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 of Meridian and with me is Owen Hackston, our Investor Relations Manager, who I'm sure you know. This is the regular call where Owen and I share our thoughts and insights on the last quarter, something we do [ we're introducing them ] regularly in-between the interim and annual results announcement calls. The format is pretty straightforward. Owen and I will mix and match a little bit of commentary on climate, hydrology, generation, wholesale prices, electricity consumption, Tiwai retail, operating costs and capital spend over the next 10 to 15 minutes or so, and then we'll take some questions. Given it's a general update on Meridian's operations, we'll steer clear of any financial results. Of course, if you do have questions, please drop them into Q&A, which you should see on your screen as -- you can do it as we go because it's about a 20-second delay between what you would write and then what we see, given the way that Teams functionality exists. And I'll attend to -- we'll attend to them at the end of our spiel. With that all been said, I'm going to hand it straight to Owen to talk to you about climate.

Thanks, Mike. Hello, everybody. Summer might seem a blinding memory in most of their minds. But the 2021, '22 summer was comparatively warm, the fifth warmest on record. At [ Darkfur ] a pretty cool, Wellington Summer, probably would have been warmer. General rainfall was above average. The exceptions were if you were north of there and the extreme south of the South Island, which we'll get to in a little bit. March followed on as another warm month, albeit with generally below average rainfall between the South Island. The notable exception to that low rainfall spread was Eastern parts of the North Island, which saw quite a remarkable rainfall numbers. Generally, the predominant pattern behind the weather was a La Niña pattern that brought mainly easterly weather flows, and we've all experienced a number of sort of extratropical cyclone events that have hit mainly in the north and east of the country. As a consequence, North Island Hydro is in relatively good condition. However, has met the parts of the South Island have seen a remarkably dry summer. A little bit of hope of change in there. April has seen a number of westerly rain-bearing fronts passed across the South Island. However, the last few days with another extratropical with the system dropping out of Pacific shows that La Niña patterns are still relatively influential. In terms of what that's meant for Meridian's hydrology, the quarter was characterized by a remarkably dry sequence in our Waiau catchment. Manapouri and Te Anau lakes recorded the lowest March quarter inflows on record, amounting to just 1/3 of average inflows and about 20% lower than the next driest March quarter we have on record, which happened in 1970. To give you a sense of how prolonged the dry period down there has been, in the 90 days of the quarter, we had exactly 3 days where we had inflows above these daily averages. That lack of water has seen the lakes dropping into their low operating ranges. And at that level, Manapouri production becomes restricted. And what generally follows is greater draw on the Waitaki catchment to compensate. Fortunately, in February, the Waitaki catchment saw a decent rainfall event. Unfortunately, March followed up with record low inflows in net catchment as well. So it's been a dry, period. And despite the scantness of inflows, quarterly hydro generation actually ran something like 9% ahead of the comparative period, although net comparative period also [ jinxed ] with low inflows, although at this time a year ago, we were experiencing much more widespread dry conditions with both below-average North and South Island storage. However, it's reached a point where starting in late March and for certain periods in April, we've chosen to call tranches on the Genesis Swaption just to help manage the ongoing dry conditions. And we deal with dry conditions. One of the things we hope for is exceptional wind conditions. We didn't get those, either. So wind hasn't provided much relief for South Island, low inflows. Generation volumes for the quarter were off about 8%, and that's consistent with the lower level of wind generation that we've experienced so far this financial year. So while it's cool in the lower parts of the North Island, the upside as it hasn't been quite as windy, which is an upside for everybody except generators like us. So fairly challenging climatic conditions over the quarter. And the immediate rainfall outlook doesn't suggest a lot of change. The rain that we have got, particularly in the Waiau catchment, falls on very dry soils and forest beds. Not a lot of it makes its way into catchment lakes. It needs a good soaking for that to happen. So that's where we sit currently. There's certainly some price impact in relation to that. And I'll pass it back to Mike to talk a little bit more about prices that we've observed in markets.

Thanks, Owen. Let's just say there's some challenge -- been some challenge out there for our operating teams. And before getting into prices directly, I just want -- I do want to do my reflection on Owen's comments on hydrology because back in February 23 where we had our interim financial statements announcement. I said we had a pretty decent January as capture the operating report from January and that the tropical cyclone, I can't remember its name, really. February though, that it adds -- basically it filled Lake Pukaki. So we were sitting in a pretty good spot. I noted, thankfully that at that same cyclone [ missed the wire, through the autumn ] was a rain forest. So we weren't that concerned at the time. And to Owen's point, that's been a long time between [ drenches ] for those trees, farms and hydro lakes down that way. And it's certainly drier than I've seen all that I had to endure when I ran the wholesale team, and I did that for an extended period of time. So as Owen picked up, it's exceptionally -- or that the conditions down there are very unusual. So in early -- a little bit more color. Given that backdrop, in early April we advised the market that we were exercising a provision within the NZAS agreement, that's known to us anyway is price separation provisions. That's for the first time since the contract was negotiated. We haven't done that before. But the result of it is that for any trading periods when the Tiwai price is 15% higher than the Benmore price, then volumes under the NZAS contract reduce to the quantity of generation produced by the Manapouri [ hence ] wind farm down that way at White Hill. So as a result, NZAS takes spot price risk for any consumption that sits above those production volumes, the idea being, obviously, is -- provide an incentive when conditions are tough for others to pitch in outside of -- to manage energy stability outside of just running hydro facilities. There are a couple of restrictions in that contract. We published the contract on our website, but it's quite a read. And to summarize the way that those provisions, the price separation works is, we do have to provide NZAS with 7 days' notice that we were looking at those provisions, which meant the first time we excised them was 2nd of April, and that's when we notified the market that, that was the case end. Another important piece is the first 2 hours of any price separation period that we do notify are excluded from any exposure that NZAS has. Possibly, I might be speaking a little early, but Transpower -- for those in -- close to our industry will know that Transpower completed the upgrade of the Clutha Upper Waitaki Lines Project yesterday. And having done that, that -- they reinstated those lines, the project is now officially complete, which is a superb job completed by Transpower. They are ahead of schedule, certainly the schedule they set out for the market and for themselves, being April as compared to May. And while that was a project that was primarily focused on Manapouri production not getting [ tracked to NZAS, did indeed leave ], obviously has benefits for energy security and stability in Southland when conditions are dry down that way. So our expectation is that -- given those lines have been reinstated and upgraded, price separation periods are unlikely to occur moving forward. As I said, it might be a little early on that call, but we'll see. And of course, the good news is don't ever forget it, what has been a long stretch while conditions have been unusual, Fiordland remains a rain forest. So the regular pattern it will reemerge at some point and when it rains, it tends to rain pretty hard down that way. Now it is a good opportunity, though, to kind of just again demonstrate that New Zealand's got limited hydro storage and operating conditions change faster than people are able to comprehend, particularly when they look at the lakes and go, it seems like a lot of acreage. So things have moved quite materially over a couple of months. Post those same conditions moving kind of on price a little bit -- the same conditions have had their impact on spot and near-term forward prices. That said, the quarterly generation prices for us were 28% lower than last year. And some, they have to be scratching their heads at this point. But if you jump back to last year, you might remember that starting hydro storage January last year was a lot lower than starting hydro storage this January. And I mentioned just earlier that we were fortunate that Lake Pukaki got to top up from the cyclone early February as well. So prices being lower on average than they were at previous quarter when you take storage into account, hopefully isn't that surprising. The move in the longer -- the forward curve, ASX prices out through '23, '25. Now that's a phenomenon for the quarter as well, those movements have been significant. They're trading 20% to 30% higher than they were at the start of the quarter and low hydrology obviously, doesn't impact into future periods particularly when you're looking out through '23, '25. So we see the markets pricing and the multiplicity of challenges and risks, whether it be gas prices, gas availability, coal prices, coal availability, carbon costs potentially delays in getting physical generation into the country and to provide for new investment to moderate the price impacts could be the cost of any new investment is going up with the tightness of those supply constraints. And there's been a change in sentiment from Rio Tinto in relation to NZAS over the period that might be being picked up in those periods as well. And it's hard to go pass those prices. You see that at our interims is the trading volumes on ASX are significant. And they were very, very strong in both February and March, the trading volumes on ASX. That is with a lot of the activity is not just focused on market makers, so us, Contact, Genesis and Mercury. A lot of that volume is transacting outside of the market makers, suggesting there are folks that are either hedging or speculating out there that are driving a lot of that volume. And you would seen in our operating results, the cost of market making for us in January, February was reasonably substantial, although March, we managed to [ pull forward ] a lot of that back in year-to-date as reasonably neutral. So probably the majority of our update this quarter is focused on those physical conditions and the movements in underlying wholesale prices that either the conditions drive or the concerns that people might have longer term. Our retail team continues to deliver with -- the volumes are up over the quarter on 5% on last year. Customer numbers are up 8%. Probably the only interesting bit, that's a trend that you will have seen from our retail team over a period of time, probably [ own divergence ] might be interesting, might not be, is that our agri customers, so the big irrigators and particularly the irrigation demand was well down to 19% off, given some of those summer conditions that people have experienced up north in particular, but also probably driven by that real [ douse ] in early February. And we did put through what I'd call modest mass market price -- energy price increases from 1/8th worth the quarter as well, in that 2% to 3% range. We take a long-term view of pricing for our residential customers. If I jump beyond that, as I say, that's kind of stuff you've seen from us for some time. I jump to our cost base. You might have picked up that March OpEx looks higher compared to the prior year, really simple explanation. We introduced fortnightly pay runs across our business for those who wanted to opt in to fortnightly pay runs. A number of people picked that up. And March was just a month where we had 3 cycles as opposed to what we would have picked up last year, where it was just a monthly cycle. So the cost base there was driven by the introduction of fortnightly pay cycle. There's no change to our full year OpEx forecast, though. We are still expecting 2022 New Zealand operating costs to fall in the range, the $215 million to $220 million range. I jump to CapEx, and then I'll finish with the events at [ Hume Dam ]. Wellington office is Harapaki, represents the main component of growth CapEx. The bulk, Earthworks, which are materially under worksite continue to be impacted by the wet weather. We did note that at our interim result announcement. We won't have really any insight into what consequences of the wet weather will be until the end of the summer season, so late May is when we will get better insight and we'll provide an update if there's any impact been or further update. And the interim CapEx forecast, though, which we gave at $165 million to $175 million looks reasonable, but we're likely to land at the top end of that forecast. Now I'll finish on our Wellington office not for any other reason that it's just recent. You may have seen described, probably the announcement this morning about seismic risk to our Wellington office. Meridian spoke to [ Te Anau ] of that property, and we've chosen to vacate the premise. And really simply is we don't have a significant amount of information on the data of the property, but what -- we did here enough yesterday to vacate the team because the safety of our people is the most important piece to us. Business operations aren't impacted. We've got alternative sites for generation control, which does operate out of the building and the rest of us are reasonably used to working from home. So we've got a pretty decent hybrid model. A bit of -- it's an inconvenience as much as anything else. And we're right in the middle of process, we have to frame up what we'll do given the news we received yesterday. I'll stop the spiel right there. I'll have a quick look to see whether there are any questions from anybody, and I'll talk slowly to give people a chance to register. It doesn't look like we've got any questions. So what I'm going to do is I'm going to wrap it up. I'm going to thank Owen and the team that are helping us with production for hanging around as we get deep into the day before Easter, and thank you all as well for attending. Hope you enjoy yourselves over the Easter break, and I hope you've got some useful information from us today. Thank you very much.