Neal Barclay (left) and Mark Verbiest (right)

Chair and CEO Review

Successfully navigating a range of challenges

Meridian’s commitment to our purpose of Clean Energy for a Fairer and Healthier World continues to be the number one driver of all our business decisions, and being closely aligned with this purpose in FY20 was more important than ever.

FY20 was another successful year for our Company and we were particularly pleased with the continued growth in our customer businesses. Financially it was a solid year for Meridian with another record EBITDAF result, although net profit after tax was lower.

But there are significant challenges on the horizon, particularly the global impact of the COVID-19 pandemic and the closure of the Tīwai Point Aluminium Smelter. These changes will affect the way in which we operate our business and we are confident we have the team and the strategies to manage through these uncertain times.

Throughout the COVID-19 pandemic to date we have maintained full operational capability. For Meridian, as an essential service, this was vital, and we believe the electricity sector and Meridian performed very well during this time.

Supporting our customers

We’re fortunate that the product we generate, and sell is needed by everyone and that the COVID-19 pandemic’s impacts on demand and on our business to date have not been significant.

However, we know that the impacts on many other New Zealanders, businesses and the economy as a whole will be far more extensive and long lasting. We’re committed to playing our part to ensure our economy recovers as quickly as possible and to help shape the opportunities that will deliver sustainable economic and environmental outcomes.

During FY20, we supported customers who have been impacted by COVID-19 by working with them to find payment solutions that suited them and by making sure their power wasn’t unfairly disconnected. We also didn’t charge any late-payment fees or credit-reminder fees to customers across our brands in New Zealand and Australia.

We also wanted to do something more to help families facing hardship, so we matched the $1 million donation made by generous Kiwis to our charity partner KidsCan. With that additional money KidsCan is able to help kiwi kids in hardship get a hand up, and the best chance at a good education, to help break the cycle of poverty. The ongoing impacts of the COVID-19 pandemic have reinforced our view that sustainable businesses will be the most successful businesses over time.

Healthy customer growth

Our Powershop business in Australia once again achieved outstanding growth as customers continued to choose cleaner energy options. Customer numbers grew by 24% and there was a 24% increase in the volume of electricity sold whilst gas sales were up three-fold.

Powershop’s success in Australia means we’re looking at new generation options the business will need in the medium term. These include the 130-megawatt Rangoon wind farm development project that Meridian Australia has in northern New South Wales, which could power 58,000 homes a year.

Whilst supporting customers through the COVID-19 pandemic we were also able to continue to grow our retail market share.

In New Zealand across both our Meridian and Powershop brands, we grew customer numbers by 7% and the volume of energy sold by 18%. Even more pleasing, our overall customer satisfaction ratings and our customer retention rates improved and set the benchmark for the industry.

Rio Tinto to exit New Zealand

In October 2019 Rio Tinto announced that it was undertaking a strategic review of New Zealand’s Aluminium Smelter at Tīwai Point in Southland.

On 9 July 2020, Rio Tinto announced the termination of its contract with Meridian and its intention to close the smelter by 31 August 2021. Rio Tinto’s decision is hugely disappointing for the smelter workforce and the Southland community of which we’re a part.

During the Rio Tinto strategic review, Meridian was able to put together a package of contractual amendments that would have delivered a significant reduction in the cost of delivered energy to the smelter, well in excess of $60 million per annum. We believe that this offer was fair and in the interests of Meridian shareholders and New Zealand. As part of that package we asked the smelter owners to commit to Aotearoa for a period of at least four years. They were unwilling to make that commitment and have instead chosen to close the smelter.

The loss of roughly 13% of electricity demand within a relatively short space of time will undoubtedly be disruptive for our industry and our company in the short term. However, the smelter closure also creates significant opportunities for Meridian. Our team is working hard to mitigate the short-term effects of the closure, maintain our balance sheet strength and build an even stronger business for the future.

Electricity Authority preliminary undesirable trading situation decision

In December 2019, an energy trading company (Haast Energy Trading) and a group of small retailers lodged a claim with the New Zealand Electricity Authority that Meridian and other South Island hydro electricity generators had caused an undesirable trading situation (UTS) in November and December 2019. On 30 June the Electricity Authority released its preliminary decision, determining that a UTS had occurred between 3 and 18 December 2019.

Management and the Board have looked closely at the Authority’s preliminary decision and we do not believe our actions constituted a UTS. We believe the preliminary decision failed to adequately consider the enormity of the flood conditions that Meridian was managing during that time. We were also very concerned with the way the preliminary decision was incorrectly portrayed in the media as there was no cost to most consumers. Meridian’s financial statements have been prepared on the basis that the Authority confirms its preliminary decision and resets prices during the trading periods concerned. The impact on the financial statements by making this adjustment was insignificant.

We have made our position clear in our submission to the Authority. We have also suggested amendments to the Electricity Industry Participation Code may be necessary to clarify the Authority’s expectations of generators in similar situations. Meridian cares deeply about its customers and the environment. It was our priority to put safety and our environmental obligations first as this significant rainfall event unfolded.

Deferring investment at Harapaki

The Board made the tough decision in August to defer the build of our Harapaki wind farm.

While the business case for Harapaki is very sound, the market needs time to adjust to Rio Tinto’s decision to exit New Zealand. We’re still confident that we’ll build Harapaki in the future.

Transmission Pricing Methodology

Just before the end of the financial year the Electricity Authority released its final decision on the Transmission Pricing Methodology guidelines.

We're pleased with the outcome and that a benefits-based approach to transmission pricing was adopted by the Authority. It will provide certainty, be fairer and enable a more efficient investment in and use of the transmission grid. This new approach will be positive for Meridian financially.

Climate action policies progressed well

We believe that in FY20 there was considerable progress made at the policy level to support New Zealand in meeting its zero-carbon aspirations. The Climate Change Response (Zero Carbon) Amendment Bill was passed, the Climate Change Commission was established, and we also now have a package of Emissions Trading Scheme (ETS) reforms that are the key policy tool driving emission reductions. In June a water reform package outlined changes to how freshwater is managed and steps to improve water quality within a generation. These changes protect the flexibility and output of existing large hydro to support further decarbonisation, aim to improve the health of our waterways and, importantly, better recognise the values and perspectives of tangata whenua.

Most of the energy New Zealand consumes still comes from burning fossil fuels – the fuels that power our cars and provide heat for industries, homes and public infrastructure. Combined, these energy sources account for 41% of New Zealand’s greenhouse gas emissions. About half of that’s from transport.

The opportunity to electrify these energy uses and to power our nation with renewable electricity is massive for our country and, once done, will go a long way to eliminating our non-agricultural emissions. Meridian remains totally committed to working with government, industries and our customers to support the future electrification and decarbonisation of the New Zealand economy.

Our employees are committed

Our survey in May 2020 saw employee engagement scores across Meridian, Powershop and our Australian companies lift to 85%, demonstrating that our people are proud to work for Meridian and committed to the company.

This is also reflected in the fact that nearly 60% of Meridian Group permanent New Zealand employees now own shares in the company. Together, employees in the MyShare scheme are now one of the 100 largest shareholders in Meridian, out of a total of 47,000 shareholders.

We introduced Learning Teams

The most important thing at Meridian is that our people go home safely at the end of each day – but in FY20 we had too many significant injuries for our liking.

We made changes to ensure that our health and safety culture continued to evolve and improve, and to ensure that our people were as physically and mentally protected as possible. Most notably we introduced Learning Teams as a replacement for the ICAM (Incident Cause Analysis Method) incident investigation process. Learning Teams is a self-managing process that allows those close to an incident to engage more openly in the review of what happened. As a result, we’re already seeing a significant lift in the levels of transparency and learning that we glean from incidents.

Refreshing our executive

During the year there were four new appointments to Meridian’s Executive Team. Lisa Hannifin was appointed as Chief Customer Officer, Claire Shaw was appointed as General Manager Corporate Affairs and Sustainability, Jason Woolley was appointed as General Counsel and Company Secretary and Jason Stein, who was previously Meridian Energy’s General Counsel and General Manager of the Office of the CEO, was appointed CEO of Meridian Energy and Powershop Australia. All these roles were filled internally after recruitment processes that included external candidates. These appointments show we have talented people in our organisation, that our people are encouraged to step up, and that the skills and leadership we’re developing here test very well against the market.

Flux increases capability

We’re increasing Flux’s capability in New Zealand to better support the migration of Meridian customers to the platform.

However, this increase and the associated complexity with Meridian’s customer base meant that the migration project, which commenced during 2018, was extended by nine months and it’s now scheduled for completion during September 2021. The benefits of and business case for the project remain very positive.

The ongoing relationship between Flux and Powershop UK is now uncertain. Powershop UK is owned by npower who in turn are now part of the E.ON Group.

In the U.K, E.ON and Kraken Technologies, part of Octopus Energy Group, entered a strategic agreement regarding E.ON’s UK residential and small and medium-sized business (SME) energy retail businesses.

It is our understanding that E.ON intend to migrate their customer base (including the npower customer base) to the Kraken platform. At this stage we are unsure of npower’s intentions in relation to the Powershop UK brand.

2020 financial results

Meridian Energy has reported a strong financial outcome for the FY20 year powered by record generation and strong retail sales growth on both sides of the Tasman.

Group EBITDAF increased by 2% to $854 million. Net profit after tax decreased 48%, reflecting higher depreciation on previously revalued assets and movements in forward prices and rates on financial instruments used to manage risk (non-cash, fair value movements). Underlying net profit after tax* (which removes these fair value movements) decreased by 5%.

The Board has declared a final ordinary dividend of 11.20 cents per share, 4% higher than the previous year. This brings the total ordinary dividends declared in FY20 to 16.90 cents per share, 3% higher than last year’s, and represents a 75% payout of free cash flow. Meridian also declared an interim special dividend of 2.44 cents per share ($62.5 million) in February 2020 under the company’s capital management programme. With Rio Tinto’s announcement of its intention to close the Tīwai aluminium smelter, the Board has now ceased this programme.

The smelter decision also saw rating agency Standard & Poor’s change Meridian’s credit rating outlook from stable to negative.

* Net profit after tax adjusted for the effects of changes in fair value of hedges and other non-cash items. A reconciliation is provided on page 30.

Underlying net profit after tax reconciliation ($M) - Financial year ended 30 June FY20 FY19
Net profit after tax 176 339
Underlying adjustments
Hedging instruments
Net change in fair value of electricity and other hedges 113 (58)
Net change in fair value of treasury instruments 48 63
Premiums paid on electricity options net of interest (20) (17)
Assets
(Gain)/loss on sale of assets - (3)
Impairment of assets 58 5
Total adjustments before tax 199 (10)
Taxation
Tax effect of above adjustments (58) 4
Underlying net profit after tax 317 333

Undaunted in our pursuit of our long-term goals

All in all FY20 was quite a year, but our commitment to 100% renewable energy and helping New Zealand to achieve its zero-carbon goals remained our focus.

The electricity sector is a big part of the solution for New Zealand’s greenhouse gas emissions. The industry can and will build the renewable generation and transmission assets required to power growth in the number of electric vehicles on our roads and the electrification of stationary energy uses, ending our country’s current dependence on fossil fuels. Meridian will play its part in moving rapidly to that future.

We also need to preserve our backbone of hydro generation in Aotearoa, which can flex and fill the gaps between intermittent wind and solar generation. It’s the key to renewable expansion.

We need to do all this while keeping electricity affordable – both to ensure that we are playing our part to reduce energy hardship and to ensure the right priority is put on key decarbonisation projects. We need to focus on projects that will help to transform our society and economy in the next decade as we reduce our reliance on fossil fuels and transition to clean energy to respond to the climate emergency facing us all.

We are most definitely on the right path. New Zealand's electricity market is gloablly recognised as world-leading and well-functioning. The International Energy Agency says New Zealand is a success story for the development of renewable energy without the aid of government subsidies and recent Ministry of Business, Innovation and Employment (MBIE) data shows the average New Zealand household electricity bill is at its lowest in real terms since 2009.

On behalf of the Board and the Executive Team, a sincere thank you to our shareholders, our customers, communities and partners, and the Meridian team for your continued support for and investment in cleaner energy for a fairer and healthier world.

What drives us

Our purpose of Clean Energy for a Fairer and Healthier World is at the centre of everything we do. To deliver on our purpose we have focused on areas in which we can make a meaningful difference, and that also align with our values and goals of climate action, putting our customers first, being a great place to work and our role as a responsible generator. We strive to achieve these goals by ‘being gusty’, ‘being in the waka’ and ‘being a good human’ to ensure that we are able to deliver positive outcomes for New Zealand and for our shareholders.

Our Purpose Circular infographic - Cleaner energy for a fairer and healthier world Our Purpose Our Values and Goals Our Behaviours Delivering on our purpose Our Purpose Our values and goals Our behaviours Delivering on our purpose Our purpose Our values and goals Our behaviours Delivering on our purpose

What drives us

Our purpose of Clean Energy for a Fairer and Healthier World is at the centre of everything we do. To deliver on our purpose we have focused on areas in which we can make a meaningful difference, and that also align with our values and goals of climate action, putting our customers first, being a great place to work and our role as a responsible generator. We strive to achieve these goals by ‘being gusty’, ‘being in the waka’ and ‘being a good human’ to ensure that we are able to deliver positive outcomes for New Zealand and for our shareholders.

Our Purpose Circular infographic - Cleaner energy for a fairer and healthier world Our purpose Our values and goals Our behaviours Delivering on our purpose Our purpose Our value and goals Our purpose Our behaviours Our purpose Delivering on our purpose