Meridian Energy Limited (MEL) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to Meridian's quarterly operating results call. I'm Mike Roan, CFO at Meridian. And with me is Owen Hackston, our Investor Relations Manager. This is the second call we've had where we share thoughts and insights on the last quarter, and we'll continue these calls semiannually in between interim and annual results announcements. Format is pretty straightforward. Owen and I will mix and match commentary on climate, hydrology, generation, wholesale prices, electricity consumption, Tiwai retail, and we'll toss in a bit on operating cost, capital spend over the next 10 to 15 minutes. And then we're happy to take questions as you may have them. Given it's a general update on Meridian's ops, we will steer clear of financial results and questions related to the financials. But if you do have questions, please drop them into the Q&A as we go. There's about a 20-second delay between what you write and what we see given the functionality of Teams. We'll attend to them, though, at the end of our opening spiel. So hopefully that was helpful, and I'll hand you straight to Owen.

Thanks, Mike. Just some general comments about the weather. Here in New Zealand, we've just lived through the country's second consecutive almost winter on record, beating last year's winter actually, so consistently higher temperatures. And notably, no part of the country experienced below-average winter temperatures this year. And apart from some isolated parts of the North Island, rainfall was generally above average through the quarter. Hydro catchments in both islands benefited from good inflows. We do have a La Niña pattern prevailing, but the [indiscernible] is much less advanced compared to the same time last year. And as a short-term influence on New Zealand's climate, this likely won't be as substantial as last year looking forward. What that means is there's no real influence on the weather patterns, likely to see just variability in weather systems during the coming months. Like I said, there's no strong indication either way on La Niña versus El Niño weather patterns. And looking at the East Coast of Australia, similar sort of thing and a similar sort of experience in terms of warmer-than-average winter temperatures. In terms of hydrology, I guess, for us, the drought of 2021 seems just a memory now. Q1 inflows into our catchments were the second highest Q1 inflows on record and about 1/3 higher than Q1 of last year. What that means is we have 100% more water than we had this time last year. In practical terms, Lake Pukaki is 4 meters higher than it was in October last year. So look, a good store of water there. And while it has been warm, the relatively high precipitation levels that we've seen can actually mean a healthy snowpack in place coming into the melt season. And if you've been up at ski field in the South Island, you might wonder where that snow is. It's certainly there. It's about 132% of average, probably sitting at slightly higher levels of altitude than what we've seen previously, but snowpack is in really good shape. And also in great shape is our Hume reservoir in Australia. During the quarter, lake levels at Hume rose from 57% to 96% of average. And typically, that storage is seasonal, builds up with irrigation releases generally occurring between December and May off the back of winter inflows. We're running ahead of that. We've seen earlier releases that's boosted hydro generation in Australia. Hydro generation in New Zealand has also been boosted, too. So 13% higher this quarter than the comparative. That's 370 gigawatts of more generation length that we've had this financial year. That underpins pretty strong quarterly result. And certainly, in Australia, well above the comparative due to providing direct conditions that we had that eventually finished up in the previous financial year. And look, just a quick comment on wind. Volumes are variable on a sort-term basis year. Intra-year, we tend to see pretty consistent wind numbers. They were off a few percentage points in Q1. But as the last couple of weeks have reminded us here in Wellington, we are definitely into the windiest time of the year. That's about it in terms of sort of conditions. Mike, I'll kick it back to you. You have a little bit of talk about prices, et cetera.

Thanks, Owen. It might be the windiest time of year, but there's certainly [indiscernible] here in Wellington today. Okay. So as Owen mentioned, I'm going to talk to wholesale prices and with the strong hydro storage that Owen talked about and as most of you will have seen and expect as we've seen spot prices more than half through the July to September period. The forward curve shunted downwards as well. So a bit of an example, Q4 '21, which trades on ASX, it's the October through December months that's fallen from $150 a megawatt hour back in July to $73 a megawatt hour as of yesterday as national hydro storage improved. Some markets are doing what you would expect in that regards. But that said, forward electricity prices or prices that's covered on ASX, they still reflect the stress in the supply side of the gas market in the medium term, so they're still reasonably strong. And they possibly cater for increase in carbon costs. We do see that the overall, though, the effect of new renewable investments, which start to show up in '23, '24. It means that the forward curve is what we call backward-dated, so it falls over time and certainly well off its 2021 highs, which, again, stuff that you would expect in a market that's functioning pretty well. And if you look at the graphs on Page 5, the operating report, I don't know if anyone's got it in front of them, you will see that trend with 2025 futures, which commenced trading on 1st of October at lower levels than 2024 prices. I think it might have been a couple of analysts who called that before the product started trading. So good picking skills. All of that said, there's certainly heightened awareness of gas and gas impact. So any unscheduled gas outage offshore will drive volatility into those forward markets. So hedging risk, in our view, remains important consideration. Over the ditch, Australia market prices recovered reasonably strongly from the 2020 low levels that we saw. As -- and there's -- Australia had winter, but they have moderated again as warmer temperatures and COVID lockdowns over there have brought those prices back, but that's still tracking above this time last year. I'll jump into demand quickly. Demand in New Zealand is down slightly on Q1 this year compared to last year. No surprise as last year at the same time was -- New Zealand was COVID-free, whereas the COVID lockdown again in August knocked business, commercial, industrial consumption down a touch, while residential consumption lifted us. Overall, consumption over the quarter fell by about 0.4% on the same quarter last year. If you do remove the COVID impacts, the New Zealand economy has been pretty buoyant, with demand this calendar year up nearly 1% on last year. Quick note on the smelter running at full noise on 3 potlines that you expect with aluminum trading at about $3,100 per ton. It's probably gone up a touch as it's tended to do over the last few months. But certainly, they are operating strongly. Potline 4 remains in suspension. I did see there was a question from Andrew in that regards. We will -- if there's anything to say on Potline 4, then we'll be sure to make a market announcement on it when the time comes, but nothing that we've seen so far. So I jump to retail. The New Zealand retail team here, so our retail team remains on a tier. Volumes up over the quarter, as you were seeing, 11.6%, customer numbers up 8%. And while sales prices were also up, it's good to see that -- or not see, how I think of it, as the September quarterly CPI release shows that electricity prices were not fueling inflation. If I jump across the ditch again, we've eked out more customer volume growth over there. Average prices -- retail prices remain significantly lower. They're driven by the regulatory contracts. VDO and DMO drive that. But as I mentioned above, as prices lift into this year, then those frameworks will lift retail prices. Again, that said, we tend to have a price reset period over and all, so we changed our pricing in line with those frameworks on 1 July. And we'd expect to do the same again next July. I'll finish with OpEx and CapEx, not too much with the stats. Costs are up a little on last year. Hopefully, people remember that that's what we forecast. We're still tracking to the $275 million to $280 million full year number we indicated. One thing to note is that, during the quarter, we did receive final $8 million payment from E.ON, and E.ON's a large utility out in Europe, as we wound up the Flux relationship with them in the U.K. We mentioned back in February that E.ON had announced intention to close its Powershop U.K. business during the '21 calendar year. And that's what that payment represents. So terms with npower have been finalized. And just finishing up with CapEx before turning to the questions, if there are any. Growth CapEx captures Harapaki. So you note that our growth CapEx is up. No surprise. The project is underway, going well. I've been up the site for a couple of months. It's definitely windy up that way, but we've established a project village. Several contractors are well mobilized and bulk earthworks have commenced. Owen and I both saw a flyover at the site, and it's quite incredible what massive machinery does in a reasonably short space of time. And last piece in CapEx was that zoomed in the detail. There was a land purchase, and that was a land purchase to house our North Island battery. Can't say too much more on it here or anytime really, but we will provide an update at interim results, just a reflection of earlier comments that we made, which is we're accelerating that development given events that played out during the year. And that's what we were going to talk to. So what I will do is I will turn to questions that people have raised.

I'll flip them to Owen if there's anything that's in there. The first one -- the first -- what do we got? 1, 2, 3, 4 from Andrew. So the first one was -- is Potline 4 restarting any conversations? Hopefully, I answered that, Andrew. I did see that one come through as we started. There's -- second question from Andrew is, are there any conversations yet about staying open beyond '24? The answer to that is real simple, which is no. And just a reminder for folks who might be wanting to raise a question as you jump into the Q&A tab and type it in there, we should be able to see it. Last question from Andrew was, can I comment on 2025 ASX prices? It looks like the market assumes [indiscernible] stay open. Maybe a small discount and be more. Is that consistent with Meridian's view. I think we've been reasonably clear. Well, 2 things. I think it would be fair to say that the ASX prices reflect market view that the smelter stays open. But whether that plays out or not, in our view, hopefully, we've been really clear on the parameters that we would want to see that might facilitate any conversation between ourselves and Rio. And they have got to do with really simple things like having a mandate from New Zealand public and managing reputation, provide support and flexibility to support the New Zealand electricity system. If we're talking, we want to talk about a real commitment to New Zealand. And of course, as we've mentioned many times is the arrangement we've got in place is an exit arrangement. That's why we did it. It would be a better transition for not only ourselves, Rio, but also for New Zealand, but price that's reflected in that exit arrangement would also need to change. So there's -- we will see how that plays out. As I said, I don't have anything new today for anybody on that, though. And that is the extent of the questions. So -- no, I've been told that, that is incorrect. So here we go. We've got one more that has just come in or probably came in while I was talking. The question is, is there a time line for completion of the Australian business review? And does that remain within the first half of fin year '22? So yes is the simple answer to that is. That process continues to track and track to the time line that we've laid out before, which is into November, certainly before the end of the financial year. So a little too early to tell you anything more than that, but the process continues to track as we had laid out in our internal time line. I think that's it for us today. I don't know if there are any further questions, which is good. We'll give people a couple of seconds in case there are any remaining questions. Otherwise, we can call it a day. Hey, thanks to folks who have taken some time to show up. But hopefully, that is useful commentary. I'm sure you'll give us feedback as we step through it. But thanks for your time.