Meridian Energy Limited (MEL) Earnings Call Transcript & Summary

Good morning, all, and welcome to Meridian's quarterly operating results call. I'm Mike Roan, I'm CFO at Meridian and sitting with me virtually is Owen Hackston, our intrepid Investor Relations Manager. This is the video call where Owen and I share some thoughts and insights into the last quarter. We do it semiannually and between the interim and annual results to provide a little more color and context to the operation of our business. The format is pretty straightforward. We'll mix and match commentary on the climate hydrology, generation, policy on prices, consumption, retail operating costs and I might throw a couple of tidbits in there if there was anything interesting from an operating perspective as well. But given it's a general update, we'll steer clear of the financial data and financial results. If you've got questions, anyone who's participated or listened to us previously, you'll know that it's about a 20-second delay between what you hear and what we see. So if you do have questions, make sure you drop them in early so that we don't miss them. If there are any questions, I will talk to them at the end of the spiel. So first, I'm going to hand over to Owen.

Thanks, Mike. And I'll talk about the weather actually. And look, while our collective memories of summer may be fading, it did prove to be both a warmer and drier summer than average -- with temperatures above or well above average for most of the country. The exception in that was western and southern parts of the South Island, but nothing outside of normal. And really low rainfalls or a large wave of eastern parts of the country and near drought conditions by the end of summer. In contrast to that, there was a lot more rain through the Central North Island and in western and southern parts of the South Island, driven by more prevalent westerly winds, which is one of the defining characteristics of the prevailing El Nino conditions that we have been in. And then Autumn started. And if it felt like summer ended quickly. It did March 2024 proved to be the coldest March in 12 years. And [ Ni ] would describe an unusually cold month as a month where the average temperature is more than 0.5 degree below its historical average. And March was one of those unusually cold months. And in fact, it was the coldest unusually cold month in over 10 years. That's another way of saying in all of the 10 years, the coldest month to its historical average was the March that we just went through. And the cold conditions were driven predominantly by south westerly wind flows, which can be a characteristic of a waning El Nino weather pattern. And that's the outlook that we have in place for the rest of autumn and into winter and easing to neutral El Nino is expected to bring normal rainfall levels and temperatures through autumn and winter. From a hydrology point of view, the contrast between the El Nino conditions experienced this quarter and the La Nina influences of last year were evident in our inflow totals. This Q3 was something approaching average, and it was 22% higher than what we recorded as inflows in Q3 of last year. However, -- and to highlight the rank full variability you get in with the patents last week saw a major inflow event into hydro catchments. With South Island and National Storage quickly rising back to average levels, which puts us in a very good position fuel wise approaching this winter. Between the 9th and the 14th of April, nearly 900 meters -- sorry, 900 millimeters of rain was recorded at high altitude rain gauge in Aoraki, Mount Cook. Our main storage like in the Waitaki, Lake Pukaki has risen more than 1.7 meters so far, and it's still rising and is forecast to exceed average over the next few days. [ Waiau ] lakes are now at high storage levels, and there's a series of smaller weather fronts in the deep south arriving this week. So we should continue to see like Manapouri and Te Anau levels rise. All of that supported strong Q3 generation volumes. And in fact, it was the highest Q3 generation numbers in the last 4 years, which broadly ties in with the last time we saw an El Nino prevalent Q3. And average prices through Q3 of this year were high to 35% above what we experienced in the same period last year. And Michael talked to wholesale prices in a bit more detail shortly. Finally for me, just to touch on system demand. That was the other really strong number we saw in Q3 of this year, lifting over 4% on the same period last year. Firstly, agricultural reasons saw double-digit demand growth off the back of higher irrigation load. However, provincial and urban demand was stronger, too, likely lifted by a combination of summer [ cooling ] and then March heating load. Look, it's also worth remembering that Q3 last year did see electricity supply interruption in the North Island from numerous serious weather events. What does that mean? Well, it's always hard to pick layers or pick through the layers on demand. But overall, it feels like there's positive growth in and amongst those other seasonal factors. And we think that's pretty encouraging. With that, I'll pass it back to you, Mike.

Thanks, Owen. There's no question that Q3 weather was a little kinder to southern hydro catchments this year compared to last and the one before that. The 900 mills of rain is always appreciated. As Owen mentioned, the quarter did see high generation price capture for us. You would pick that up in the operating report for Q3. And you see it coming through futures as well as the futures curve did lift over the quarter as hydro storage kind of drifted below average during the quarter. Of course, that's changed now. But longer-dated futures also rose over the quarter. And always hard to know what drove that but we do sense that ongoing uncertainty around the future of existing gas supply continues to manifest itself in those longer-run future prices. And there's a lot of conversation out there in relation to gas supply. Most of it seems to focus on deliverability and in fact, deliverability decline. You see the production from most of the main gas fields are falling, and that's despite the completion of investment programs at those fields. So we will wait and see. I don't know if people have a tremendous amount of confidence in the capacity of our storage or production facilities at guess from a long run perspective, and that looks like it's showing up in those long-dated forward curves. And while there's plenty of reference made to a tight winter supply this year, the rain that both Owen and I mentioned means that hydro storage is at a pretty good level. And the production and capacity additions that we have seen and been able to drive into our business alongside a couple of demand response provisions that I'll talk to in a bit with NZAS production at Harapaki and [ Tararua ] certainly feeling like things have eased a little bit in the short-term. From a retail perspective, for us, another great quarter, 8% lift on volumes over the quarter with 6% higher price capture. The volumes were driven by agri dryer in the Southeast and Northeast of the country meant that volumes certainly in our portfolio lifted quite materially. And Owen mentioned earlier that alongside the lift in residential and small business customers within our book drove the volume lift out of the quarter. That compares to corporate and industrial volumes that were actually pretty stable. One thing that's not there that may be of interest is the team -- I've talked to it a few times, is the team has focused on extending the duration of contracts in that C&I segment and jump back probably 4, 5 years ago, the average contract length or duration in our book was about 2.2 years. That's now just over 5 years. And we have done that on purpose to manage risk, but also to help customers who have been challenged by the higher wholesale prices and forward curve. If I jump to OpEx, hopefully, it's no surprise -- see the lift in quarterly OpEx. We guided to a full year range at the interim result release of $276 million to $282 million for the full year. Just as a reminder, that was driven by higher [ RIM ] across the business. IT and insurance costs had lifted and we were and are investing into retail business. So hopefully, that doesn't come as a surprise. And nothing to focus on CapEx. Again, at interims, we updated the full year CapEx guidance. We dropped at $345 million to $370 million. And assuming we land a couple of land purchases that we are focused on, we're on track to land inside that range. I mentioned I might talk to a couple of other things as well. And the first couple will focus on Rio. The -- really good to see NZAS enter into a new peak demand response agreement with us covering the 12 weeks over winter covering 12 weeks of winter 2024. And for those who don't remember it, that's an agreement that allow us to ask Rio to reduce consumption for 4 trading periods or a couple of hours a day or 20 trading periods or 10 hours over a fortnight to reduce peak pressure on the electricity system over peak periods. And that sits alongside the demand response agreements that we entered into with NZAS back in 2023 that allows us to ask Rio to reduce consumption over a longer period of time by up to 50 megawatts. And interestingly, we exercised the 50-megawatt agreement in March off the back of a couple of transmission outages in Southland that we're potentially going to cause spring washer effect, which would have been particularly unhelpful for us and consumers who are caught by that spring washer. So that agreement is already helping even though we exercised it under unexpected conditions. And we talked about Manapouri transformer outages at the February results announcement. The main transformer or 1 of the 2 transformers has been repaired. It's being reassembled as we speak and tested, and it will go into a period of Soak, which will last through June, all going well. We should have 6 units back at Manapouri and operational as winter kicks in. And I mentioned earlier that turbine installation at Harapaki is going well. It's going brilliantly. Both Owen and I have got backdrops of Harapaki in our minds a little earlier in the piece than [indiscernible]. You can see that magnificent crane putting turbines up, whereas Owen's had a nice cloud cover with a couple of turbines [ poking ] above the cloud. But the key point beyond the photos is things going well in terms of the construction. If anything, slowing them down. It's wind speeds over the last month have been reasonable. So that had a few days where they haven't been able to do much, but they're making good progress. And as a reminder for us that the wind resource up here is superb -- that's the end. That's come to the end of the kind of spiel.

So I'm going to move to questions. I do see that we've got one. But if anyone has any others, make sure you drop it in now because there is that 20 seconds delay. And if you could throw your name into the question, that would be great. So that I know who the question is from -- I will move to the first question, though, is from Grant -- I reckon that's Grant Swanepoel, hope it is, if not apologies to Grant. The question was the price cutback of the HVDC link. And were there any negative -- was there any negative impact on March profits or March financials. The simple answer to that is no. So HVDC link, there was a major outage that spend the best part of 3 weeks. It was well signaled. We set our position up for and to manage that. Probably the only imposed from our operational perspective is the Southland transmission outages that I mentioned, but they were for a period of a couple of days, none of the above over there had any impact on our financials. For March and I reckon that could be it. So hey, quick thanks to everybody for joining. I hope you found it useful. Owen is obviously available outside of us for anybody who's got any questions and loves taking those questions and informing people of our business. But for now, we'll sign off. Thanks.