New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Power Points<br>Looking Ahead to 2022—January 2022</h2>
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<p>December 2021 capped the year with low electricity demand, low wholesale electricity prices and hydro lakes in a healthy position. South Island hydro generators Contact Energy (CEN) and Meridian Energy (MEL) once again had the best of the conditions. Looking ahead to what we can expect in 2022, it should be less dramatic than 2021. From a stock perspective, we expect interest rates and regulatory/political pressures to continue to provide headwinds for the sector and we maintain our negative view. Our preferred stocks are CEN and Genesis Energy (GNE) on NEUTRAL ratings. We are UNDERPERFORM on Mercury (MCY), MEL and Trustpower (TPW).</p>
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<h3>2022 should be less dramatic than 2021</h3>
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<p>2021 was an action-packed year, beginning with record level share prices and NZAS agreeing to remain open until at least 31 December 2024. Then there was the dry spell producing enduring high wholesale electricity prices and the 9 August blackouts. We expect 2022 to be less dramatic (although the weather could yet surprise), but expect&nbsp;signs from Rio Tinto it wants to keep NZAS open for longer by restarting the 4th&nbsp;potline&nbsp;and commencing discussions with MEL.&nbsp;We anticipate the interest rate headwinds that impacted electricity share prices in the second half of 2021 will continue and note the average electricity gross dividend spread to the 10-year swap rate remains low at 3.1%. In addition, we expect regulatory/political risk will remain elevated. These are the key factors likely to continue to weigh on electricity share prices.</p>
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<h3>Wholesale electricity markets end 2021 with a bit of price volatility</h3>
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<p>Wholesale electricity prices averaged NZ$65/MWh at Otahuhu (OTA) in December 2021, the lowest month average since December 2019 (excluding the COVID-19, impacted April 2020). Soft electricity demand, down -2.7% vs. December 2020, firm wind generation volumes as MCY’s Turitea North windfarm nears final commissioning and continued high hydro storage levels (~125% of average at year end) weighed on wholesale electricity prices. We expect it was another good month for South Island hydro generators CEN and MEL, but it appears to have been a more challenging month for GNE. Whilst its thermal generation was well below normal, we estimate its thermal generation average price received was ~NZ$79/MWh vs. operating costs of ~NZ$110/MWh (at market carbon and gas prices).</p>
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Power Points Looking Ahead to 2022—January 2022

December 2021 capped the year with low electricity demand, low wholesale electricity prices and hydro lakes in a healthy position. South Island hydro generators Contact Energy (CEN) and Meridian Energy (MEL) once again had the best of the conditions. Looking ahead to what we can expect in 2022, it should be less dramatic than 2021. From a stock perspective, we expect interest rates and regulatory/political pressures to continue to provide headwinds for the sector and we maintain our negative view. Our preferred stocks are CEN and Genesis Energy (GNE) on NEUTRAL ratings. We are UNDERPERFORM on Mercury (MCY), MEL and Trustpower (TPW).


2022 should be less dramatic than 2021


2021 was an action-packed year, beginning with record level share prices and NZAS agreeing to remain open until at least 31 December 2024. Then there was the dry spell producing enduring high wholesale electricity prices and the 9 August blackouts. We expect 2022 to be less dramatic (although the weather could yet surprise), but expect&nbsp;signs from Rio Tinto it wants to keep NZAS open for longer by restarting the 4th&nbsp;potline&nbsp;and commencing discussions with MEL.&nbsp;We anticipate the interest rate headwinds that impacted electricity share prices in the second half of 2021 will continue and note the average electricity gross dividend spread to the 10-year swap rate remains low at 3.1%. In addition, we expect regulatory/political risk will remain elevated. These are the key factors likely to continue to weigh on electricity share prices.


Wholesale electricity markets end 2021 with a bit of price volatility


Wholesale electricity prices averaged NZ$65/MWh at Otahuhu (OTA) in December 2021, the lowest month average since December 2019 (excluding the COVID-19, impacted April 2020). Soft electricity demand, down -2.7% vs. December 2020, firm wind generation volumes as MCY’s Turitea North windfarm nears final commissioning and continued high hydro storage levels (~125% of average at year end) weighed on wholesale electricity prices. We expect it was another good month for South Island hydro generators CEN and MEL, but it appears to have been a more challenging month for GNE. Whilst its thermal generation was well below normal, we estimate its thermal generation average price received was ~NZ$79/MWh vs. operating costs of ~NZ$110/MWh (at market carbon and gas prices).


Power Points: Looking Ahead to 2022—January 2022