Meridian Energy Limited (MEL) Earnings Call Transcript & Summary

Good afternoon, everyone. 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 our video call where we share our thoughts and insights on the last quarter, something we do semi-regularly for investors in between the interim and annual results announcement. The format is pretty straightforward, Owen and I'll do a bit of mix and matching on the commentary. We'll cover everything from climate to hydrology generation, wholesale price information, consumption, retail operating costs, capital spend. It would take probably 10 to 15 minutes to do it, and then we'll take some questions from you all. And given it's a general update on our operations, we will steer clear of financial results. So I think it was an operating update as opposed to a financial. Okay. If you do have questions, remember to please simply drop your name into Q&A as we go because it's about a 20-second delay between what you write and what we see, given the functionality of the Teams' environment, and we will be sure to attend to them at the end of our spiel. Let's keep going. I'm going to hand it over to Owen.

Thanks, Mike. I'll just spend a bit of time talking about sort of climatic conditions in hydrology. And if you were wondering what the quarter was like, it was weak. In fact, the New Zealand 2022 winter, so June to August, was the warmest and the wettest winter on record. And if you're wondering if that's some kind of anomaly, it isn't, bearing in mind that of the 10 warmest winters on record, sets have occurred in the last 9 years. And it wasn't just wet, it was exceptionally wet. The vast majority of the country observed rainfall above 150% of normal, and largely as a result of multiple extreme weather events. Now while September dried out quite significantly in the South Island, soil moisture levels, particularly in the main irrigation regions are at or even well above average levels for this time of year. So we expect to see some sort of impact on summer irrigation demand, at least at the start of that irrigation season. And in terms of the climate outlook, look, a moderate La Niña climate pattern is prevailing, and that's expected to become an important climate driver during spring. And if you couple that with the -- familiar with the characteristics of a strengthening marine heat wave and higher-than-normal air pressure, things point to a third successive spring with a La Niña climate pattern in ascendancy. And look, we know from the hard experience of the last 2 years that is typically characterized by less frequent westerly winds which are the rain bearing wind flows that our catchments are fueled by, and more north-easterly winds, which typically results in dry spells in western and southern areas of the country and more frequent rainfall events in the north and in the east of New Zealand. I don't want to spell doom and gloom for everybody's summer. However, we are already mindful of this outlook and the prospect of dry spring and summer conditions with how we're using our current storage. In terms of hydrology, Q1 was the third highest Q1 inflows on record, and that was pushed along by the Waitaki catchment, which had inflows close to 220% of the Q1 average. And look, it was record setting staff, the winter inflows, June, July, August. And the Waitaki set a new record, the Waiau catchments that fuel the Manapouri station were not far behind. And that's a dramatic change from what we experienced in the summer quarter of this calendar year. And it just goes to highlight the increased variability that warmer temperatures are bringing. And particularly, through the latter half of the quarter at September, we leaned quite heavily on the Waiau water availability, and that's allowed us to keep Waitaki catchment storage at high levels. And Pukaki has come off a peak now, but it was close to twice the seasonal average at that peak. And look, despite a warm winter, if you did get down to a southern ski field this year, you will have enjoyed good snow depth, and we're seeing the current catchments at both pack sitting at about 116% of average. So it was wet, but the freezing level was still there, albeit probably higher than historical levels. We've got good snowpack to fuel the summer and spring inflows as well. [indiscernible] a good melt. Look, we pumped out the second highest level of Q1 generation that we've recorded, so a strong generation quarter. Now with the low wholesale market spot prices reflecting that high national hydro storage, that record generation volume realized a pretty modest average price of $62 a megawatt hour. On the demand side, despite what is clearly, sort of temperature headwinds, the quarterly demand was strong. In fact, we recorded the highest -- although naturally, we recorded the highest Q1 demand in the last 15 years, and it's the first time in 4 years that we've seen Q1 growth year-on-year. Now that all sounds super encouraging. Taken slightly longer view of demand and levels are still relatively flat, the calendar year for 2022 still has demand a little bit behind the prior year comparative. So there's probably a little bit more to go before we can see any kind of clear pattern in terms of change from what's been relatively flat demand for a decent period of time. Look, I'll pass back over to Mike, and he'll cover off the rest.

Thanks, Owen. Look, as Owen just mentioned, the weak conditions that we've experienced, they haven't all been bad for people who are purchasing energy and wholesale anyway because they had an impact on spot near-term forward prices as well. The quarterly generation prices that we received were half as well again as last year. And as there's been the opposite change, I think. And in relation to the long-dated forward curve, where oil prices have fallen in the short run, the forward curve certainly, as seen on ASX, prices through the 2023-2025 period are trending 10% higher than that we're at the start of the period. And mobile hydrology doesn't extend into those periods, so I think what we see as the market continues to price and multiple risks over that time frame is -- everything from gas availability and price uncertainty are forcing views on high-price coal sitting on the margin to rising carbon prices and risk of delay in new generation and construction. So a myriad of factors that are weighing in on ASX prices as you look in the future. Same time '26 has begun trading. It's trading at about a 10% discount to '25 prices. So some of the same consumers might flow through that period. But what I can also do is I'd like to talk to the volumes traded on ASX, so how real are those prices in the formation. And back in August, when we announced our annual results, I said that over 90,000 gigawatt hours have traded on ASX over the previous 12 months through June or twice the physical consumed volume. If you jump forward now so the volumes traded on ASX and not at June end but at September end is that 90,000 gigawatt hours has lifted to 107,000 gigawatt hours or a lift of 19% through the first 3 months of the year. So the volumes are lifting, which is pretty impressive in a market that's already incredibly liquid. So I think those prices are a reasonable view of what people expect as of today with that sort of volume traded. And Meridian is a [ lag ] participant. We provide support to that market by providing market-making services. We traded over 10,000 gigawatt hours on the ASX over the last quarter. So Q1 this financial year, which is up 24% on the same period last year. And those 10,000 gigawatt hours that I just mentioned is over 275% of our Q1 physical generation volume, so give you a bit of an appreciation of the support we provide and the scale of activity on ASX. You may also have picked up from the operating report that future contract closeouts through ASX that flow through our results have been higher than normal. And reason for this is projected retail sales for '24 and '25 have reduced from where we were probably a year ago. And so what the team has been doing is closing out excess hedges that were bought to match the previous sales projections and better aligning the portfolio. And those hedges really -- because we bought them a year ago or so, some of them probably earlier have all been well in the money. Therefore, as you would have picked up in our operating report, we have realized gains of around $32 million in the quarter as we've closed those out. We still got a little way to go to balance out that hedge position. So there might be a few more closeouts through the next quarter. If I jump to retail, as I noted, just for -- our rate of residential growth is slow. And that follows a decent period of strong growth, in fact, a very strong period of growth for us. We're still accommodating growth in business and corporate volumes, but our portfolio is sitting pretty full, so I'd be surprised if we see too much more growth. And you would have picked up from the quarter, it's captured in the operating reports that the average price that's sold into those retail channels was up 9% over the quarter, largely driven by the rising forward curve and some impact on corporate and industrial pricing that I mentioned. I talk quickly to OpEx. So operating costs were up $8 million in the quarter, and that's what we expected. The full year forecast that we provided is about 11% to 13% on fin year '22 still holds. And just a reminder, that's driven by -- there's an accounting change, which is a full year of Australian COGS in the costs, which were previously eliminated between the New Zealand and Australian business, are now captured in our operating costs. We have had a $0.07 lift in average salary across the business, and that was deliberate from our perspective is we want to retain and encourage the crew that we work with to give their all to the business, and particularly with a low rate of migration in to New Zealand, attracting new folks to come support us is tough. So I think that's a good change to have made. And of course, the last piece that I've mentioned was the growth in Flux and we're trying to grow our Flux business. We're also lifting -- we're looking to lift the run rate of our development team as we set to grow earnings and revenues from both those activities. So the rest of the business, this job is to hold operating costs flat and that's what they're doing. I jump to CapEx or capital spends. The key piece there is the Harapaki wind farm builds. That's the main component of growth CapEx this year. Well, earthwork crews continue to make good progress there. We managed to get through winter without too much weather disruption, which is a surprise given the disruption that we had in summer. But we're pretty happy about that. We actually expect from the last turbine, wind turbine hard stands in October. So the team is making good progress as evidenced by transformers are on site and the substation is expected to be livened towards the even -- or early part of next year. And the first delivery of turbine componentry is expected late May -- late April, May 2023 with first power a couple of months after that. So look, our CapEx guidance that was [ $40 ] million to [ $435 ] million still stands. We'll provide an update on that at interim results early next year. And I'm obviously going to finish with another piece of info that doesn't flow through the operating reports, but on Wednesday, the Electricity Authority, our regulator, that released part 2 of its wholesale market review. My initial reaction, at least, was that the Electricity Authority identifies the renewable investments needed and necessary and that the more parties investing in our future of our industry and our economy as we decarbonize the bidder, that's the business we're in, which is we believe is the competition brings out the best of everyone. So we're up for it and we embrace that challenge. At the same time, EA noted that they were confident that the market monitoring framework that they introduced back in 2021 was doing the job they expected, and the price formation in the wholesale market reflected supply and demand, which is important for everybody. I'm sure we'll find a few things to comment on as we digest that information more generally, but it's certainly useful to have the regulator's views on those 2 elements in the public domain. So that is it from spiel. I'm going to move to questions which if I look at questions, which I have just done, it doesn't look like we have any at this stage.

If you do, everyone, now is the time to drop it in there. There's a 20-second delay between you typing in and us seeing it. So we'll give you a few more seconds to see if anything comes through. Otherwise, I will shut things down in 30 seconds or so. Okay. Question. Looks like it arrived just to make in time, from Ian. Thanks, Ian. Question is on the EA report, how you respond to them raising the possibility incumbents were holding back on generation to build new generation? Certainly put, I don't think there's any substance, and we offer generation into the market at all times as is appropriate and required under the market rules. And when it comes to new investment, we are working as hard and as fast as we can to deliver new energy to the market. We're well aware that there are plenty of other people who are doing exactly the same thing as we are. And we would rather that we are able to successfully deliver new energy to the market, so it does take time to do. The conditions out there globally are probably a little more challenging than we'd hoped, and -- but we do have a pipeline that we are trying to bring to market as quickly as we possibly can. So hopefully, that answers your question. It doesn't look like we've got any others. So I might close by thanking you for joining, and we'll see you and do another one of these in 6 months or so. Thanks all.

Thank you.