Meridian Energy Limited (MEL) Earnings Call Transcript & Summary

Good morning all, and welcome to Meridian's Quarterly Operating Results Call. May not be as good as an ASM that was held an hour or 2 ago, but Owen will do the best. I don't know, I'll do the best we can. I'm Mike Roan, CFO at Meridian. And as I just mentioned, I've got Owen Hackston with me, who is our Investor Relations Manager. If you've attended this call before, you'll know that this is the regular call where we share some thoughts and insights on the last quarter. We try and do it semiannually between interim and annual results announcements to add a little bit of flavor to our operating reports. The format is pretty straightforward. As I mentioned, we'll mix and match the commentary on various elements that include climate, hydrology, generation, wholesale prices, electricity consumption, retail operating costs, capital spend. We'll try and do it over 15 minutes or so and then we'll take some questions. But as it's a general update on our operations, we don't talk to the financials. That said, anyone who's dropping our operating report into their own financial or Excel spreadsheets or financial algorithms will see that the quarter was reasonably challenging for us for reasons that either should be obvious already or in 15 minutes or so we should have explained why that is obvious. If you do have questions, this is a slightly different format. It's not live. So if you could drop your question and your name into the Q&A as we go, because there's about a 20-second delay, Owen and I to catch them and I'll attend to them at the end of our chat. But right now, I'm going to hand it over to Owen.

Mike. And as played out with lots of media coverage, New Zealand endured its first deep winter drought in probably close to 15 years. Through the quarter, we saw record low winter inflows, unseasonally low demand and draw on water as gas availability really crunched. And all those things contributed ultimately to national hydro storage hitting a new record low August level. It was really dry only until it wasn't. And the last 2 months have seen a remarkable increase in hydro and snow storage conditions. The weather has turned and unsettled westerly airflows have prevailed over the country and particularly the South Island since well into the second half of August. And those weather patterns are what we like. They bring abundant precipitation to the main divide of the South Island that really turns -- means water turns up in hydro lakes. And the remarkable thing through the quarter is those inflows actually balanced out the overall winter rainfall totals for parts of the country that up until that point had looked a whole lot drier than normal. So looking ahead, NIWA's spring outlook suggests quite unsettled and windy weather patterns, particularly in the west. That hints at good fuel supply for us. The other interesting thing in their forecasting is La Nina like patterns have a better than even chance of developing sort of mid to late spring. And so there's a La Nina watch in place. Like I said, it's probably 50-50 about whether, as an event, it officially develops by the end of spring. What seems evident already, I think, is spring temperatures are likely to be above average across most of the country. Rainfall, probably more near and normal, maybe a little bit more in the west of the South Island, which again suggests a good outlook for fuel, but reasonably unstable. As you imagine, spring in New Zealand is fast-moving, low-pressure systems, westerly winds in fronts. Hopefully, there are good days in between there. So, look, the theme really for the quarter was we had winter aridity giving way to significant hydro inflows and culminating in September, where our catchments saw an excess of 200% of average inflows that month. And again, rather ironically, Q1 inflows this financial year actually topped last year, which back in early August seemed inconceivable. What we have seen in particular is very high inflows into our Waiau catchment. And with its limited storage, that's meant that we've had to clear large volumes of water from there through the wholesale electricity market at low prices. Layering in -- into the combined or the combination of hedge and demand response contracts that we put in place in early August, has actually seen Waitaki storage build. And the inflow rate into Pukaki has been slower than the Waiau. And it's only this week that Lake Pukaki has returned to average storage levels for the first time since the start of May. And a quite remarkable change in the depth of snowpack, too. So at the start of the quarter, it was around 2/3 of average and right now, it's closer to 120%. So relative to average, it's nearly doubled. Look, a lot has been made of the demand response agreement with NZAS. And at a headline level, that takes the top off demand. So quarterly demand took something like a 3% hit relative to previous year. I think what that contract proves is the value it provides to system security, even if it reduces system demand. And the fact that, that's been proven out within 3 months of actually signing that agreement is something, a, we're very proud of and b, I think, very grateful for the support of the smelter in doing that. And I think more broadly, demand numbers feel soft. The economy seems a bit beaten up at the moment. A lot of lead macroeconomic indicators suggest more to come. So that's probably filtering down into demand overall. So from a generation perspective, look, despite periods of frustratingly calm winter weather, our quarterly wind volume has actually lifted 40%, largely in part to a fully commissioned Harapaki wind farm delivering from the get-go. And hydro, of course, as I've talked about, went the other way. That, however, is the thing with droughts. What it did introduce is a lot of movement in wholesale electricity prices through the quarter. And Mike -- I'll pass it back to Mike now to provide a bit more flavor on that. Thanks, Mike.

Hey, thanks. Nice work. Again, I'm probably not telling anyone anything they don't already know, but wholesale prices over the quarter were incredibly volatile for what we've seen over the last couple of years. And the reason for that, obviously, is the drought that extended. And as that occurred, hydro storage levels fell. And as that occurred, the wholesale prices -- wholesale spot prices lifted to about $300 to $400 level in the South Island. And then when the gas suspension notices got issued early August, the market moved to dispatching diesel fuel at Whirinaki as opposed to the gas-fired units. And the wholesale prices jumped from that level to $800 a megawatt hour, which is particularly difficult week for any number of people. But as those Methanex deals were inked, the prices fell back to the $300 to $400 range. And then as Owen noted, as the rain returned late August and the prices collapsed during September, they held well below $100 levels. And they collapsed largely because for the reasons that Owen mentioned, one, there was hydro energy that became available, but two, demand was lower because we had exercised the NZAS swaption and three, the Methanex deal had been struck. And so there was plenty of gas generation available in September that wasn't there in that very challenging week in August. Forward curve and forward prices. So '25 futures prices were influenced by the events of Q3. It's always hard to tell why, but I think our view of that is implications for winter '25, given the uncertainty of gas supply. Further out than '25, there wasn't that big an impact to the curve, but average levels did lift. And again, I think it's the same reason as we think that people's views on gas supply turned very bearish during August for obvious reasons, but that decreasing confidence that you see in supply certainty or I'll put it another way, the lack of confidence in supply certainty that means that New Zealand likely has an increased resilience on or reliance on coal and hydro reservoirs over the next few years while we look to replace the gas that we expected would be available to the market. And people are doing plenty in that space. We're looking at all of our reservoirs to see what can be done and others are looking at the ongoing relationship with Methanex as well as the capacity for coal handling at our port. So these events, they are tricky to navigate. I think the key piece, at no point did we feel there was a risk to secure supply. What we did see is the wholesale market work to signal the increasing scarcity of resources. And there were responses to that that ultimately saw us through the challenge that we faced. Through this, our retail team continued to operate as we challenge our retail team to continue to operate as they would normally during these events, leave them to our wholesale business to manage them. And so during Q1, we saw a reasonable strong growth in customer numbers. So as you would have seen in the operating report, the number of total customer connections lifted by over 8,000 over the quarter. And you would have also picked up that the comparable quarter to Q1 this year, last year, you see an 8.5% lift in average retail sales prices as well. So growth in customer numbers and sales prices. But as Owen mentioned, balancing those positive attributes is the customer sales volumes in the quarter decreased across all segments. And it was a mild winter and then we've both talked to the impact on consumption. We saw some of it play out in the press. And with the September rain, it means that agricultural irrigation is off to a very slow start and we saw that in September. So I might jump onto operating costs. So we've seen a quarterly lift in operating costs. We had signaled that at our year-end announcements. The operating costs that you see, they're in line with full year guidance that we provided of $302 million to $308 million. They're probably slightly elevated by a provision that we've taken in relation to the changes going on within our retail business. And I might just touch on them quickly here is we are resetting our retail business and that will result in changes that they work. The rationale for it is absolutely sound and that we need to provide a new set of products and services to customers as we look to future relationships with them that will increasingly become 2-way, not just us selling them the product, but actually buying products from them as well. But to make those changes, they can be painful and will be painful most likely to people within our business. And so we expect that we will end up reducing the number of people within the business that support the retail operation. And we're going through that change impact as we speak. So difficult, uncertain for people, but we've got the customer at the center of the changes that we're making and the relationships that we do need to manage. But that elevated operating cost that you would have seen in that quarterly guidance is, I think we're well on track to deliver to that range. So if I move to CapEx. Full year CapEx guidance at our year-end result was $295 million to $325 million. That included 2 things. One, it was the completion of the battery, the Ruakaka battery system, the 100-megawatt, 200-megawatt hour battery. And we did forecast solar build at the same energy park, the Ruakaka solar build. We had conviction that that was going to play out until yesterday where the consent that was issued, subject to appeals, was actually appealed. And so we now need to work through what that appeal means for the construction of that solar development and it will affect the timing of that build. But to what extent, I can't form that view today, but I will tell you that we'll likely revisit the capital forecasts that we presented at interims when we've got a good handle on that. I mentioned at the announcement that the stay in business CapEx includes a few one-off projects like the generation control system replacement, a gravel removal at Lake Manapouri Lake Control. And we've also got other work that we're looking to do to grow the business, including reaching FID for the Te Rere Hau wind farm up in -- near or just south of Te Apiti. We got battery -- another battery site. We've got the Bunnythorpe battery site, which has secured Regional Council consent and we're hopeful that District Council consent is coming. It feels imminent, but we will -- time will tell. And the Mt. Munro wind farm, it's been through an Environment Court hearing. That is now complete, and we expect a decision sometime between the end of this year and June 2025. The other thing that I'd probably just touch on quickly is that the Waiinu and Western Bay solar projects, which are in our development pipeline -- is neither of those were scheduled for the fast-track legislation. That was obviously disappointing for us. But we know that the expert panel had a number of submissions and applications, and we'll work through what it was that didn't see them make that list and we'll also continue to develop those projects. And if appropriate, we'll look for consent applications at both those sites sometime mid-2025. So the key determination for both of them is transmission connection arrangements. So we will make those calls as we get to the other side of Christmas. And I'm probably going to cut it there. So you've heard from Owen and I how we felt about the quarter. One thing that you may have missed is that the Manapouri Unit 6, it was originally scheduled for a return to service in March 2025, but we've been able to bring that forward to December 2024. So we're pretty happy about that. In fact, the transformer is currently on a boat on its way to Bluff and preparing for the transport across Lake Manapouri to the power station. So I think I'll stop there. I'm getting ready for questions.

So if folks do have them, I see a couple of them that are in there, but if you do have a question, remember, there's a 20-second delay between the time you hear this and when I can answer the question. So if you could submit one, if you've got it, that would be great. If I do cut you off, I apologize now, but you have been given that info. So I'm going to go with the 2 questions that we've got. There's 1 from Nev. Nev, thanks for question. It's on the HFO contracts with Genesis for cal '25. Have we nominated any commitment amounts yet? The answer, Nev, is no. So I don't have a number for you in terms of gigawatt hour or, I think, megatons that you would see from us. The team is still working that through. We do intend, as you note, to commit to the exercise of that option early, but we haven't made that call yet. And there's a second question. So there's a question here from Andrew. Andrew, thanks for the question. Can you provide any color on Ruakaka consent? I'm going to ask Owen in a sec whether he's got anything. My answer is, I don't. It's just too early in the piece for Ruakaka. And then the second piece to -- Andrew your question was why do we miss out on the fast-track consent process. Again, I'll throw to Owen in a sec. We need to catch up with MB and understand what the answers were. Our sense is probably the point you make there, which is shovel-ready or not, is those projects still got a lot of work to put them in shape for FID. And so we suspect that there were other projects that were closer to being ready to develop in those 2, but we need to find that out. So, Owen, any thoughts on either.

Just in terms of Ruakaka, I mean, we know there was 1 party who was opposed to -- we know who it is. We're seeking to learn a little bit more about what their objection is based on because conversations with them up until this point were positive. In relation to the fast-track process, yes. So I think at a government minister level, they've indicated they followed the expert advice they received. We're still working through meeting those experts and MB to understand the rationale. The other point I would make is those projects will still have the option to seek a ministerial referral to the fast-track process in the future. So the fact they weren't on the original schedule appended to the legislation doesn't discount them from being included in the fast-track process later down the point. And I think that is still our preferred option on both of those developments.

Very good. So there haven't been any other questions registered. I think 20 seconds is probably giving people enough time if you did want to raise questions. So the only thing I'd do to close would be to say thanks for joining us. Hopefully, you did get a little bit of color in the quarter from both Owen and I and some useful information outside of the operating report that we released this morning. Thank you very much.

Thank you.