Corporate Governance Statement 2019 by Mercury

CORPORATE GOVERNANCE STATEMENT 2019

CORPORATE GOVERNANCE FRAMEWORK Contribution to Governance - John Hawkins Mercury wishes to take this opportunity to acknowledge the contribution of John Hawkins to New Zealand’s corporate governance fabric. John retired as Chair of the New Zealand Shareholders’ Association Inc. in April 2019 after 14 years with the organisation. John leaves a fine legacy for the more than 1,500 members of the association and for corporate governance generally, most notably for establishing under his guidance the Framework for Reporting of CEO Remuneration and, most recently, standing proxies. We believe high standards of corporate governance with robust frameworks, policies and processes are fundamental to Mercury’s foundational pillars and our purpose of inspiring New Zealanders to enjoy energy in more wonderful ways. Our commitment to the highest standards of corporate governance underpins our maintaining strong relationships with our stakeholders, the long-term sustainability of our business and assets and our ability to create the long term-value.

Recommendation 3.6 (Takeover Offer Protocols) and Recommendation 8.5 (Notice of Meeting) and are explained later in this Corporate Governance Statement. We have also reviewed guidelines from the International Corporate Governance Network (ICGN) Global Governance Principles, the International Finance Corporation (IFC) Global Corporate Governance Forum, and the OECD and we consider our practices and procedures substantially reflect these guidelines.

At the heart of our Corporate Governance framework is our commitment to protect and enhance the interests of our owners through the highest standards of governance, business behaviour and transparency. The framework ensures Board accountability to our owners and provides for an appropriate delegation of responsibilities to our Chief Executive and our Executive Management Team (EMT).

BlackRock, as a fiduciary to its clients, undertakes investment stewardship activities which are focused on protecting and enhancing the economic value of the companies in which it invests on behalf of those clients. As part of those activities, BlackRock has established the BlackRock Corporate Governance Guidelines and Engagement Principles, which sets out its view of best-practice corporate governance. We have considered our corporate governance framework and performance against the BlackRock Corporate Governance Guidelines and Engagement Principles published early in 2019 and consider that we are generally consistent with those guidelines.

The Board regularly reviews Mercury’s governance structures against national and international guidelines to ensure we remain current with developments in corporate governance. Accordingly, the Board adopts 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 opted for early adoption of the latest ASX Corporate Governance Principles and Recommendations (fourth edition) (ASX Principles). We complied with the ASX Principles and we complied substantially with the NZX Corporate Governance Code. The only exceptions to our compliance with the NZX Corporate Governance Code relate to: Recommendation 3.3 (Remuneration Committee),

Information on how Mercury remunerates fairly and responsibly is contained in the Director and Executive Employee Remuneration section of our FY2019 Annual Report and is also available in the Investor section of our website. Mercury’s Constitution, and relevant Charters and Policies are available in the Corporate Governance section of Mercury’s website (https://www. mercury.co.nz/About/Leadership-Governance/ Corporate-Governance).

Shareholders

MERCURY BOARD Risk Assurance & Audit Committee

People & Performance Committee

Chief Executive

Executive Management Team

MERCURY PEOPLE

Nominations Committee

CORPORATE GOVERNANCE STATEMENT 2019

ENGAGING WITH INVESTORS OUR INVESTOR RELATIONS PROGRAMME

ASMS AND WEBCASTS

We are committed to open and effective communication with our stakeholders and owners by providing comprehensive relevant information. Mercury takes the steps set out in our Stakeholder Communications Policy to achieve this.

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. Mercury’s seventh ASM since listing on the NZX Main Board and ASX will be held in Auckland on 27 September 2019. Mercury did not comply with Recommendation 8.5 of the NZX Corporate Governance Code (that shareholders should be notified of a shareholders’ meeting at least 28 days before the meeting) in relation to its 2018 ASM as a result of the time taken to consult with stakeholders on the subject matter of the Notice of Meeting. Mercury’s Notice of Meeting for its 2018 ASM was sent at least ten working days before the meeting as required under the Companies Act 1993 and in compliance with the timeframe set out in Mercury’s constitution.

Mercury communicates with its investors in various ways, including 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. 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 also run a programme to build understanding and appropriate measurement of Mercury’s performance among investors and research analysts. That programme aims to be responsive, clear, timely and accurate, and is designed to ensure appropriate access to management and 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.

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, and shareholder meeting materials. Mercury will continue to build environmental, social and governance (ESG) website content to meet the increasing demand for transparent disclosures of its performance across these areas and the management of long-term risks and opportunities. Shareholders can direct questions and comments to Mercury through the website or contact the Head of Treasury and Investor Relations.

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. Most of our shareholders receive information electronically. However, we understand that this does not suit everyone and we also provide hard copy reports to shareholders who wish to receive them.

CORPORATE GOVERNANCE STATEMENT 2019

MERCURY’S BOARD RESPONSIBILITIES

CHAIR

The Board is responsible for Mercury’s strategic direction and operation and has delegated certain responsibilities to the Chief Executive and the EMT. Our Board is committed to create long-term value for investors and to safeguard the highest standards of governance, corporate behaviour and accountability.

As at 30 June 2019, Joan Withers was the Chair of Mercury’s Board and was first appointed in 2009. Mrs Withers is an independent, nonexecutive director. Mrs Withers’ overarching responsibilities are to provide leadership to the Board and to ensure the Board is well informed and effective. From the close of the Annual Shareholders’ Meeting on 27 September 2019, Mrs Withers will be succeeded by Prue Flacks who has been nominated by the Board and whose appointment has been approved by the Minister of Finance. More information about the role of the Chair is contained in the Board Charter.

The Board’s responsibilities are set out in the Board Charter, and include: • establishing clear strategic goals with appropriate supporting business plans and resources; • 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, financial performance and the integrity of reporting; • setting delegated authority levels for the Chief Executive and EMT; • 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; and • ensuring Mercury adheres to high standards of corporate behaviour, responsibility and ethics. The Board reviews Mercury’s Board Charter at least every two years. The Chief Executive and the EMT have appropriate employment agreements setting out their roles and conditions of employment. 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. Chief Executive and EMT performance are reviewed regularly against objectives and measures set by the Board in annual performance scorecards. The Chief Executive’s and each EMT member’s performance were evaluated during the reporting period on this basis. Further details are contained in the Director and Executive Employee Remuneration section of Mercury’s FY2019 Annual Report.

BOARD COMPOSITION AND DIRECTOR APPOINTMENT As at the date of this Corporate Governance Statement, the Board comprises eight directors: Joan Withers, Prue Flacks, Andy Lark, James Miller, Keith Smith, Scott St John, Patrick Strange and Mike Taitoko. A brief biography of each director is available in the Leadership section of Mercury’s website.

SELECTION We undertake appropriate checks before appointing a director or putting forward any candidate for election as a director in accordance with our governance processes.

NOMINATION 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 NZX Listing Rules. The Board is responsible for identifying and appointing directors to the Board through the Nominations Committee (see the Board Committees section later in this Corporate Governance Statement). 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 1993.

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 Inclusion and Diversity section later in this Corporate Governance Statement.

CORPORATE GOVERNANCE STATEMENT 2019

MERCURY’S BOARD (CONTINUED)

SKILLS MATRIX The Nominations Committee has developed a Board matrix setting out the mix of skills and diversity of the Board. The matrix is used to evaluate whether the collective skills and experience of the directors meet Mercury’s current and future requirements. If the Board determines that new or additional skills are required, training is completed or a formal recruitment process is undertaken. The Board, through the Nominations Committee, strives to ensure that Mercury has the right mix of skills and experience for Mercury to achieve

its strategic aim of inspiring New Zealanders to enjoy energy in more wonderful ways. The Board also focuses on ensuring its culture takes advantage of, and benefits from, its diversity of skills, backgrounds and experiences. Our philosophy is that the Board as a collective group should exceed the individual contributions of its members. The Board fosters this philosophy with 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 that director’s attributed skills and experience.

The table below highlights those skills which the Board considers are required for governance. This aligns with Mercury’s commitments to its foundational pillars and strategy for creating long term value for its shareholders. SKILL ATTRIBUTE

Joan Withers

Customer Retail, marketing and brand experience Senior experience in retail, marketing and brand development as we seek to positively differentiate our offering Partnerships 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 Government relationships An understanding of the functioning of government and experience developing and maintaining constructive relationships and interactions with government and regulators Shareholder/investment community relationships Experience in and understanding of shareholder and investment community concerns and developing constructive relationships Iwi relationships/connectivity An understanding and appreciation of Māori culture, the ability to build and foster deep trusting relationships with iwi and a deep connection with iwi concerns and aspirations Kaitiakitanga Electricity industry operational experience Senior executive experience within the electricity industry, together with a deep understanding of operational excellence Natural resource management (including climate change) Familiarity with issues associated with natural resources including climate change and living our value of kaitiakitanga Primary Skills

Secondary Skills

Andy Lark

James Mike Patrick Prue Miller Taitoko Strange Flacks

Keith Smith

Scott St John

CORPORATE GOVERNANCE STATEMENT 2019

MERCURYâ&#x20AC;&#x2122;S BOARD (CONTINUED)

SKILLS MATRIX SKILL ATTRIBUTE

Joan Withers

People Human resources, health and safety experience Familiarity with people and performance issues to provide an environment for personal and business growth and an appropriate understanding of health and safety and wellness concerns Large company leadership experience Sustainable success in business at a senior executive level Digitisation/technology A detailed understanding of ICT and disruptive technologies and their potential impact to provide our customers with choice and freedom Commercial Governance experience Commitment to the highest standards of governance and an ability to assess the effectiveness of senior management Australian energy market experience Familiarity with the Australian energy market and the opportunities and challenges of doing business in that market Finance/accounting/audit committee/risk management experience Senior executive or board experience in financial accounting and reporting, corporate finance and internal controls, and developing and overseeing an appropriate risk framework and culture Business strategy experience A track record of developing and implementing a successful and sustainable strategy Innovation and growth, entrepreneurship A track record of demonstrated entrepreneurship and/or demonstrated understanding and commitment to innovation and a clear record of achieving organisational growth Commodity or financial markets trading Experience and understanding of commodity and financial markets Primary Skills

Secondary Skills

Andy Lark

James Mike Patrick Prue Miller Taitoko Strange Flacks

Keith Smith

Scott St John

CORPORATE GOVERNANCE STATEMENT 2019

MERCURY’S BOARD (CONTINUED)

INDUCTION AND DEVELOPMENT

re-election that the Board considers may be useful to provide to shareholders.

All new directors participate in a comprehensive induction programme to familiarise them with Mercury’s business and the electricity industry.

Directors must retire every three years and, if desired, seek re-election.

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 of Mercury’s assets and operations and in particular with respect to health and safety and wellness matters. The Board runs a training programme drawing upon internal and external resources for general skills relevant to 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.

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

6+ YEARS

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.

3-6 YEARS

0-3 YEARS

Name

Originally Appointed

Last Reappointed/ Elected

Joan Withers (Chair)

1 August 2009

3 November 2016

Prue Flacks

1 May 2010

28 September 2018

Andrew Lark

10 July 2014

7 November 2017

James Miller

1 May 2012

3 November 2016

TENURE

Keith Smith

1 May 2009

28 September 2018

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

Scott St John

1 September 2017

7 November 2017

Patrick Strange

4 February 2014

7 November 2017

Mike Taitoko

28 August 2015

28 September 2018

BOARD CHARACTERISTICS MER CUSTO

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ER ND GE RSITY E DIV

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CORPORATE GOVERNANCE STATEMENT 2019

MERCURY’S BOARD (CONTINUED)

INDEPENDENCE AND CONFLICTS

ACCESS TO ADVICE AND COMPANY SECRETARY

All of Mercury’s 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 interest, 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 director has been employed or retained, within the last three years, to provide material professional services by Mercury. Within the last 12 months, no director was a partner, director, senior executive or material shareholder of a firm that provided material professional services to Mercury or any of its subsidiaries. No director has been, within the last three years, 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 receives performance-based remuneration from, or participates in, an employee incentive share scheme 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.

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. 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.

DIRECTORS’ MERCURY SHAREHOLDINGS The Board encourages the alignment of directors’ interests with those of shareholders and with Mercury’s strategic aims. To improve this alignment, the Board encourages directors to accumulate meaningful shareholdings in Mercury.

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 June 2018. The review found Mercury’s Board to be in the top tier, holding many strong attributes including highly relevant board capability and governance processes. Some opportunities were identified for Board focus to maintain and extend that performance. As at 30 June 2019, a Board performance review was underway with the assistance of an external facilitator, and the results will be reported to the Board in September 2019. The Board also completed a comprehensive analysis of the skills of the Board during the reporting period.

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.

FUTURE DIRECTORS PROGRAMME The Board has been a long-standing supporter of the Institute of Directors’ Future Directors Programme and has to-date offered three appointees valuable experience sitting at the board table for 12 or more months. The programme provides future directors exposure to reallife governance in action and also valuable mentorship with the aim of increasing the pool of board-ready new directors in New Zealand. Our third and current future director, Anna Lissaman, will conclude her 18 month tenure on 31 December 2019. Anna brings strong operational and strategic experience in human resources to the Board. Anna participates in discussions in all Board meetings and is invited to all Committee meetings although does not participate in decision making.

CORPORATE GOVERNANCE STATEMENT 2019

BOARD COMMITTEES 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. People & Performance Committee

Risk Assurance & Audit Committee

Nominations Committee

Roles and Responsibilities

Assisting the Board to fulfil its people and performance responsibilities relating to: • Mercury’s people and performance strategy and plan; • the remuneration and performance of the Chief Executive and EMT; and • people and performance policies and practices. Monitoring and providing guidance to management on people and performance-related matters.

Overseeing, reviewing and advising the Board on Mercury’s: • risk management policy and processes; • (which includes oversight of Health & Safety assurance and climate related risks and opportunities); • internal control mechanisms and internal and external audit functions; • compliance policies and processes; and • financial information prepared by management for publication. 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.

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: • 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; • recommending individuals qualified to become Board members and reviewing nominations from shareholders; • recommending to the Board an annual evaluation process of the Board and its committees; • recommending to the Board any proposal relating to director remuneration to be put to shareholders; • ensuring that succession plans are in place for the continued effective composition and expertise of the Board; and • recommending induction and continuing education for directors.

Membership

At least three directors, the majority of whom must be independent. Members as at 30 June 2019: • Prue Flacks (Chair) • Andrew Lark • Mike Taitoko • Scott St John. Joan Withers is also a member by virtue of her position as Board Chair.

At least three directors, each of whom must be independent non-executives. Members as at 30 June 2019: • Keith Smith (Chair) • James Miller • Patrick Strange. Joan Withers is also a member by virtue of her position as Board Chair. The Board Chair is not eligible to Chair the Committee. At least one member must have an accounting or financial background as that term is described in the NZX Listing Rules.

At least three directors. Members as at 30 June 2019: • Joan Withers (Chair) • Prue Flacks • James Miller.

Meetings

At least three times annually. During the reporting period, the Committee met four times.

At least annually. During the reporting period, the Committee met two times.

CORPORATE GOVERNANCE STATEMENT 2019

BOARD COMMITTEES (CONTINUED)

Mercury does not comply with Recommendation 3.3 of the NZX Corporate Governance Code because it does not have a separate Remuneration Committee. The functions that would ordinarily be allocated to the Remuneration Committee are shared between the People & Performance Committee in respect of the Chief Executive and the EMT, and the Nominations Committee in respect of the directors.

COMMITTEE CHARTERS

Mercury assesses on a regular basis whether additional standing or ad hoc committees are required. During the year ended 30 June 2019, the Board established three temporary committees for discrete projects. Additional temporary committees are established from time to time, including as required to provide governance oversight on short-term projects.

TAKEOVER OFFER PROTOCOLS

As at the date of this statement, Mercury has considered that no other standing committees are required.

ATTENDANCE The table below shows attendances at Board, committee and strategy meetings by directors during the year ended 30 June 2019. 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. Employees only attend Committee meetings by invitation.

Each standing 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 does not comply with Recommendation 3.6 of the NZX Corporate Governance Code because it 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 Mercuryâ&#x20AC;&#x2122;s ownership under the Public Finance Act 1989, no person other than the Crown may have a relevant interest in more than 10% of Mercuryâ&#x20AC;&#x2122;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.

Board

Risk Assurance & Audit Committee

People & Performance Committee

Nominations Committee

Number of Meetings

Joan Withers

Prue Flacks

Andrew Lark

James Miller

Mike Taitoko

Keith Smith

Patrick Strange

Scott St John

2 3

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

CORPORATE GOVERNANCE STATEMENT 2019

ASSURANCE AND MANAGING RISK AUDIT PLAN AND ROLE OF AUDITOR The Auditor-General is the independent auditor of Mercury and each of its subsidiaries (together, the ‘Group’), under the Public Audit Act 2001. The Auditor-General appointed Lloyd Bunyan of Ernst & Young to carry out the FY2019 audit on his behalf. The NZX Listing Rules require rotation of the key audit partner at least every five years. 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.

INTERNAL AUDIT AND RISK ASSURANCE 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 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. During FY2019, the focus of the RAAC continued to be on operational and reputational risks, which remain as trending risks for the Group.

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. Where Mercury provides a new and substantive investor or analyst presentation, it ensures the presentation materials are released to the NZX and ASX ahead of the presentation. The Market Disclosure Policy is designed to ensure this occurs in compliance with Mercury’s continuous disclosure obligations under the NZX Main Board 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, RAAC Chair, Chief Executive, Chief Financial Officer and 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. Disclosures relating to the annual and interim financial statements must be reviewed by the RAAC before being approved 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 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 FY2019 financial statements. We report on non-financial information in our Annual Report. Material environmental, social and governance matters are covered in the report and this Corporate Governance Statement. To provide this information in a format accessible to our stakeholders we use both the Global Reporting Initiative (GRI) standards and the International Integrated Reporting Council (IIRC) Integrated Reporting <IR> framework. We do not currently have a policy on assurance of non-financial data.

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.

CORPORATE GOVERNANCE STATEMENT 2019

ASSURANCE AND MANAGING RISK (CONTINUED)

KEY RISKS 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.

Safety Mercury undertakes activities that present the potential for significant safety risks including electrified assets, handling of iso-pentane, steam field operations, well drilling, operating large generation equipment, dam safety, power station construction and medically dependent customer management. A key risk for Mercury is that an incident occurs causing a fatality or serious injury to our staff, a contractor, a customer or the public. The risk management framework supports a comprehensive approach to risk, encompassing financial, strategic, environmental, operational, regulatory, reputational, social and governance risks. This includes assessing and managing climate related 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. Mercury must accept some risks 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 several 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 FY2019.

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, changes to consent conditions, or levies on the use of natural resources, 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.

Operational Fuel Security and Supply 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. 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, generation build or retirement, technological changes or new sources of energy, and regulatory changes.

CORPORATE GOVERNANCE STATEMENT 2019

ASSURANCE AND MANAGING RISK (CONTINUED)

Power Station Availability

Other

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:

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

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

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

Information security We depend on several 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 customers’ 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.

Financial Risks Insurance 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. Some catastrophic events are uninsurable, or Mercury has chosen not to insure against them, such as acts of terrorism. In the event of a severe catastrophic event, it is possible that the insurance portfolio will not provide sufficient cover, impacting future operational performance and the financial condition of Mercury. Mercury estimates that the maximum foreseeable loss to which the Group could potentially be exposed is approximately $9 billion with an assessed likelihood of occurrence of 1 in 100,000 years. Mercury reviews the level and nature of its insurance cover annually. Growth and Development Risks Growth and development projects are subject to risks that may affect expected financial returns or outcomes: • major generation development projects during construction give rise to risks including cost over-runs, commissioning delays, environmental impacts and employee/contractor safety; 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.

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.

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; and • 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-, mediumor 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).

CORPORATE GOVERNANCE STATEMENT 2019

ASSURANCE AND MANAGING RISK (CONTINUED)

CLIMATE CHANGE RISKS In addition to the material risks noted above, the following table provides a summary of how Mercury is managing climate-related risks1: Risk

Risk type

Physical

Acute Increased severity of extreme weather events, such as cyclones, hurricanes, or floods

Impacts and mitigation Acute physical risks, to generation facilities in particular, are considered as part of environmental risk management processes.

Chronic Longer-term shifts in climate patterns e.g. increase in mean temperature or sea level rise

The long-term physical impacts of climate change continue to be assessed, in particular: • the impacts that increased inflows and increasing intensity of storm events will have in hydro catchments; • the increase in average temperatures that could impact on geothermal generation facility output; and • the impacts that changes in drought periods, rainfall and temperatures will have on demand/supply profiles that could impact on portfolio management.

Transitional

Regulatory and legal Policy changes such as carbon-pricing mechanisms and litigation or legal challenges

Mercury is participating in the New Zealand Emissions Trading Scheme. New Zealand is currently looking at introducing a Zero-Carbon Act and is reviewing the Emissions Trading Scheme. Both could have impacts on Mercury’s approach to how it responds to climate change risks.

Technological Improvements or innovations that support the transition to a lower-carbon, energy efficient economic system

Mercury is continuing to invest in renewable generation of electricity. In addition, Mercury is investing in technological solutions and supports the electrification of transport for New Zealand.

Market Shifts in supply and demand for certain commodities, products, and services

Mercury is involved in the Emissions Trading Scheme and has long-term contracts for forestry units. Any changes to the carbon market conditions could pose a risk and are assessed on an ongoing basis.

Reputational Changing customer or community perceptions of our contribution to or detraction from the transition to a lowercarbon economy 1.

Based on the Recommendations of the Task Force on Climate-related Financial Disclosures.

Reputation is a key parameter in Mercury’s risk assessment framework and is always considered, including when looking at climate-related risks.

CORPORATE GOVERNANCE STATEMENT 2019

ACTING ETHICALLY AND RESPONSIBLY At Mercury, all our people strive to do what’s right. We have put in place the Mercury Code to ensure that our people know what the ‘right thing to do’ is. The Mercury Code documents the behaviours we require to embed and sustain our culture to successfully deliver our strategy and achieve our Purpose of inspiring New Zealanders to enjoy energy in more wonderful ways.

MERCURY ATTITUDE A Mercury employee is expected to apply the Mercury Attitude. This attitude shapes our decisions, our actions and our interactions with each other. • Commit and Own it • Share and Connect • Be Curious and Original Our Mercury Attitude aligns our direction to achieve our Purpose.

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 with integrity and fairness at all times, and to strive to foster those standards within Mercury. The Mercury Code can be found in the Corporate Governance section of our website. 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. We also want to ensure that we work with suppliers who share our commitment to acting ethically and doing the right thing. Our Supplier Guiding Principles describe the way we work with our suppliers and what we expect in return. Our Supplier Guiding Principles set out our commitments to treating people fairly, wellbeing, protecting our business and our reputation, protection of personal information and sustainability. Our Supplier Guiding Principles are available in the Corporate Governance section of our website. 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 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. All potential conflicts of interest are declared prior to appointment and at each Board meeting, including in relation to specific agenda items if applicable.

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 Assets The Mercury Code places restrictions on the use of 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 Whistleblowing Policy. 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 by directors and employees, 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.

CORPORATE GOVERNANCE STATEMENT 2019

ACTING ETHICALLY AND RESPONSIBLY (CONTINUED)

Market Disclosures

INCLUSION AND DIVERSITY

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.

Mercury embraces and celebrates diversity in all its forms. A key element of the Mercury Attitude is that we encourage our people to share and connect. We believe that the best way to create value in our business and deliver the best customer experience is through High Performance Teams. We aim to make Mercury a great and safe place to work, where our employees feel engaged and motivated to live up to their full potential, and also the full potential of their teams. Being part of a team that celebrates different backgrounds, views, experience and capability helps create an inclusive workplace where our people grow and thrive, leading to better business performance.

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.

Privacy We are committed to the safeguarding and proper use of personal information. We have a comprehensive Privacy Policy, which is reviewed every two years, and a robust privacy framework. Privacy is afforded significant consideration within Mercury and is managed in accordance with our risk management framework. Our General Counsel is Mercury’s Privacy Officer and is responsible for implementing our Privacy Policy, promoting awareness of privacy matters, monitoring matters on a day-to-day basis, and escalating matters as required to our Chief Executive, with notification to our Risk Management Committee. Privacy issues are reported to the Risk Management Committee on a quarterly basis. We also have an Enterprise Information Security Manager who is responsible for ensuring that appropriate systems and processes are in place for the storage and security of personal information.

Our commitment to inclusion and diversity starts with our Inclusion and Diversity Policy and framework. A copy of this policy is available in the Corporate Governance section of our website. Mercury’s approach to inclusion and diversity focuses on gender, age, ethnicity, sexual orientation, inclusion and flexibility. Activity is aligned to the following principles: • 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; • promoting leadership behaviours that reflect our belief in the value of inclusion and diversity; and • attracting and retaining a talented workforce through increasing the diversity of the candidate pool and maintaining a recruitment strategy that is attractive to all candidates. Our progress against inclusion and diversity goals is measured against objectives set by the Board. These 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.

CORPORATE GOVERNANCE STATEMENT 2019

ACTING ETHICALLY AND RESPONSIBLY (CONTINUED)

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

Objective

Target

Actual

Gender

Improve representation of women at senior leadership levels.

2020

2021

Employees

41%

43%

Leaders

33%

EMT

33%

Board

33%

2022

2018

2019

45% Employees

41%

34%

35% Leaders

30%

33%

33% EMT

22%

33%

33% Board

25%

Ensure that everyone is rewarded fairly Targeting between 97% and 103% ratio on for their work, regardless of gender. average over time.

Actual as at 30 June 2019 across all bands, excluding EMT = 93% – 101%.

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 Our average age across the workforce is of the labour force in the New Zealand National 42, which is consistent with the national Labour Force Projections. 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

2020

2021

2022 Ethnicity

Ensure that our leadership reflects the Māori Employees diversity of our teams. People Leader

6% 4%

6% 5%

Māori 7% Employees 6% People Leader

5.0% (39) 3.3% (5)

Pacific Employees People Leader

9% 4%

Pacific 10% Employees 5% People Leader

7.7% (60) 2.0% (3)

Asian Employees People Leader

22% 11%

Asian 23% Employees 13% People Leader

21.4% (166) 10.0% (15)

Increase representation of team member and people leader across targeted ethnic groups – Māori, Pacific and Asian. Benchmark against National Statistics (Census data) that show the ethnicity of the population and communities that we work in.

Mercury 2019 Ethnicity*

NZ Population 2013 Census 13%

* Employee data, as at 1 July 2019, from Mercury's payroll system provides the baseline benchmark of self-identified ethnicity.

Targets will be reviewed year-on-year, taking into consideration workforce impacts associated with digitalisation and automation and the available tertiary-qualified talent pool. Inclusion

Ensure that our team are supported ** Setting a new baseline in 2019 with to do their best work and they engage improvements monitored year-on-year. fully as part of our team. Targeting better performance than the external benchmark.

In response to our 2019 Employee Engagement Survey, 80% of employees confirmed that people from all backgrounds have equal opportunities to succeed at Mercury, compared with 2019 Global Inclusion Benchmark of 76%.

Flexibility

Facilitate flexible workplace ** Setting a new baseline in 2019 with arrangements to enable employees to improvements monitored year-on-year. balance responsibilities appropriately. Targeting better performance than the external benchmark.

In response to our 2019 Employee Engagement Survey, 74% of employees confirm that they are genuinely supported if they choose to make use of flexible working arrangements, compared with 2019 Oceania Large Organisations Benchmark of 70%.

* Mercury 2019 ethnicity data based on self-identified ethnicity responses captured in Mercury’s payroll system. ** In FY2019, Mercury changed to a different employee engagement survey provider from that used in FY2018.

At the 30 June 2019, the proportion of women on the EMT (including the Chief Executive) was 22%, or two out of nine (as at 30 June 2018 this was 22% or two out of nine). The proportion of women on the Board at balance date was 25%, or two out of eight, including the Chair (as at 30 June 2018 this was 25%, or two out of eight). Our Future Director is a woman.

The Board believes that for this reporting period Mercury has made progress towards achieving our inclusiveness and diversity objectives and against our Inclusion and Diversity Policy generally. However, the Board notes that continued focus is required in order for us to achieve our 2020 gender diversity targets.

CORPORATE GOVERNANCE STATEMENT 2019

ACTING ETHICALLY AND RESPONSIBLY (CONTINUED)

OTHER INFORMATION This Corporate Governance Statement was approved by the Board of Mercury NZ Limited on 20 August 2019. 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 FY2019 balance date of 30 June 2019. 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