Meridian Energy Limited (MEL) Earnings Call Transcript & Summary

Welcome to the first Meridian quarterly operating update. My name is Mike Roan. I'm the CFO of Meridian, and I'm joined virtually on the call by Owen Hackston, who is our Investor Relations Manager. This forum forms part of our ongoing efforts to make sure that our investors have the information they need that helps describe how business is tracking. And we intend on holding these forums semi-annually from here on in. We intend on spending 15 minutes talking to the highlights of our monthly operating reports, but we won't cover or convey any financial information as they are updated formally in February and August. If you have questions along the way, please type them into the drop-down box, which you should see at top of your screen designated by a question mark, and we'll answer them in the last 15 minutes or as many of them as we possibly can in the last 15 minutes of the call. The format is -- I'm going to give a little bit of a background update. Owen is going to cover hydrology, hydro generation and wind production, I'll pick up little pace on hydro prices, flip back to Owen, who will talk to Australia wind generation and demand, and then I will close with a bit of an update on New Zealand Aluminum Smelter retail business in New Zealand and Australia and our operating costs and CapEx. So background update. Obviously, a challenging quarter for folks in the renewables energy market, and particularly those who have got generation assets in the South Island, largely due to the La Niña conditions. It was an unusual La Niña climate system this year as typically there are dry conditions experienced in the south, which we have obviously faced, but you tend to see wetter the further you go north and East. This year, as folks who are North and East will know that while there was wetter in most parts of the country, North and East, it was also particularly dry in places in the North and East. The good news is that, that system seems to be fading with the tropics moving back to more neutral conditions. At the same time, as we experienced La Niña, the -- it's been warmer than average through the summer months that we've just experienced with lower than average rainfall and mild -- mild conditions generally, but the same weather pattern brought more rainfall than we would typically see to the East Coast of Australia and extremely low temperatures over there, substantially below the last 5 years. So an interesting set of conditions in both New Zealand and Australia, and I'm going to hand off to Owen.

Thanks, Mike. And look, just to reiterate Mike's comments, this is a semi-annual call that we'll do. It's not in response to any particular event. So no need to read anything into it other than us just trying to provide a little more flow of information in between our interim and full year reporting. With that La Niña dominant weather flow, our hydrology has really suffered certainly comparative to last year. So Q3 inflows were about 70% of average. That's more than 1,000 gigawatt hours lower than a fairly large inflow quarter in Q3 of last year. And particularly in the Waitaki, which reported its second lowest December to March inflows on record. The result of that is the Waitaki catchment storage now sits at its third lowest level on record for this time of year. And it's a little bit under half its average. Now that sounds like a lot. But to give you some context, Pukaki, the main storage lake in the catchment is currently sitting at about 524 meters. Now [indiscernible] to be taken down to 513 million. So including the conditional storage at the lower end of the lake, there's another 11 meters of water sitting in there. So while it's dry, we're not at the bottom. Now the interesting contrast with that is what we've seen in Australia, quite a big different. So Hume, which has run through a multiyear sort of drought impact is now seeing significant more water than it had a year ago. So around 200% more sitting in that lake. It's not quite half full. But what we are seeing is with the mild Australian summer quite a reduced irrigation draw on Hume storage. We are getting generation away. Important thing to remember with Hume is its storage is very seasonal. So you typically get irrigation releases between December and May. And you typically get inflows during winter. So in a normal seasonal range, the life would be full around spring of each year. In terms of hydro generation, it's followed the hydrology track really, so a lot lower in New Zealand, 17% off the quarter comparative. And we've infilled that with synthetic generation and particularly, use of the Swaption. So we had 250-megawatt tranches of the Swaption available to us all year around. We've been using those for several months, and the third tranche has become available in April, and we're now drawing on that too. And that third tranche is available through to October. Again, the contrast in Australia, much higher generation there, like I said, offered a drought-affected comparative. And relatively calm in terms of wind generation or wind conditions in both New Zealand and Australia, the volumes are sort of 10% to 15% off. Difficult to read too much into that. Remembering wind on an intraday basis can be highly variable on an annualized basis, we tend to find as much on this side. Mike, I'll pass it back to you, but on wholesale prices.

Thanks, Owen. Driven by those dry conditions that Owen mentioned here in New Zealand and also exacerbated by gas supply concerns, the wholesale forward curves over the quarter lifted materially in -- for the calendar year 2021. They also lifted materially, but less so for the remainder of the curve being 2022 through 2024. So reasonable levels of pricing stress seen in those forward curves and indeed in the spot market in New Zealand as a result of the underlying conditions. If we flip to Australia, though, you've got a completely different story with market prices there being incredibly low, driven by the mild temperatures that I referenced earlier, some lingering COVID-19 demand reduction. And what we would say is high supply availability from both renewables and from baseload thermal generation in Australia. Alongside that, the gas prices in Australia have been reasonably weak. And as a result, it had an impact on those wholesale prices in Australia. It's possible that in Aus, we're a cyclical low, given some of the announcements made by the Australian entities, there is recognition and a need for some form of rationalization of supply side facilities in Australia as renewables increase their level of generation over there. So very different experiences in New Zealand and Australia over the last quarter, and I'll hand it back to Owen.

And just to comment on average wind generation prices in Australia. The market dynamics that Mike just mentioned have -- obviously mean our average wind price capture is lower. But Q3 also includes impacts from the settlement in February each year of forward sold large generation certificates. So just a reminder that forward LGC sales get mark-to-market monthly through fair value movements below our EBITDAF line. Those forward sales settle in February of each year. And at which point, the accumulated fair value gains and losses transfer above the earnings line and into generation revenue. So if you look at a time series, average generation prices in February of each year look heavily distorted. The significant point is that with the fifth FY '21 settlements in February, generation revenue and average prices, including mark-to-market losses of about AUD 3 million. The comparative number in February last year was around a settlement gain of $12 million. So there's a significant swing in those settlements. The other point, which Mike alluded to was just around demand. So reasonably similar sort of profile in both New Zealand and Australia, quarterly demand down 2.5% to sort of 3.5% range. Some of it driven by temperature. So the heating cooling dynamic in Australia. But there is a little bit of probably read through in terms of lingering COVID impacts demand. And one of the things we know in both countries is the demand makeup looks a little different year-on-year. So residential demand generally higher, given, I guess, some of the lasting impacts on their lifestyles and work styles from COVID, business, commercial and industrial volumes typically lower. Mike, back to you.

Thanks, Owen. And just a reminder to people on the call, if you do have a question, you will need to type it into the question prompt so that Owen and I can answer that question. We'll read it out to folk and answer it. So if you do have them as we go along, please raise them with us, right. Onto New Zealand Aluminum Smelters. So the New Zealand Aluminum Smelter is running just under full capacity for the 3 potlines and did so over the quarter. Probably the reminder for people is their consumption profile is lower this Q3 than it was last year, and that is because the fourth potline, which was restored late 2018 remains in suspension. It was suspended last April due to COVID concerns. Probably the interest around New Zealand Aluminum Smelter at the moment is smelter demand response provision that we do have in our contracts. And just to inform people or remind people what that looks like, you can get a detailed review or information on smelter demand response by looking at the full NZAS contracts that we have disclosed on our website. But smelter demand response provisions effectively enable us to notify Rio Tinto that so long as certain conditions are met that we would like them to reduce consumption at the smelter. And specifically, if we make that request, the smelter must manage its electricity consumption to achieve a reduction in consumption of 250 gigawatt hours over 130 days. The way the provision works is if we do give a notice to NZAS, NZAS must start to reduce its electricity consumption by a date that we specify, which must be between 14 and 40 days after receipt of our notice to NZAS. We've been tracking the intersection between storage and that smelter demand response trigger level on our website for the last couple of weeks, recognizing the increased interest in that provision as we sit here today. The difference between storage and that dry year trigger level is 232 gigawatt hours. We'll move on to our retail business. And we've continued to see reasonable growth in volume in both New Zealand and Australia. We're up about 8% to 9% over the quarter, and we have continued momentum in customer acquisition on both sides of the Tasman. That said, if you look at the operating report, you'll see that our residential volumes remain flat as our overall prices on average. And in Australia, the average price is actually off same quarter last year by about 9%. That's driven by elements that we have mentioned in previous results, which are federal mechanisms called Victorian Default Offer and the default -- the federal default market offer provisions. Of course, at the same time as average retail prices are off in Australia, underlying wholesale prices have fallen further than retail prices. Our operating costs for the year -- sorry, for the quarter were down slightly on Q3 2020 at $61 million. That is off by $1 million and our capital expenditures were flat for stay in business capital at $10 million, but well up for our growth related CapEx at $39 million. That lift was primarily driven by the first payment that we made to Siemens Gamesa as a result of entering into the agreement with them to build Harapaki. So that concludes the info that we intended to release on the call.

We have received one question. I think we've now got 2 questions that arrived. And I'm going to read those questions out and then I'll either answer them or I'll hand them to Owen. And both questions are related to New Zealand Aluminum Smelter demand. The first question is, if hydro storage drops, to the New Zealand Aluminum Smelter demand response levels, and you notify NZAS to drop consumption and then it rains before they drop loads, do they still have to drop load? The answer to that is yes. Once we've provided notice unless we revoke that notice the New Zealand Aluminum Smelter consumption does need to reduce. The second question, is it not in your best interest to run hydro hard burn through the 232 gigawatt hours that I mentioned earlier on this call to get to the agreed point and trigger the 250 gigawatt hour [TY] reduction benefits. The answer to that is reasonably complex. The simple answer to it is no. We have a business that we sell electricity to many customers and security of supply and managing the ongoing flow of electricity to our customers is something we take extremely seriously, and we're not in the business of affecting contractual provisions at the cost of managing the ability to supply electricity to the rest of our customers. If hydro storage does fall to that level, then we will make the decision on whether we exercise the smelter demand response provisions at that time. I'm going to hand the next question to Owen, but I'll read it out, which is we have 11 meters of headroom in Pukaki. How many gigawatt hours does that equate to? Owen, do you know the answer?

Thanks, Mike. I might spend the time, while you answer the next question, trying to find the answer to that question. I haven't got it off the top of my head.

Yes. Very simple. But we can find out if anyone person who did ask that question, if you want to give [indiscernible] on a call after this we can let you know because we do have that data. Question here, which is guys, given high spot prices at present, can you comment on how you see the risk of regulatory interference in the sector? I think that question is beyond us. I think it's a question best answered by others. I do know that Transpower posts its view of security of supply on its website and anybody interested could look at their website for regular updates as well as talk to the EA if they want to read on regulatory views in relation to interference, but I don't think we are that well positioned to answer that question. Next question is any update on hydrogen progress. Again, simple answer there is no. No formal update. We continue to up skill ourselves really as to how realistic hydrogen production might be down in Southland, but we will provide updates when we feel we've got something reasonable. Question here, which is, does NZAS have any rights to restart the fourth potline under the existing electricity contract. The answer is -- to that is, yes. So it is suspended through August this year. But if you -- again, the agreement for the fourth potline is captured on our websites. And if you do look at that agreement, you'll see that NZAS could provide us with 5 days notice that they are reconnecting that potline. I'll move on to the next question, which is where does Meridian see the intersection between storage and NZAS trigger demand response level tracking in the near term. I think I can probably answer that question, which is we honestly don't know. As it will depend on rainfall as much as anything else. The trigger level can be found in the agreement. So you can see that over the next week or so, the trigger level lifts incrementally day on day plus hydro or storage will depend on how much it rains. So we have noted over the past week or so that the distance between hydro storage and that trigger level has increased. What that does in the coming days and weeks is again, a bit of speculation.

Sorry, Mike. I might just jump in there with a couple of comments. Demand will also be a factor in determining how close storage gets to the trigger level. So obviously, as it gets colder, demand [indiscernible] hydro generation has to lift to some degree, that will have a potential impact on any gap. And just to circle back, there's a little over 1,000 gigawatt hours of water sitting in Pukaki with its current storage level from there -- from 524 meters down to the bottom.

Thanks for that, Owen. A last question that we have here before wrapping it up. This question is, are you seeing any large or mid-sized C&I customer scale back electricity consumption. We haven't seen it directly. So we haven't seen large or mid-sized C&I customers scaling back electricity consumption directly. It doesn't mean that they aren't. Our customer team is in constant direct contact with not only our C&I customers, but all customers who might either have concerns about electricity prices to work through what we may best be able to do to support their ongoing businesses. And during time of stress what we see right now, they work very hard to do what we can to support those customers. So that brings us to the end of the questions. And with that, I think I will wrap things up. Appreciate everybody joining us this morning. We hope that you found the information that we presented a useful wrap of the quarter that our business has just been through. Appreciate the questions that people have, and we will have another one of these forums in 6 months or so in between publishing our year-end results and our interim results most likely in October after the release of the operating report for first quarter of financial year '22. Thanks, everybody, and we will see you then, if not before.