Assessing our financial performance
Strong inflows, disruptive outages
While inflows provided plenty of water in New Zealand, a planned transmission outage challenged us to manage our potential risks carefully.
At year end, a number of variables remained unresolved. We were still waiting to hear New Zealand Aluminium Smelters Limited’s (NZAS’s) decision on its Tīwai Point smelter. The COVID-19 pandemic has had, and may continue to have, effects on customer demand. There’ll undoubtably be changes for businesses in New Zealand due to ongoing COVID-19 restrictions internationally and at the border. These uncertainties may affect our results in the coming year, but the year just gone was a good one.
Results in New Zealand
Energy margin measures the combined financial performance of our retail and wholesale businesses and is an indicator of the success of our vertically integrated model. As a generator and retailer, Meridian sells all of the electricity we make into the wholesale market and we purchase from the market the electricity that our retail customers use.
The average wholesale price for electricity in the year was down significantly on FY19 by $34 per MWh (28%). But a lift in generation volumes along with a significant lift in customer sales volumes and margins meant we improved Energy Margin by 1% over the prior year.
Our customer sales teams lifted our sales volumes across both the Meridian and Powershop brands by 18% and our market share in all of the customer segments that we service. We also improved retail margins significantly as a result of the increased scale of our retail businesses, the improved customer retention rates that we were able to achieve and the smart pricing we adopted in the business sectors.
The amount of electricity we generated was up 5% on the prior financial year due to reasonably healthy inflows into our hydro storage lakes. But overall spot generation revenues were down 24% on the prior year due to a significant year-on-year reduction in the wholesale prices for electricity.
But that doesn’t tell the full story. The primary function of our Wholesale business is to not only generate the most energy we can from our generation assets but also to manage our wholesale price risk. Meridian’s New Zealand hydro generation volumes (comprising approximately 90% of its New Zealand generation) so the availability of, and access to, water is critical. The Waitaki and Manapōuri hydro systems are heavily influenced by seasonal hydrological conditions. Given the high variability in rainfall in and around our catchments and the relatively small amount of hydro storage we have, the amount of generation available can vary significantly and managing our storage lakes well is not only critical to our financial performance but also ensuring we play our part in avoiding energy shortages for New Zealand. Adverse hydrological conditions, resulting from dry periods or drought conditions in those catchments, may reduce water levels and significantly affect our generation capability.
As an electricity retailer Meridian must buy all of the electricity that our retail customers use from the wholesale market and wholesale prices can vary significantly. When we have low storage levels resulting from low inflows, we may be forced to spend more money on purchasing electricity from the wholesale market to meet our customer commitments than we are making from selling electricity we have generated into the wholesale market.
Our wholesale team manage these risks by conservative storage management and by engaging in the wholesale market to buy and sell financial hedge instruments to secure prices ahead of time and to manage the impacts of transmission outages that may limit our ability to generate.
Overall, the team did a great job in New Zealand by delivering a record amount of generation for the year and managing some significant transmission outages, most notably the HVDC outage during January to March.
Our Australian performance
The trading conditions in Australia throughout the year were challenging, so an EBITDAF result 3% higher than the prior year was pleasing. Wholesale electricity prices trended down as oil prices and then gas prices collapsed. In addition, generation volumes from our hydro assets were down year on year due to the deepening drought conditions. Our risk management processes were put to the test particularly during a number of high price events during the summer. As temperatures soared and bush fires raged and people consumed energy to stay cool, we were hard pressed to make headway.
While our Australian generation team had a challenging year, our retail business saw sustained growth and a significant increase in customer numbers. In the short term we’ll continue to focus on growing our customer numbers and supplying them with what they want. Pleasingly, we saw growth in all sectors in FY20, and this has motivated us to ramp up our focus on the SME sector in the year ahead.
Longer term, the prospects are more optimistic. A large number of coal-fired plants are approaching the end of their 20- to 30-year lives and we’re confident that will produce important opportunities for renewables.
The Australian energy margin was 3% higher compared to FY19. Powershop Australia grew its electricity customer base by 24% during the year, with a 24% increase in contracted electricity sales. Our retail gas offer in Victoria gained 15,000 gas customers by the end of the year, with sales of 1,491TJ.
Overall, we recorded a record EBITDAF result for the year, up 2% on FY19. Operating cash flows were $605 million in FY20, $30 million (5%) lower than last year. Total capital expenditure was $64 million.
Operating cash flows ($m)
Movement in EBITDAF
Higher retail sales and record New Zealand generation helped offset the impacts of lower wholesale prices.