Meridian Energy Limited (MEL) Earnings Call Transcript & Summary

Welcome to Meridian's 2021 Annual Result Briefing. I'm Neal Barclay, Meridian's Chief Executive, and I have sitting here on my virtual left, Mike Roan, our CFO. Well, actually, I think he's here. I'll make a few opening remarks before getting to the guts of the presentation. Most obviously, we saw quite a shift in financial performance in FY '21 compared to the previous 2 years. FY '19 and FY '20 saw successive record results powered by strong generation and growing retail sales volumes. This year, we maintained our customer growth momentum. However, we ran into tough drought conditions that reduced our generation capability and increased our hedge costs. That's just the nature of the business and the variableness of the weather. In January, we also completed negotiations with the owners of the Tiwai Point Aluminum Smelter to extend our electricity supply contract to the end of 2024. That extension was done at a significant discount in the existing contract. Now both of these events impacted financial performance with EBITDAF and underlying NPAT down on prior years by 15% and 27%, respectively. But we do believe the underlying drivers of future business value are strong. And in particular, since 2019, it's worth noting that we've grown the size of the combined New Zealand Meridian and Powershop customer bases by 20% and the total volume of energy sold through our retail channels by 14%. And our sales momentum has not wavered this year. We believe there's still plenty of scope for further growth and enough liquidity in hedge markets to allow us to manage the risk. Our Harapaki wind farm construction is underway in Hawke's Bay, and our development pipeline is rejuvenated, also buoyed by future opportunities that have started to take shape beyond the smelter's exit in 2024. I think ultimately, the outlook for growth in the sector is huge as Aotearoa embarks on a path to net 0 emissions by 2050. But there are some challenges our industry must manage on the decarbonization journey. I think the own goal the electricity sector managed to score on the 9th of August by causing widespread customer outages was just the symptom of a broader contextual issue that the industry must address. The industry is emerging from a period of around 13 years where we've seen no discernible growth in demand. Accordingly, the system has not been put under any real pressure to accommodate new levels of peak demand as occurred on the 9th of August. It's also become crystal clear that over the last 3 years that the flexibility and reliability of the gas supply chain, from gas fields through to generation, has eroded considerably. And whilst there is investment going into the upstream gas assets, the situation may be exacerbated by the inevitable growth of renewables that are displacing baseload thermal generation at a rate of knots. Waitaki, [indiscernible] and Harapaki combined equate to 8% of current demand despite muted demand growth. Now I don't think there's -- I don't think anyone doubts the importance of reaching 0 emissions economy ideally sooner than 2050. But the introduction of the 100% renewable electricity target by 2030 has rapidly upended the wider industry's long-standing plans to use gas and in particular, [indiscernible] to provide renewable firming capacity and to efficiently transition away from coal. Now I doubt there will be one silver-bullet solution to enable a seamless transition. And some of the renewable firming initiatives being mooted presently are still well over a decade away. So we do need government policy that is more sympathetic to an acceptance of some gas generation. Also, what happens to the load currently contracted by industry through to 2024 is a relevant consideration to any package of options to enable a seamless transition, as our efforts to enable large-scale demand response from existing and new industrial users. I think the future is bright, but we do need to be smart in tackling the transition to a renewable grid to ensure the continued affordability and reliability of electricity to New Zealand consumers. And I'll talk more in this presentation about some of the actions Meridian's been taking to invest in the decarbonization challenge. The New Zealand customer growth momentum was mirrored in our Australian Powershop business, and we're super proud of these results, succeeding retailer down to the proverbial battle of interest. And there's no single ingredient that I would point out to be our secret sauce. It is really about getting every aspect of the customer offering and service experience just right. And to do that, you need great people and a culture that cares. The really good news is we know where we are now, and we know we've got plenty of potential to improve. While our cash earnings reflected the impacts of the drought and the industry negotiations, the Board was comfortable maintaining the ordinary dividend at FY '20 level, albeit be at a higher payout ratio. To help accelerate decarbonization, we kicked off our Process Heat Electrification Programme in February, and it's super encouraging to see a growing commitment from businesses wanting to decarbonize their industrial processes. We already have 171 gigawatt hours of annual load under MoU or contracted, and we're close to having a few of a 100 gigawatt hours signed up. Now Meridian can bring to the table sharp, long-term pricing. But the emerging barrier to getting more of these projects up, particularly as it relates to the financials, is the cost of transmission and distribution upgrades. Businesses are clearly trying hard to decarbonize, and this infrastructure is critical to support a timely transition to cleaner processes in New Zealand. Accordingly, many conversations, also many conversion opportunities. are dependent on the timing of funding awarded from the government's $69 million decarbonization fund. Process heat electrification opportunities typically deliver a low cents per tonne of carbon abated equation and if appropriately supported will deliver great outcomes for customers and our country. As an example, the cold water replacement [indiscernible] will reduce emissions by 11,000 tonnes a year. This is equivalent of taking around 3,000 cars and their emissions off the road. Now very small operational emissions. The bulk of Meridian's footprint is in our supply chain, and it's really pleasing to see our partners making improvements in the quality of the measurements, reporting and quality of their emissions. We continue to make positive progress in our gender equity measures. But as you can see from the chart, we clearly have more work to do. Last year's COVID lockdown coincided with our staff engagement survey, so we saw a natural lift at that time. I guess our people were thankful to have our support and the job security we promised. This year's survey results have returned to pre-COVID levels, but they are still -- well, we did expect that and are still results that are sector-leading. I would like to call out the great work our people continue to do in this COVID-affected world. They have been positive and flexible, and as a business, we haven't missed a thing. I particularly like to acknowledge our team based in Victoria, who have endured more than a year of COVID-related restrictions. And their commitment and resilience is absolutely amazing. I've talked before about my concerns around our annual rate of injuries. Now while none of the 18 LTIs resulted in serious harm this year, our people do operate in challenging work environments, and we have a lot more work to do to ensure they can continue to do that safely. Safety leadership and safety culture are the focus of the new program being led by Tania Palmer, our Chief People Officer. We showed investors our fresh strategy at our May Investor Day. We've also indicated the start of an ownership review of Meridian Energy Australia. Mike will update you on that process a bit later on. We have evolved some of the targets since May. For example, Mercury's acquisition of Trustpower's [ NetSmart portfolio ] gives us the opportunity to focus on a more appropriate medium-term target for our retail business around fixed price growth. And as we deepen our development pipeline to accelerate decarbonization of this country, we're now aiming to have 3 options already built by the end of 20 -- ready to build by end of 2024. I've talked previously about the roadblock this industry faces getting potential sites through consenting. So this will be a real challenge and does require support through the government's RMA reform process. We'll touch on progress on most of these targets through the course of this presentation. Work with shareholders or stakeholders has helped us distill our sustainability focus down to the 10 material topics presented here. Those topics inform our activities, and I'll call out a few successes over the last year. Now it is easy to forget Meridian is already net 0 carbon, and we are now planting forest to create our own carbon offsets. By the end of 2021, we'd have doubled -- we had doubled the number of trees currently in the ground, but we do need to seriously pick up the pace. And pleasingly, we've recently acquired 2 additional parcels of land to accelerate our planting program. Meridian's own EV charging network was launched earlier this year. We're deploying mostly AC chargers that integrate well on to existing electricity networks. They are ideally suited to shopping malls, retail and business parks and community facilities. International experience shows AC charging offers an efficient complement to fast DC chargers. We published our first modern slavery statement. The statement sets out our actions to assess and address modern slavery risks in our operations and our supply chains. And we've now just presented our third TCFD report. We at Meridian puts -- social focus is well established. We have long-term commitments to our generation communities, supporting local projects that are important to them. KidsCan, Kakapo Recovery and project recovery are amazing causes. I'm personally honored to be part of them. We specifically acknowledge iwi rights under the Treaty of Waitangi. It is important for us as a large user of natural resources to partner with iwi and find ways to deliver improved environmental, commercial and cultural outcomes. And this isn't just corporate speak, we are working actively with many iwi groups to make a real difference. We've been talking about the green shoots of demand growth for a few years now, the impacts of COVID and Tiwai's fourth potline. Consumption skews things a bit from prior periods, but if we normalize for those, we see demand uplift in the last 2 years, and that is despite near-record temperatures taking off the top-up winter demand. Whilst the impact of a nationwide lockdown must have an economic impact, we're not seeing anywhere near the same level of negative impact on demand that was evident last March, but it's early days. And as I mentioned earlier, the customers we have -- the customer growth we have achieved in retail and customer numbers -- sorry, the volumes and numbers, has been a standout in the last few years, and we've achieved this without big movements in headline prices. The project to move Meridian's customers across the Flux platform is in its final stages. The focus is now on the remaining complex corporate and industrial customers. I'd like to acknowledge the Meridian Retail and Flux teams for doing an absolutely amazing job. They have reimagined and rebuilt our customer service operating model and migrated 95% of our customers to the new platform. But the really truly amazing bit is they've done all of that whilst losing no momentum in sales and creating close to 0 disruption for our customers. There's no doubt electricity pricing is an emotive topic, full stop. And high wholesale prices have been exercised in many in the market and in the media over recent times. But there are still plenty of evidence to show that sector overall is delivering great outcomes for New Zealand across the energy trilemma. The price graph here, which is MB-published data tells quite a story. Now historically, there has been a significant rebalance in our electricity prices across sectors. I think that's well understood. It also shows, though, that in real terms, overall market prices have not really increased since the 1980s. During the last 10 years, other than the industrial sector, most customers have experienced real price decreases. And lastly, the hedging strategies adopted by most retailers have meant the vast majority of customers have been insulated from these high wholesale prices that we've seen of late. Also, the price for electricity in New Zealand compares favorably with other OECD countries, and in particular, and as of the last year, large C&I customers paid the seventh-lowest price than the OECD. That's of little comfort, if you're a large business, trying to [ re-contract ] supply in this market, and the high wholesale prices, we're seeing are certainly a course of the concern. Meridian has not stepped away from any customer. We've provided pricing solutions, including terms of 5 and 10 years, to help moderate the impact of the current pricing on those customers. We've clearly seen prices moderate as hydro storage has recovered. They still remain relatively high, however, but that doesn't mean to say we're seeing inefficient price signals or a broken market. We'll touch on the drought shortly, but it is worth noting that both Meridian's Waitaki storage and the national hydro storage only just got above average for the first time this year in the third week of July. The drought's caused higher prices, and we have seen that many times before. But underlying the variable weather is the well-documented degradation and the gas deliverability that emerged in 2018. The outlook may be on the improve as investment programs of major-producing gas fields are underway or are better defined. But simply put, right now, the system has less fuel storage and capacity available for it to meet demand than we have enjoyed over most of the last decade. We are seeing the industry respond with several new renewable projects, and that will deliver around 8% of electricity demand at a cost of about $2 billion. These projects are in construction, and they are in full commissioning right now, and more new developments also being signaled. But these stabilizing initiatives take time to turn up. And given hydro water values reflect scarcity, we believe supply risk is still being priced into the spot and electricity futures market. In my view, the long-term trend in prices is likely to be down as renewables become cheaper to build. But we're also likely to continue to see considerable short- and medium-term price volatility, both up and down, as the percentage of renewable energy increases. The risk management strategies adopted by businesses will need to account for that volatility. Now I mentioned earlier that there is sufficient liquidity in wholesale hedge market, will enable us to manage the portfolio risk for the retail growth. This chart shows just how successful the reforms of the electricity hedge market in 2009 have been. The volume of exchange-traded ASX futures has trended up to be similar in size to the physical market. And in FY '21, volumes far exceeded the physical energy traded. As you can see, Meridian has put significant capital risk and continues to do the heavy lifting in terms of supporting ASX growth. And ASX is only part of the story. There's also a strong over-the-counter market in New Zealand and a growing market for long-term power purchasing agreements as new developments are being kicked off. So I think there's plenty of liquidity and opportunity for parties to manage risk and their exposure to wholesale prices should they choose to do so. But of course, there's no point in waiting until your house catch fires before attempting to buy insurance. Now the electricity authority has an extensive market improvement program in play. Of late, we've seen the implementation of many of the electricity price review recommendations, and we've had an overhaul of the trading conduct provisions, and that was needed. The final decision on corrective actions for the December 2019 UTS have been published. And as expected, the cost of Meridian was within the $5 million before tax amount that we provided for last year's account. More recently, the events on the evening of 9th of August created a very poor outcome for affected customers. Now I can assure you that the industry's collective failure is felt most acutely by those of us who have a responsibility towards our customers. I'm certain all parties will want to ensure learnings are taken on board, and we have avoid a similar outcome occurring again. As I mentioned at the start, the industry is moving quickly into a decarbonization phase. And we'll have bumps along the way. So there is a broader contextual conversation that also needs to take place. 2021 saw the landmark final advice from the Climate Change Commission to government on its first 3 carbon budgets. The government now has until the end of the year to set these budgets and release the country's first emissions reduction plan. Already there is movement on government policy. The Clean Car Discount has been launched, and government has implemented further reforms of the Emissions Trading Scheme. From my point of view, it just sets New Zealand on the path to its low-carbon future, and the electricity sector is the biggest enabler of this future. Notably, the Climate Change Commission has recommended consideration of the 95% to 98% renewable electricity target, which could allow for a longer runway for gas to support system flexibility. And this month, Transpower published its new Transmission Pricing Methodology. This offers an updated estimate of what Meridian could pay in transmission costs once reforms are implemented. However, we understand the electricity authority has asked Transpower to rethink some aspects of the proposed methodology, and further consultation will take place later this year. So the TPM saga continues. Now back in January, we reached agreement with Rio to extend our contract with the smelter to the end of '24. And it's fair to say that since then, we've enjoyed plenty of constructive feedback about the extent to which we were taken to the cleaners. Now looking at where LME prices have gone since, it certainly would appear Rio got the best of that deal. But at the same time, they have lost any option of a guaranteed electricity supply agreement beyond 2024. I think most people understand the revised NZAS agreement is $0.01 to the dollar-type arrangement designed by time. Time for the Southland region, the electricity sector and Meridian to transition away from a significant employer and user of energy and to do that in an orderly fashion. And I guess it will be a far more interesting results briefing for all concerned if we were contemplating the smelter turning [indiscernible] next week as could have been the case. Now the key thing is we are making the most of that time to mitigate the impacts of the smelter closure. You'll be familiar with the plan as described on this page, and I'll just quickly go through the latest on some of the options. The swaption replacement discussion continues with various parties. We expect a portfolio of options is emerging and as part of that smelter demand response within the existing agreement with NZAS will likely take on a greater degree of importance. The close of our Waitaki lines project continues to track well and Transpower do not envision any significant time delays. We aim to secure a North Island battery site by the end of September. While the battery concept grew out of a desire to create greater effective capacity on the HVDC, an asset like this would have also made a big difference during the event like on 9th of August. So we've upped the priority on this project and are looking at ways to bring it forward for deployment in late '22 or early '23. Earlier this month, Hawaiki Submarine Cable Limited, owned by the founders of Datagrid, was sold to a large Singaporean private company, BW Group Limited. We view this as a positive development both for getting the subsea cables required for the Datagrid installed in Southland and more broadly for Datagrid itself. We expect to see significant focus on the Datagrid -- on the Datagrid opportunity in the coming months. The hydrogen registration of interest jointly prepared by Contact and Meridian was issued to the market on the 22nd of July, which coincided with the public release of the McKinsey report and the launch of the Southern Green Hydrogen website. Counterparties have until the 10th of September to submit their responses. We'll evaluate those responses by early October and then enter into more detailed commercial and technical discussions with shortlisted counterparties. In parallel, we are progressing engineering pre-feasibility work that will support future counterparty discussions. So I think we're making really, really good progress across a range of options there. Now I'll finish with just some comments on the severity of this year's drought. Our analysis shows it was the third-worst drought that we have seen in the Waitaki catchment. The amount of water that didn't turn up in FY '21 compared to FY '20 was the equivalent of the entire Lake Pukaki operating range twice over. Catchments are generally hit by a small number of significant rainfall events each year, and there was clearly a lack of those between November and June. That's part -- that's part and parcel of what we deal with. And I think we managed our portfolio well through the long dry period. Now Mike will add a bit more color on that shortly. The good news is inflows in the last 2 months have now alleviated our fuel squeeze, and we've started the new financial year in reasonably good shape. I'll now hand over to Mike, who's leading our MEA ownership review, and he'll also drill into the numbers in a bit more detail. Over to you, Mike.

Thanks, Neal, and thanks, everyone, for joining the call this morning. Hey, I'm going to talk very quickly to the review of our Australian business before cracking into those financials. And as always, I'll try and provide a little more insight than you might see on the slides directly, so showing up is worth your time. Right. We announced that we are considering an ownership review of the Aussie business during our Investor Day back in May. We followed this up with an NZX announcement in early June and followed -- and following our Board endorsement. We released a slide during July, and last week, followed this up with an information memorandum to parties who have entered into a nondisclosure agreement with us. This created a bit of media and speculation on both bidders and proceeds. All I'd say is don't count your chickens yet, as it won't be until later this year, all going well, that we decide whether we go -- whether ongoing ownership offers the most value to shareholders, or alternately, a partial or full sale. And to get ahead of any questions, the reason we're looking closely at our business in Australia is twofold: first, we noted that investors seem particularly interested in entities like Meridian Australia; and second, the increasingly fragmented and interventionist electricity policy at state and federal levels in Australia concerns us. That said, we do like Australia's long-run prospects as it must also transition to renewables, and the challenge there is larger than it is in New Zealand. So time will tell, but retaining an organic proposition in Australia remains an option for us. Back to fin year '21 financial results. It was an interesting and challenging year for us. In terms of the year itself, I think my comments at interims are a good place to start. If you recall, we had a decent first half with EBITDAF of $422 million, which was down by about $43 million on fin year '20 but still represented the best first half performance ever for Meridian -- or second-best first half performance here for Meridian. However, my key point from February was that we'd run into a dry patch by November and start using hydro storage to deliver revenue while we waited for summer inflows to arrive. I didn't know it at the time, but those inflows wouldn't arrive until mid-May, and the lack of rain would put a material dent in both storage and our opportunities. By late April, Lake Pukaki was approximately 700 gigawatt hours or 53% below average for that time of year. So the drought, alongside the renegotiated TY agreement that kicked in on 14th of January, meant that second half EBITDAF was well down on the prior year, $81 million to be precise. As a result, full year EBITDAF fell by 15% from $853 million last year to $729 million this year. At the same time, underlying net profit after tax fell by 27% from $316 million last year to $232 million in fin year '21. Now both EBITDAF and underlying net profit after tax are non-GAAP measures. And if you look at our net profit after tax, you could be fooled into thinking we had a bumpy year. The reality is the majority of the difference between underlying net profit after tax and net profit after tax itself was driven by unrealized gains on electricity and treasury instruments, which do not translate into cash. So don't be fooled. And the best way to measure how the year went, at least from my perspective, is by tracking operating cash flows. They fell by 29% to $604 million -- from $604 million last year to $431 million in fin year '21. Now don't get me wrong, our performance remains sound during the challenges we faced. We just didn't do as well as we did last financial year. So let's move on to dividend before diving into a bit of detail. As Neal has already mentioned, there are no surprises in the dividend space either. We're rolling the fin year '20 ordinary dividends through to fin year '21. That means an ordinary -- a final ordinary dividend of $0.112 per share will be paid on 15th of October. And in turn, the full year ordinary dividend will remain at $0.169 per share, imputed to 86%. One thing I do want to pick up on here is that the Board has approved the implementation of a dividend reinvestment plan. We've signaled this a couple of times this year, and as a result, shareholders will have the option to participate in that plan. Those that do will be able to buy shares in Meridian with their final ordinary dividend proceeds at a 2% discount to the market value of those shares. Documentation that describes how the dividend reinvestment plan works is being sent out as we speak. Simply put, performance in New Zealand was sound in some areas and outstanding in others. And there are a few things to reference in this slide. First, energy margin was $128 million lower in fin year '21 than it was last year. As mentioned above, there's good reason for this, is while wholesale prices soared, we faced pretty sizable drought in the second half. And while some uninformed commentators think we do well in these circumstances, the more nuanced know that it tends to create challenges for us. And those challenges are pretty simple. Without an adequate supply of fuel, we could end up short to those wholesale prices. Now we're fortunate that our wholesale team puts a lot of thought and effort into managing our portfolio in these circumstances. And as a result, we didn't end up with spot price exposure, with the hedges we bought, and the lack of fuel weighed on energy margin delivery. For a drought as substantial as it was, the wholesale team did a superb job. And as I've said before, we also have a pretty decent retail team. In my view, they're the best -- they are the best that are out there. And they did a stellar job lifting contracted revenue by $149 million, as shown on the waterfall. Now I know that some will be thinking that if we hadn't been focused on developing customer relationships, that we would have had stronger energy margin. That's possibly true, but it's short-term thinking, and what really matters is long-term success. If you pick up any business textbook, it will tell you that it's only possible if you've got strong relationships with those who use your product. And whether you're an electricity business, a lustful teenager or Amazon, relationships take time to develop. You might be wondering how teenagers fit into that category. Well, they don't. My current lockdown experience cooped up with a couple of them suggests that they're too focused on short-term goals to think about longer-term relationships. Anyways, I'm off-messaging getting into dangerous territory, particularly as one of them might [ wind down ] with tears if they're listening to this. What I'm trying to say is that they've been -- is that we've been really clear over the past few years that our focus has been centered around customers first. While that might cost us a little in the short run, we're confident that in the long run, it will serve our investors well. And I know there are folks out there that will also think that we're simply looking to extract more coin from them, but that's a cynical view. The reality is that if someone values what you do, they'll gladly pay your fee of services and possibly stick with you through the tough times. And that is what we're trying to build. So far, the data shows we're doing a reasonable job on it. Since I manage cynicism, this also feels like the right place to focus a little commentary on the wholesale market, particularly commentary that suggests it's broken. My only request to you is that you ask yourself why folks might be saying that and yesterday provides a useful example. As yesterday, a group of large New Zealand business attacked another, us, for making too much money with the sole motivation of lifting their own profitability. So go figure. This was both surprising and disappointing. But given the underlying motivation, you have to be skeptical for claim, particularly as the government looked into excess profit as part of its electricity price review in 2018 and found nothing, and our own independent analysis completed by PwC aligns with the government findings. We've released those PwC conclusions, but I want to come back to my key points. Consider the motivation for claims before deciding whether they're critical as opposed to buying into the rhetoric directly. We see business attacking business. It will be an economic motivation. And we know that some new members were exposed to the higher wholesale prices in 2021 and if they want those prices to fall, we get that. But I'd point out that, in this case, the electricity industry has responded ahead of them by committing to approximately $2 billion worth of new generation development in response to those prices. And those investing are not just incumbents, we're seeing new entrants step into the electricity market and invest as well. And this is the exact response you'd expect from an effective market. This is a complex industry and silver bullet fixes do not exist. While kicking off in the media to make me feel better, it tends to distract from managing the challenges we face. The good news is that over the past 20 years that the market's been in effect, there's been substantial progress in terms of market design and levels of competition, even if over the same period, we've had a few moments that we wish we could have back. We're always striving to get it right, but perfect does not exist, unfortunately. But the progress has been substantial enough for residential customers to see pricing, security of supply, sustainability and product choice benefits. That might seem like a strange thing to say following the events of 9 August. But I've said, this is a complex industry and when things are complex, they don't go right all the time. The industry actually has a pretty decent track record at least compared to the period before the market existed, and we need to give folks time to work through how such situations might be avoided in the future. In the meantime, the data that I see and Neal referenced, suggest that residential customer cost per unit are lower today in real terms than they were in 2013. I should point out that industrial customer per unit costs are rising, but that's still approximately half the cost that residential customers pay. That's pretty decent empirical evidence as it means that for residential customers, electricity is a smaller part of people's cost base than it was back in 2013 at least an inflation returns. And to top it off, the International Energy Agency last ranked New Zealand's electricity market as the 10 best in the OECD and New Zealand is the only non-European country in that top 10. We also get the International Energy Agency's highest rating of AAA and a pretty solid sound bite in that New Zealand is a world-leading example of a well-functioning electricity market, which continues to work effectively. We know that the International Energy Agency will update its rankings in October. So we'll get to see if that view changes, but that is where my security of supply comment came from. Anyways, the facts suggest that residential customers are benefiting from what has played out within the electricity sector, and our team will continue to work at how we attract more of those customers to Meridian. All right, let's talk about Australia. The key feature on this slide is the fall of generation spot revenue. As I've noted in the second and third bullets, generation volume is sound, but wholesale prices fell materially, and this drove the $39 million reduction in energy margin. In turn, this flowed through to EBITDAF, which fell from $66 million in fin year '20 to $38 million in fin year '21. The good news is that wholesale prices lifted towards the end of the financial year. And if you've seen our operating stats for July, financial performance has improved materially. That said, the customer story in Australia is similar to how I presented it at interims. Since lockdown, the growth in customer numbers has slowed even though customer revenue has grown on the back of a 20% lift in household consumption due to lockdowns in the lucky country. The growth in customer numbers slowed, but the team in Australia remain committed, and they once again lifted the Roy Morgan Electricity Provider of the Year and Canstar's most trusted energy provider award. So the opportunity for growth remains. Now I always like to say something about large generation certificates or LGCs largely as we do not have or need such certificates in New Zealand. But the team in Australia, both create and then sell LGCs from our renewable generation assets. Unlike previous years, we hedged -- hedging of LGCs added value to the business. This year, mark-to-market losses from them were $3.3 million and hence, derivative sales and purchases are well off fin year '20 levels. I'll finish with my other favorite when talking about Australia hydro storage for good news. Storage at both Burrinjuck and Keepit Hydro Power Station is [ foldable ]. And at Hume, storage is higher than any time Meridian has owned that asset. I suggest you look at the Hume graph on the Goulburn Murray website you can see what I mean. So it looks like we're going to get decent generation volumes from those facilities this year. Now that's a new slide, but we added it as we think it provides some useful insight. First, it sets out that we, like all retailers, pay the spot price for electricity consumed by our customers. It doesn't matter whether a company is vertically integrated or not, the New Zealand electricity market ensures a level playing field for retailers. This slide also builds on the New Zealand energy margin slide that showed that the cost to supply customers has grown massively. And here, we show that at $184 a megawatt hour, the price paid to support our customer base in fin year '21 was about $89 a megawatt hour higher than in fin year '20. And finally, it highlights the internal transfer price that our retail team buys electricity from our wholesale team. As stated on the slide, it was $81 a megawatt hour in fin year '20, and it lifted to $88 a megawatt hour in fin year '21. What isn't as clear from this slide is how we calculate that price, but it isn't that complex either, so I'll summarize it here. We simply assume that a retail business would hedge its risk progressively over a 3-year period and the fin year '20 and fin year '21 internal transfer prices reflect that. The average of the previous 3 years ASX prices for the relevant financial year shaped on a volume weighted basis based on our consumption profile. Of course, there are more important issues than internal transfer price, but we thought it was useful to capture this information. So on to operating costs. There's always a bit more on this one than I think is necessary. So a long story short, we showed discipline again in fin year '21 in relation to costs. At this time last year, I stated that we expected to spend between $261 million and $266 million, and we spent $265 million. And while that's a lift of $6 million on last year, by the time you strip out the accounting adjustments for software as a service, and the Holidays Act provision, an underlying operating costs lifted by $3 million during fin year '21. And that increase was directed towards our development activities where we continue to ramp up efforts to ensure we have sites available to meet the expected decarbonization growth. For those not versed in the software as a service adjustment referenced here. In April, IFRIC, the International Financial Reporting Interpretations Committee revised its policy in relation to cost incurred implementing software-as-a-service arrangements. Long story short and following that policy revision, all costs related to software as a service should flow through the P&L as operating costs as opposed to recognizing those costs as intangible assets on the balance sheet and amortizing them over time. Given this decision, we've presented a small restatement for fin year '20 and in fin year '21 software as a service costs amounted to $2 million, as you'll see on this graph. For those that would like more detail, you can see Page 122 of our annual report. Second, the last comment. While this doesn't captures cost item here, we've retained an elevated provision for doubtful debts from fin year -- in fin year '21. At $9 million, it's lower than the $15.7 million provision held in fin year '20, but it's approximately $4 million higher than the levels held before COVID showed up. How it moves in time will depend on how the economy navigates the virus. And with that in mind, during the first week of lockdown, electricity consumption looks like it's down by about 7%, which isn't substantial compared to lockdowns in 2020 where consumption fell by between 16% and 19%. That could change, of course, so we'll see how earnings progress. And finally, we estimate that operating costs will fall in the $275 million to $280 million range this financial year, largely driven by $6 million of software as a service costs flowing through the P&L with the remainder driven by ongoing focus on development and lifts in insurance and employee costs. I talked about in net profit after tax and underlying net profit after tax at the start, so I won't dive into it in too much detail here. As the 2 graphs show, our preferred measure of performance, underlying net profit after tax fell by 27% from fin year '20. I'm sure that makes sense to most of you given explanations provided earlier in this presentation, and it shows that year-on-year, our cash performance was impacted by the drought. And while net profit after tax lifted by 145%, the key difference between the 2 measures is fair value movements in both electricity and interest rate derivatives. These are noncash items that can move materially year-on-year. For example, in fin year '20, electricity derivatives reduced NPAT by $113 million, but this year lifted it by $169 million, so that can move around considerably. My simple message is that fin year '21 was not the record year that for fin year '20 was. Other than for that, in Australia, we saw a gain from changes to the Australian generation asset remediation costs. And while it isn't shown here, the value of Mt. Millar and Mt. Mercer wind farms were stable the Green State hydro asset valuation lifted by $55 million. I don't have too much to add to the statements captured on this slide. Stay in business CapEx remained stable at $50 million, but the decision to move forward with Harapaki and the ongoing work to cutover our customer platform to Flux meant that investment CapEx was $72 million, which is well up on prior years. Harapaki consumed about $41 million of the cash and the cutover to Flux much of the remainder. And while on the custom platform cutover, the customer team delivered the impressive results I mentioned earlier, while this was in progress, and there hasn't been any material issue for our customers or our business in completing this 3-year project. We're pretty sure that customers are going a lot of what they see in the coming months as we finish the migration of C&I customers onto the Flux platform and then start optimizing it. I'll leave you with our forecast CapEx range for fin year '22, which is $205 million to $215 million. While I expect stay in business CapEx to be similar to fin year '21 with the residual largely attributed to Harapaki and Australian development activities. Obviously, we'll revisit this when we've determined the outcome of the ownership review. And our balance sheet remains a pretty straightforward read. Net debt lifted by 9% over the year to $1,648 million, and while net debt to EBITDAF lifted from 1.8 to 2.3x. S&P removed the negative outlook from our BBB+ credit rating following completion of the NZAS transaction. So I'll finish where I started. It's been an interesting and a challenging year for investors in Meridian. Our team is focused on working through the transition away from aluminium as directly as it is focused on the economy-wide transition away from fossil fuels. We need to put our best feet forward if we are to make that transition a successful one for both our shareholders and for New Zealand. Neal, back to you.

Just get off mute. Thanks, Mike. I think you summed things up quite nicely there. I'll just make a couple of concluding comments myself. I think what you see in Meridian is a high-performing business and a culture that is values based and our customers do understand that about us. You can expect us to be very focused on mitigating the loss of aluminium smelter, but in doing so, we will not lose sight for the bigger picture, and we will continue to focus on our customers in supporting New Zealand's decarbonization goals. What you see in the electricity sector is an industry that whilst not perfect, does deliver world-leading outcomes for New Zealanders across the trilemma of reliability, sustainability and cost. And most importantly, that market is delivering clear investment signals and the industry is responding. So I think we'll wrap it up there and move to questions. Obviously, there's none on the floor today, so we'll be going online.

[Operator Instructions] Your first question is from the line of Andrew Harvey-Green from Forsyth Barr.

A couple of questions from me. First of all, just around sort of understanding some of the OpEx and the increase there. I guess from my perspective, I'd expect a little bit of the increase potentially coming through from the Flux in terms sort of benefit coming through from that. Is that still expected or has there been some change here?

Mike, it's sort of talking about the benefits from project momentum. Do you want to cover that?

Yes. Andrew, so I can't remember whether it's in that slide or not, but what you've seen is customer servicing costs have held flat. In fact, decreased slightly over time. We'd expect that to continue in the coming years. Where we're really focused on making sure we've got the right cost base is in that development space, which is why I pointed it out as part of the fin year '22 forecast.

But in essence, the underlying cost base is showing that that's [indiscernible] and probably won't deliver on the other side [indiscernible]

Sorry, Andrew, I missed that. I think I got the gist of it, but missed some of it. I said it last year, our announcement results as well as the delivery of that program is delivering real cost benefit. But what you see is the growth in customers, there's a growth associated with growing customers, just growing that customer base. So every time you pick up a customer, there were metering and field service costs alongside internal costs. The Flux platform, what it's allowed the customer team to do is manage and gain efficiencies in our internal cost base even while we have added material volume of customers to our business. And we would expect that to continue over time. So it's well and truly delivered business case benefits and the efficiency outcomes that we expected from it. And we're actually pretty proud of the fact that we're holding those customer costs flat to falling slightly, while we're growing our customer base as materially as we have.

Okay. Second question is just on the CapEx and corresponding CapEx spend. So on the slide it looked like [indiscernible]. But just looking at the last 5 years, [indiscernible] is that the kind of level we should be looking to going forward?

Andrew, I think you're really breaking up. But I think you're talking about stay in business CapEx. So Mike, just give a bit of flavor of how that looks going forward, I think.

Yes. And Andrew, I think if I pick it up. I said that I'd expect stay in business CapEx to stay there reasonably at fin year '21 levels, as you say. I've mentioned approximately $50 million in the slide that's got $45 million. And you can see the trajectory over the past few years. I think that's a reasonable frame for stay in business CapEx moving forward. We're always really trying to get people to pay attention as the growth CapEx that plays out as it relates to Harapaki and then possibly development in Australia if we continuous to be honest with that business. Does that give you enough?

Yes. No, that's okay. Last question, given pretty hard for you to end it. Just around the swaption contract [indiscernible] you talked about the smelter perhaps getting involved in [indiscernible]. Am I right in saying that sort of the first time that they would have been talking about [indiscernible]. And can you give us a bit of color about [indiscernible].

I didn't -- I'm sorry, Andrew, I didn't get the gist of that at all. It's something about smelter. Mike, could you?

Look, I think it was Andrew, I'll try and paraphrase it, was you were talking about swaption replacement and Neal's comment in relation to the SDR, the smelter demand response. And I think you're wondering whether we have had any sort of conversation with Rio in relation to demand response following the conversations last year. And the answer to that is no. No, we haven't had any engagement with Rio Tinto on their activities since conversations we had with them last year. What Neal was really referencing is we're looking more wholly at a package of both supply and demand side options to manage that underlying hydro volatility or hydro inflow risk. And what we can see is that, that smelter demand response component of the Rio agreement in fin year '23 and '24 could form part of that package. So it's an existing arrangement that we have with them rather than the anything new.

Yes. I would just say that it's an existing arrangement. We couldn't envision better arrangements that would actually work for both parties. And whilst we haven't had any conversations with them about those since the extended exit deal was put in place, we've made it very, very clear to Rio leadership that if they ever wanted to entertain any thought of remaining in this country beyond 2024 they'd have to bring something to the table that made them operate in a far more sympathetic way with the overall industry as opposed to just being the taker of energy.

Your next question is from the line of Stephen Hudson of Macquarie Research.

Can you yes hear me okay?

Yes, we could.

Okay. I just have 4 questions, if I could. You've had a PPE fair value change. I just wondered if you could give us some idea of the assumptions around the NZAS volume and pricing post-2024 in that fair value change in PPE? Secondly, maybe one for Neal, is a gas fuel swaption option acceptable to you post-2022? And then I'll be back to Mike. Could you give us an idea of the book value of the Australian assets under review? And then just lastly, Harapaki, could you confirm that you're fully at risk on your civils? And if so, what are you seeing in these early days on the civil works?

I think, Steve, I'll cover off 2 and 4. Mike, can you cover up 1 and 3?

Yes. So Stephen, you picked up the PPE fair value movement, PP&E lifted by a couple of hundred million bucks. For the assumption that we're using for NZAS is that it is not connected to the system as part of that valuation. So that's the simple assumption is there is no consumption from Rio Tinto. So therefore, no price, no contract. And hey, I'll pick up number three, while we're on that, which was I think the book value of the Australian assets, which doesn't come out through our accounts, I'll be ruining it because I've got last year's value in mind, but the book value is about $470 million net assets.

Stephen, on your second question, would we entertain a gas fuel swaption? Absolutely. And we are in conversations with parties around such sort of transaction. I would say, though, that the economics of a gas did get bigger, got a lot tougher of late, and they need some sort of confidence they can get a return on that investment within a relatively short space of time. So that's sort of the issue that I'm alluding to. But we're certainly looking to work with parties in the industry to support those sorts of investments because we're going to need them, there's no doubt about it. And Harapaki, yes, we are at risk of civils. So we manage the project ourselves. And the project has gone into abeyance with the lockdown. There will be some cost of that, but at this stage because we're in the early stages of gearing up for the actual -- into the actual project those costs are not that significant. Obviously, if we go through further COVID delays through the construction period, then those costs will build, but we had built in a reasonable amount of contingency for that eventuality into the economic projections before we sign up to the deal.

Thanks, Steve. Neal, I just had a text from Andrew, who said our call quality isn't the greatest either. So he wondered if while the questions are on, whether we both go on mute so that we can hear them a bit better. [indiscernible]. It's a good suggestion.