plants in Auckland has increased the location factor between the central and North Island. So, the Waikato River, and Auckland, by about 1% last year. So, we've seen--it's cost a little bit more to buy energy for our customers in Auckland, so that's a slight detriment.

In the chart to the left, you can see our peer GWAP versus Mercury's. Again, that does reflect the location of our assets, and also the dominant northward power flow we typically see in New Zealand. Later in the year you can see that black line actually slightly above the orange. That's a consequence of the dry in the South Island starting to switch power flows back into the South Island, so South Island prices being higher than North, it will disadvantage your GWAP relative to normal.

Fraser's touched on carbon, so we won't labour this. But certainly as CFO, I'm very keen for our business to execute the buy low, sell high strategy. So, this reflects the carbon curve for the market really lifting from where it was in 2015 around the $6 mark. Actually prior to this it got even lower, and we've been sitting around the $18, $19 range since July 2016.

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Mercury NZ Limited Annual Results 22 August 2017 So, we took the opportunity to sell 1.4 million credits for total proceeds of $26 million, of which we recognise the $5 million gain. Really the mothballing of Southdown halved our carbon emissions. We still have some carbon emissions from our geothermal plants. So, as a consequence we have surplus carbon, and effectively realised that gain which then enabled us to pay some of our special dividend this year.

We did have impairments with $18 million. A number of those were signalled in terms of foreign currency translation losses. So, the exit and sale of our interest in Tiwai at the end of June, the last financial year enabled us to effectively recognise those. So, those are recognised in the impairment line and make up the bulk of that $18 million impairment which has gone cash.

Reinvesting in plant and systems. So, this is a big journey. We are in a major lifecycle refurbishment phase on our hydro machines, and we did have a significant drilling program during FY17. So, two wells at Kawerau, and two at Rotokawa.

So, Whakamaru, very pleased to talk about the unit three coming online. So, six megawatts more capacity, 5% more efficient at peak flows. So, a great achievement there. So, that's one of four units which will be progressively replaced over the next three years. We'll be done and dusted there with significant birthday for the Whakamaru station. So, it's great to see a business case where refurbishment is essentially paying for itself through increased output and higher peaking capacity.

So, it does relieve a bottleneck in the middle of the river. So, that's very handy when you get high flow conditions like we have seen through FY17.

So, as Fraser mentioned, our guidance for CapEx is $115 million. It is elevated above our $80m. Key drivers there is the spare steam turbine rotor at Kawerau. So, that's got a major outage schedule in FY18. The rotor makes sense. We're talking about a piece of gear that weighs about 70 tonnes. If it needs to be balanced in terms of that major refurbishment, it would have to leave the country and go to Japan. That would mean that station is on a six-month outage.

So, the business interruption on that would be tens of millions of dollars. So, it makes sense to have that rotor on hand so we can actually almost half the outage time, switch in the new rotor, and get a bit of an efficiency gain because it's brand new. So, the economics of having this spare versus the risks of not having it, and having to enact emergency repairs for not expecting to have to do that. But nevertheless, significant risk reduction in terms of having that rotor on hand.

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Mercury NZ Limited Annual Results 22 August 2017 We've touched on the Waikato Hydro system. The refurbishments there, and again investing in IT systems. Clearly those are important for both our Metrix and customer businesses. Robotics, automation are important so certainly the half hourly reconciled data at Metrix and the SAP technology platform upgrade, putting that into the Cloud, latest OS, latest database, certainly laying the grounds for effectively streamlined processes and more choice for our customers.

Just turning to the dead side of the box. We can see some maturity profiles here for our debt facilities. Our net debt was sitting at $1.038 billion for the year. So, down slightly on the prior year. We've seen no maturities in 2018. So, that's good for the treasury guys and they can have a bit of a rest, but it will be a busy year in 2019 with over $300 million of debt being refinanced.

Actually, the capital bond also has a nomination period. So, this is the capital bond, the $300 million setting out at 2045 is also has a repricing having been in the market for five years in 2019.

We did refinance $50 million with new bank debts, with $120 million in wholesale bonds rolling out. Total bank facilities undrawn at $350 million. We have a CP program in place, $75 million. Again, average debt maturity pretty long at almost nine years.

Just noting in terms of interest costs, we do have a significant stepdown in funding costs come FY19 on the back of those higher priced electricity swaps rolling out. So a net benefit after tax of around $20 million.

Final slide for me, slide 29, again capital structure, strong S&P rating at BBB+. Certainly that's a key metric for the Firm. Capital management continuously reviewed. Again happy to declare fully imputed $0.05 special dividend. So gearing at 1.8 times debt to EBITDAF. You can see net debt at just over $1 billion. That ratio of 1.8 does take into account the equity credit and the capital bond so that's worth $150 million which is how you get the 1.8 on the $523 million EBITDAF for 2017.

So I'll hand back to Fraser.

Fraser Whineray: Thanks very much William. Great coverage of those topics. In terms of slide 30, we just talked through what our approach is on capital management. It should be a slide familiar to those that have looked at our investment decks before.

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Mercury NZ Limited Annual Results 22 August 2017 the moment or slightly over the good end of that, and we do get a one notch upgrade as a result of our 51% ownership by the Crown which takes us to BBB+, which was reaffirmed

by S&P last December.

So, yes, and William's talked about why we're at 1.8. It's partly because the EBITDAF's elevated, partly because of the equity credit and our current debt position.

So we look at our ordinary dividends; this year's $0.15 guidance is the 10th year of ordinary dividend growth and it's fully imputed. Therefore the '17 one is fully imputed and an expectation that FY18 would be the same. So we pay - we've got our dividend policy stated there of 70% to 85% of free cash flow through time, and then we look at investments and growth.

So we did - you look at a number of investments but FY17 didn't have significant growth CapEx. We did quite a lot of reinvestment capital expenditure and so we've landed with a $0.05 per share special dividend which also will be paid on 29 September to distribute the excess free cash flow. So that takes us to about 100% of free cash flow plus the proceeds of the carbon credit sales. So that's just to be clear on how - share our logic of how we think about that in terms of capital management.

On the last slide before we go to questions, FY17 is the ninth consecutive year of ordinary dividend growth which we've mentioned. We've covered off the ordinary which was in line with guidance. We've covered off the special and you can also see other dividends and buybacks in the history there.

You can also see probably from 2008 or slightly beforehand through to 2013 the lower dividend profile there but there's $1.4 billion of geothermal domestic development, which is where a substantial proportion of that cash flow went.

So just to conclude, I think the outtakes here are very strong customer satisfaction, employee engagement and financial performance; all achieving records for Mercury in the 2017 financial year. A successful rebrand linking employees, customers, our communities and hopefully then writing a platform for long term results for our owners, and a strong long term history in this Company.

Our guidance this year, as we've said, will be the 10th year of ordinary dividend growth, the fifth year of flat OpEx and repurposing how we're allocating our human and financial capital into new areas of the business.

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Mercury NZ Limited Annual Results 22 August 2017 It's certainly mine and William's pleasure to present these results on behalf of the very dedicated team at Mercury. Nga mihi nui ki a koutou katoa. Happy to take questions.

Thank you.

Operator: Thank you. If you wish to ask a question please press star then one on your telephone and wait for your name to be announced. If you wish to cancel your request please press star then two. If you're on a speakerphone please pick up the handset to ask your question.

Your first question comes from Grant Swanepoel from Craigs Investment Partners. Please go ahead.

Grant Swanepoel: (Craigs Investment Partners, Analyst) Morning Mercury team. First question is on pricing. Can you give some colour on the channel net pricing for FY17 that you achieved in mass market and C&I, and what your outlook assumes for this pricing over FY18, particularly I'd like you to comment on do you think that the supply and demand is much tighter than it's been in years, and we should have seen ASX hedge curve lifting more than it has? But isn't the industry players - aren't they responsible for that ASX hedge pricing so who's breaking ranks and dropping price on that front?

Then my second area of questioning is around your comments on your wind opportunities.

When do you think the next build will be in the market and should it be wind or should it just be a peak or something else?

Then finally, on OpEx you're talking about flat OpEx in your guidance. You had $4 million of OpEx due to Rotokawa in your base period. So if you're looking for flat are you assuming inflationary increases on OpEx to overcome that Rotokawa or is there some other expense we're not getting an indication on? Thank you.

William Meek: That's about 50 questions Grant.

Fraser Whineray: William will cover off the FY17 comment and I'll cover off the rest unless William's got anything to add.

William Meek: Yes, just on price in terms of breakdown, I mean operating stats give the pricing for FPVV and the CFD settlement at the back of the deck. So you saw the - in terms of all-in pricing down around $1 to $113.50. Again, a lot of that's simply driven by an increase in commercial volume so you can see the C&I volumes are up. They're typically trading at a lower energy price giving the lower cost structure for C&I customers so that's largely a mix.

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Mercury NZ Limited Annual Results 22 August 2017 We did have a price rise last year of 1.8% so that's going through. We're not going to comment on price rises in the current year. We know that line companies typically push their lines charges up in April. Historically Mercury has adjusted its prices within that timeframe to pass through those costs, but that'll be a decision we'll make later this year.

Around ASX pricing, I think you'll be well aware, we saw quite a run down in South Island storage. We got inside the 1% or 2% sort of security risk curves. That still means you've got 98% chance you're not going to run out of power so we’re certainly still a fair way away from the 10% risk curve. We're not going to - I'm not going to comment on whether we've got efficient or inefficient management of water across the country. Everyone makes their decisions themselves.

That being said I think what we have seen is with the reductions in capacity combined with the inter-generator trading, so there's quite a lot of swaptions and inter-contracting between thermal and hydro generators. You've probably got a bigger dead band than we had five or six years ago around that so I just don't think we got, you know, the timing of the drought was a bit later. I think if that had started sort of late summer I think you could have got quite a big difference in terms of the price outcomes. I just don't think you quite got into the ‘here's Johnny’ territory around wholesale pricing. Once you get through that late June period and you get over the top of that risk curve, it's a pretty sharp decline as you can see in that chart with those risk curves falling away.

That's what we got to and what we've seen is prices pretty much now have returned back to fairly stable levels. Maybe slightly elevated from what we've seen in the last few years but we've still got a fairly hefty storage deficit across the country relative to mean at this time. I think you've just got a slightly bigger dead band. The fundamentals for the main growth I think are there and so as we move forward pretty happy about that supply demand tightening through time.

Fraser Whineray: In terms of the next power station, when and what type? Look, it's a very dynamic market. I think it's good that you're noting Grant that it's not all homogeneous. Whether it's controlled or uncontrolled, renewable or non-renewable, has energy storage associated with it or not, they're important questions. But the market is incredibly dynamic and there are long lead times for building things. The main thing is to have options in place that puts you in a good position to take advantage of that volatility because volatility drives value options.

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Mercury NZ Limited Annual Results 22 August 2017 I don't know and I certainly wouldn't venture to comment, but it does just depend on market conditions and the outlook. You're certainly familiar with some of the swift changes that can happen. 2015 was a very dynamic year when it came to thermal plant and we've always got the Tiwai changes and then consequent impacts on inter island power flows and pricing et cetera and long energy short capacity, South Island, North Island respectively. That could produce even though it doesn't feel like it's going to happen anywhere in the near term. So I wouldn't venture to comment but there's a lot of considerations and we certainly want to make sure that we've made our position clear on Turitea and Puketoi in terms of the quality of those wind resources.

In terms of flat OPEX. Yes, you correctly note that that included Rotokawa which came in slightly better than budget due to a very solid repair off the back of a four new wells campaign, reflecting good execution and a warm rig and a warm crew and some good execution down the hole in terms of alloy sleeving, RK29, which is one of the biggest wells in terms of megawatt producers in the world.

But within that we also do other repurposing. We continue to invest in the front end of the business, we're continuing to invest in our people and chip away at procurement and supply costs. So yes, there are always inflationary pressures per unit coming into the business. It's a matter of us being more efficient with those but we think the - we always try and repurpose within a flat nominal and the guidance we've offered in FY18 suggests that's the fifth year in which we've managed to do that by changing the emphasis of the OPEX in the business. I think whether it's $1 million here or $2 million there Grant I couldn't comment on that level of detail, but I just gave the generic point as to five years of flat nominal I think is in a pretty good position given the dynamics in the market.

Grant Swanepoel: (Craigs Investment Partners, Analyst): Thanks‌ Fraser Whineray: I think that answers what William said were 50 questions.

Grant Swanepoel: (Craigs Investment Partners, Analyst) Can I just clarify? You've indicated that you haven't made a decision on pricing yet, so can I assume that that $500 million assumes no pricing changes from the current level of retail and C&I segments?

Thanks.

Fraser Whineray: No. Well that's right, we wouldn't indicate that in advance. Last year 1.8% on average and the three years before that were none for the Mercury brand. If there was a price change in the $500 million or not it wouldn't show up because it depends on the timing on which that is assumed to happen or not. So if you get to price change, DOCUMENT TITLE

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Mercury NZ Limited Annual Results 22 August 2017 for example 1 April which is when distributors change their prices, the network companies change their prices, it has very little impact on FY18 earnings anyway. So I'd probably say that $500 million, given the other overs and unders, it makes no comment on whether there's a price rise or not because it doesn't really influence the number this year.

Grant Swanepoel: (Craigs Investment Partners, Analyst) Thanks.

Operator: Thank you. Once again, if you wish to ask a question, please press star then one on your telephone and wait for your name to be announced. Your next question comes from Andrew Harvey-Green from Forsyth Barr. Please go ahead.

Andrew Harvey-Green: (Forsyth Barr, Analyst) Oh, hi Fraser and William. A couple of questions from me. I guess the first question I had was just around CapEx. This is the second year in a row we've got elevated CapEx. Are you able to give us a - are we looking to go back to $80 million or thereabouts for FY19 and beyond or is there potential for a little bit of elevated CapEx still to go through.

William Meek: So I mean if you look at it, in 2016 the CapEx actually was quite a lot lower.

We were 20 under our sort of medium term guidance. This year came in 10 lower than our original guidance of 125. When you put 17 and 16 together normally you're at 85 so you're not particularly far. 115 is definitely elevated. We didn't - we weren't at the time we hadn't worked through the benefits of the spare rotor, so I mean you're talking about $10 million just on that one piece of gear at Kawerau. That's a - we've got a spare rotor now at Nga Awa Purua and at Kawerau, so those are the two big steam turbine geothermal plants.

The refurbishment, yeah, we've got elevated - we've got two big projects. Aratiatia is kicking up. Whakamaru is running so you've got a bit of a bubble there so you're probably up about 10 in regard to that. Then ICT, you do have an investment. We're pretty pleased in terms of the - you can see in the notes disclosure around investments and software that intangibles, I mean you're not talking about a technology cost anything like one of our competitors who's also on SAP, so now we've got a far more formal approach and innovative approach around upgrading that SAP technology to enable sort of more choice and innovation with our customer offerings.

Fraser Whineray: I'll just add to that. Look, we don't offer FY19 and beyond guidance but if we think about that in the terms of near term free cashflow which may flow through into capital management, yeah, there could be some years where it's above and below. I mean all of those investments, such as the Whakamaru ones which result in better peaking DOCUMENT TITLE

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Mercury NZ Limited Annual Results 22 August 2017 capacity and better efficiency and better value, that's an investment in renewable generation and therefore cashflow, they're positive.

The main thing is though is just to know at these rates we're in a significant reinvestment program on the hydro scheme and have been for some years and will be for some years.

But if you're looking at a valuation perspective and thinking about terminal period cashflows then you've got to just recognise that we are in a significant hydro refurbishment phase at the moment.

I know we haven't specifically answered your question. We are trying to target back to that 80 level but if we find good opportunities given the cash position we're in at the moment which we think can add value and line up with other forms of capital, such as human capital and contractor availability et cetera, then we need to take the opportunities while we can. Even if we have a financial capital later on some of the other things might not fall into alignment such as rig availability. So just I'd differentiate between near term free cashflows and terminal value capital assumptions.

Andrew Harvey-Green: (Forsyth Barr, Analyst) Yep, yep, okay. Thanks. The second question was just around - in fact just following on from Grant's just around your wind opportunities. I guess we've heard some of your competitors talk about new wind opportunities for themselves being sort of $70 and trying to target below $70 a megawatt.

How does that stack up relative to your wind opportunity?

Fraser Whineray: Well as you know when you're doing the DCF some of those fine-tuned assumptions can make a big difference to what a current LRMC number looks like. In the case of wind it does heavily depend on capital costs upfront and the foreign exchange rate to buy the offshore gear which is the predominant part of a wind farm to bring it into New Zealand. But perhaps the most critical part of that is the price path assumption. I could actually make a wind farm stack up for $30 if I assumed the great inflation re-price path.

So I think it's very hard to make comparisons and I certainly wouldn't want to offer what our assumptions are on LRMC to the market which as I said is dynamic for the first two reasons.

I just want to make clear that is a seriously good wind site in the world actually, not just New Zealand and it does have all of the transmission corridors lined up which a lot of other wind farms - you can put up a wind farm, you just can't get the electricity out so it's probably not much point. So we think ours would compare very favourably if anyone did an independent analysis on them but of course every company has to make their own DOCUMENT TITLE

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Mercury NZ Limited Annual Results 22 August 2017 minds as to when they want to deploy capital into that and the dynamic impacts on the market.

Andrew Harvey-Green: (Forsyth Barr, Analyst) Yeah. Okay and a last question from me was just around the dividends and the fact - your fully-imputed special dividend. I note that on slide 31 you talk about prepaying some tax there. Historically you've always fully imputed both specials and ordinary dividends. Going forward does that sort of - if you wanted to keep that fully-imputed policy are you perhaps limiting the amount of specials you're going to be able to pay in FY18 which is I guess‌ William Meek: So Andrew, no, we have paid specials that were unimputed or partially imputed. Our dividend policy for ordinaries is to impute where we’re able to based on our projections of tax paid. We expect that to continue but yeah, we had an opportunity here.

We had prepaid tax previously and given the strong earnings and tax profile that prepayment has ended so you're putting yourself back into a prepayment position.

Certainly from a shareholder perspective it's much more tax effective for the Company to do that. I mean we're talking about $300,000 funding between March and July so it's not particularly large and that prepayment pays down relatively rapidly over time. I don't think it is a point of difference in that Mercury at this point in time is I think the only generator in our sector that is prepaying their fully - imputing their ordinary dividend.

Andrew Harvey-Green: (Forsyth Barr, Analyst) Yep. Okay, that's all from me. Thank you.

Operator: Thank you. Your next question comes from Stephen Hudson from the Macquarie Group. Please go ahead.

Fraser Whineray: Morning Stephen.

William Meek: Morning Steve.

Stephen Hudson: (Macquarie Group, Analyst) Good afternoon guys. Just a couple of quick ones just on the guidance. Will, I just wondered if you can clarify what your assumptions are with regards to carbon sales going forward. I know you've got some more on the books at cost so presumably there's some more potential there. You've often given us, well historically you've given us sort of some guidance on LWAP/GWAP. I know that's moving around a bit but I wondered if we can assume sort of a long term average of 1.03, 1.04. The 1.8% price increase that you put through, I'm assuming that's energy only but if you could clarify that, that would be great.

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Mercury NZ Limited Annual Results 22 August 2017 Then, a specific one for you Fraser, it looks like you've added a - or, you've had added into your STI KPIs, a long-term platform objective. I just wondered if you can flesh out what that is.

Fraser Whineray: Yes, so on our GWAP, it is - you can see - we've got a chart there, it is volatile, how it moves. Certainly that we had a very strong start to the year in July. Prices were the highest they've been for a number of years, that month. Again, the buy low, sell high strategy was strongly in play. We had a day there we generated over 20 gigawatt hours in the day, so that record generation from the Waikato system. So, 39 machines online at full capacity. That was - it was - the guys were pretty happy about all that in terms of maintenance scheduling and having the capacity available.

We don't give guidance on our GWAP, but you do have some effects with high South Island prices obviously. We're a - we've got a fluctuating position there. There are times you're a net retailer in the South Island. There are other times you're a net generator. It is an important driver, when you're sitting there selling 6000, 7000 gigawatt hours of electricity, and 1% movement in that ratio does feed through to your P&L reasonably aggressively.

The energy-only - yes, so the 1.8% was effectively an energy yield change for the company.

Yes, it was energy-only. Long-term platform, yes well it's - I'm pleased you've read so far into the annual reports, that's fantastic. Chocolate fish there. Yes, the long-term platform at 10%, is - it recognises that actually - we've been around for about 90 years in various forms, and I say to the team, we've got another century to run. To be a sustainable business, you need all forms of capital that are outlined in the Group KPIs, which are 80% flow-on to mine and 50% flow-on to other people on KPIs in the Company, which is around - putting safety to one side, financial, brand, culture and community.

This is to just try and capture a bit more of the long-term things, which envelope community, brand, and regulatory environment, because the regulatory environment is a critical value-driver for the Company, and indeed the sector. Examples of long-term regulatory outcomes, it's thinking about things like how do we get the country into a mindset of a renewable energy target, rather than a renewable electricity target, which I comment specifically on in the Chief Executive update in the annual report, because I think the renewable electricity one is redundant. It should be focused on energy, and that then links into electric vehicles.

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Mercury NZ Limited Annual Results 22 August 2017 On the brand, the cement is still relatively wet there, because we're only a year into this rebrand and what it means. It's going well, but we've got to continue to make sure we invest in making sure - and that being relevant to our employee attractiveness and our customer attractiveness, and of course our owners.

Then for partnerships, we think about - we're obsessed about water and hydrology, and everything in the Waikato. We can't shift our dams to some other location. They are embedded there through millions of tonnes of concrete. In fact, they're a permanent feature of the environment, because every other bit of capital down there that's near the river has been built assuming that the Waikato River is relatively benign.

So, what do we do to help unlock value for the Waikato and all our stakeholders there, around water, whether it's allocation, quality, et cetera. Indeed, we're part of a significant grouping going to look at other water catchments shortly as we seek to unlock what a 50year view on the Waikato might look like.

It's about just giving recognition that there is and needs to be resource allocation, where's the next dollar and the next hour going to go on long-term constructs, which don't necessarily get captured by an LTI scheme or a short-term incentive scheme.

Stephen Hudson: (Macquarie Group, Analyst) Thanks guys.

Operator: Thank you. Your next question comes from Adrian Atkins from the Morningstar.

Please go ahead.

Adrian Atkins: (Morningstar, Analyst) Hi guys. Just on the wind options you were talking about, I'm just looking at slide 17 and wondering what would we have to see in terms of those risk bands, before you would invest in more supply, or in terms of the futures prices?

William Meek: Yes, so again, as Fraser has already commented on, so the Turitea wind site is - it's in the middle of the Tararuas. It's surrounded by existing wind farms. It's clearly got a high-quality wind resource. It's competing, in terms of competitors' wind farms, against Tilts, Waverley Farm, Meridian's Hawkes Bay Wind Farm, potentially they're an essential North Island one. I don't think anyone's seriously contemplating building major capacity in the South Island, given the potential constraint risk with the Tiwai exit sometime in the next, let's say, decade and a half. That's the dynamic.

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Mercury NZ Limited Annual Results 22 August 2017 cost dynamics. The supply, demand balances is improving. I don't think a staged development - we've seen a number of wind farms where the developments are staged through time. That's something we're contemplating, because you don't want to shock the market by suddenly standing up 200MW of wind.

Wind is strongly correlated across the country, being very conscious of what that means in terms of the GWAP you might earn. So, there's a lot of wind farms out there that aren't earning the time-weighted price. They're actually getting a discount to the base-low price.

Again, just working through some of those, those dynamics. Getting pricing in from the suppliers, and then you'll make a decision.

Certainly, the - but the key factor still is long-term price curve, what does that look like?

At the end of the day we can look at the futures contracts, and that goes out three or four years. Beyond that, effectively the firm needs to make a decision about how electricity prices are going to evolve through time. That's the number one call.

Certainly cost of capital at the moment is low. Interest rates still not far off record lows.

That's also a key driver in terms of some of these capital-intensive investments. We need to work that forward.

Tiwai's obviously in the mix. Obviously the exit of Tiwai, how the market responds. Again, I think we're strongly placed, but it's still a consideration when you're making an investment which his still going to be more for the $100 million.

Adrian Atkins: (Morningstar, Analyst) Okay, thanks.

Operator: Thank you. The next question comes from Nevill Gluyas from FNZC. Please go ahead.

Neville Galith: (SNZC, Analyst) Hi team. Just one question from me, SAP really. It sounds like you’ve got that pretty contained, you expect to complete it during FY18 and I think it was included in your CapEx. I suppose really the question, it potentially inspires terror, is the risk that it interrupts your retail business. I mean it sounds like this is something you’ve got well in hand. What is the risk do you think that something unexpected could turn up here and it might sort of impair your ability to serve customers properly?

Fraser Whineray: Well, yeah, you're spot on Neville. Our promises to customers don’t include poor customer service through having an IT fail. But you see the risk management around that isn't just about when you're upgrading - we're already on SAP, let's get that clear.

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Mercury NZ Limited Annual Results 22 August 2017 We’re already on it, this is a matter of upgrading the operating system and database and sticking in the Cloud and things like that. So we have very solid partnerships and project management around that. But we also have to manage that risk day to day from a cyber perspective as well, back-up tapes, everything on the database et cetera.

So where we've certainly got - we're certainly focused on it but we're not expecting by any stretch that what we need to do will result in us becoming extra special friends with Utility Disputes Limited.

Neville Galith: (SNZC, Analyst) Excellent. Another question on the CapEx, just to flog the dead horse a little further. You’ve got quite - the extensive program, I think it's in the past, and yesterday you might have talked about a $500 million - or a substantial sum - of upgrades over quite a long timeframe. Should we - in my own thinking I am assuming that's on top of in sort of an amortised slice on top of the $80 million. The way you think about the $80 million, does that include a large chunk of those upgrades as well?

Fraser Whineray: It includes a large - it includes those, a large chunk of those upgrades.

That was my comment earlier to I think Andrew was circa we're expecting to be spending that sort of money for the next at least five years. But differentiate that between expected surplus cash flows over the next five years versus what goes into the terminal value calculation because we're not going to be doing hydro upgrades forever. Because once we've given everything a birthday we're done.

So already we've done Arapuni's generators. Ohakuri, top and bottom and ancillary services. Whakamaru we're into, Aratiatia we're about to start. Then there's a lot of other smaller activities around governors and fire protection systems, circuit breakers, the whole lot, which we keep rolling across the plant.

So no, we include that in our thinking about the $80 million largely. But there are some phasing things and you don’t - as I said, you don’t go to Mitre 10 for this stuff. You've got to actually work in with global contractors as well, and there's only about three or four places in the world - just as if you were buying a jet engine for an Air New Zealand jet.

There's only three or four places in the world you can go and get the stuff, and you’ve got to make sure that they care about coming down to little old New Zealand to bother. So sometimes you’ve got to fit in with manufacturing slots.

Neville Galith: (SNZC, Analyst) That's great, thank you. I think what you're telling me basically is, if I were modelling out beyond five years explicitly before getting to the terminal value calculation I'd be using a number less than $80 million in the CapEx line.

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Mercury NZ Limited Annual Results 22 August 2017 Fraser Whineray: Well, I don’t have the numbers right in front of me as to exactly that phasing, and it is dynamic depending on those circumstances that I talked about earlier.

But yeah, I would expect to see it start to come off from the $80 million number on a normalised basis without the hydro refurbishment in there.

Neville Galith: (SNZC, Analyst) Great, thank you.

Operator: Thank you. There are no further questions at this time. I will now hand back for closing remarks.

Fraser Whineray: Well, thank you very much for taking the time for William and I to address you today. Again, very delighted to present the FY17 results on behalf of everyone here at Mercury, and looking forward to catching up with several of you over the next few days to answer any more detailed questions.

If you've got any particular enquiry please also direct it at Tim Thompson who's the Head of Treasury and Investor Relations.

We wish you all a good day, kia ora tÄ tou.

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