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>Rain Refills Southern Lakes — July 2021</h2>
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<p>The end of the financial year for the big four generator/retailers will have been mixed, with Contact Energy (CEN) and Meridian Energy (MEL) benefitting from lower South Island rain, lifting hydro storage volumes back to 90% of average.&nbsp; Mercury (MCY) had a tough finish to FY21, losing its second largest geothermal plant and generating near-record low volumes from its hydro stations in June 2021. We remain NEUTRAL on the sector, with Genesis Energy (GNE) offering the best value, followed by CEN. We rate both OUTPERFORM. MEL is still expensive, although MCY has overtaken it and in our view is expensive even if we assume perfect execution of its wind farm developments, integration of the Trustpower (TPW) retail business it is acquiring, and other continuous improvement projects. Our MEL and MCY ratings are UNDERPERFORM.</p>
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<h3>Rainfall too late to save MCY, but will have helped CEN and MEL finish FY21 strongly</h3>
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<p>Hydro lake storage has recovered to ~90% of average, having started June ~67% of average, with most of the improvement coming in lower South Island hydro storage lakes. CEN and MEL have been the main benefactors, with Clutha and Manapouri system storage ~130% of average and both producing ~+5% more than average in June FY21. In contrast, MCY June 2021 hydro generation was -30% below average and the worst total on record. That said, late June rain boosted Lake Taupo levels from ~20% of average mid-month to 48% by month end and June 2021 hydro volumes were ~+5% higher than implied in its 9 June guidance downgrade.</p>
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<h3>Wholesale electricity market still stressed despite rainfall</h3>
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<p>Whilst improvements in hydro storage have lowered the 12-month&nbsp;Otahuhu&nbsp;ASX forward price -NZ$41/MWh, it is still high at&nbsp;NZ$199/MWh. The average&nbsp;Otahuhu&nbsp;wholesale electricity price was only -10% lower than May 2021 at NZ$266/MWh. Underlying electricity demand remains firm, with non-NZAS June 2021 demand only&nbsp;-0.2% lower than June 2020 and the market is still concerned about the tight gas market. Average daily NZ gas production in June 2021 was -18% lower than June 2020, with&nbsp;Pohokura&nbsp;production down -41%. Whilst thermal generation was similar to last year, coal generation was +30% higher with CEN in particular using its gas plant less due to the gas shortage.</p>
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<h3>Kawerau&nbsp;pulp and paper mill closure could be largely offset by&nbsp;potline&nbsp;4 restarting later this year</h3>
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<p>29 June saw the Kawerau pulp &amp; paper mill close, removing ~650GWh of electricity demand (although demand has been lower than that for most of 2020 and 2021). However, we expect there is a strong chance NZAS will restart the 50MW potline 4 before the end of 2021 given record aluminium prices and NZAS making ~NZ$1,700/tonne of aluminium produced. Potline 4 ceased production in April 2020 during the COVID-19 lockdown period. Under its electricity contract with MEL, volumes are expected to step up again on 1 November, but the additional 50MW could be brought back at 5-days notice from 9 August. At full production NZAS electricity demand would increase +60MW (+525GWh per annum) vs. current levels.</p>
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<div><strong>Andrew Harvey-Green</strong></div>
<div><a href="mailto:andrew.harvey-green@forsythbarr.co.nz" target="_blank" rel="noopener">andrew.harvey-green@<wbr>forsythbarr.co.nz</a></div>
<div>+64 4 495 8185</div>
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<div><strong>Mark Robertson</strong></div>
<div><a href="mailto:mark.robertson@forsythbarr.co.nz" target="_blank" rel="noopener">mark.robertson@forsythbarr.co.<wbr>nz</a></div>
<div>+64 4 495 5264</div>
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Power Points Rain Refills Southern Lakes — July 2021


The end of the financial year for the big four generator/retailers will have been mixed, with Contact Energy (CEN) and Meridian Energy (MEL) benefitting from lower South Island rain, lifting hydro storage volumes back to 90% of average.&nbsp; Mercury (MCY) had a tough finish to FY21, losing its second largest geothermal plant and generating near-record low volumes from its hydro stations in June 2021. We remain NEUTRAL on the sector, with Genesis Energy (GNE) offering the best value, followed by CEN. We rate both OUTPERFORM. MEL is still expensive, although MCY has overtaken it and in our view is expensive even if we assume perfect execution of its wind farm developments, integration of the Trustpower (TPW) retail business it is acquiring, and other continuous improvement projects. Our MEL and MCY ratings are UNDERPERFORM.



Rainfall too late to save MCY, but will have helped CEN and MEL finish FY21 strongly


Hydro lake storage has recovered to ~90% of average, having started June ~67% of average, with most of the improvement coming in lower South Island hydro storage lakes. CEN and MEL have been the main benefactors, with Clutha and Manapouri system storage ~130% of average and both producing ~+5% more than average in June FY21. In contrast, MCY June 2021 hydro generation was -30% below average and the worst total on record. That said, late June rain boosted Lake Taupo levels from ~20% of average mid-month to 48% by month end and June 2021 hydro volumes were ~+5% higher than implied in its 9 June guidance downgrade.


Wholesale electricity market still stressed despite rainfall


Whilst improvements in hydro storage have lowered the 12-month&nbsp;Otahuhu&nbsp;ASX forward price -NZ$41/MWh, it is still high at&nbsp;NZ$199/MWh. The average&nbsp;Otahuhu&nbsp;wholesale electricity price was only -10% lower than May 2021 at NZ$266/MWh. Underlying electricity demand remains firm, with non-NZAS June 2021 demand only&nbsp;-0.2% lower than June 2020 and the market is still concerned about the tight gas market. Average daily NZ gas production in June 2021 was -18% lower than June 2020, with&nbsp;Pohokura&nbsp;production down -41%. Whilst thermal generation was similar to last year, coal generation was +30% higher with CEN in particular using its gas plant less due to the gas shortage.


Kawerau&nbsp;pulp and paper mill closure could be largely offset by&nbsp;potline&nbsp;4 restarting later this year


29 June saw the Kawerau pulp &amp; paper mill close, removing ~650GWh of electricity demand (although demand has been lower than that for most of 2020 and 2021). However, we expect there is a strong chance NZAS will restart the 50MW potline 4 before the end of 2021 given record aluminium prices and NZAS making ~NZ$1,700/tonne of aluminium produced. Potline 4 ceased production in April 2020 during the COVID-19 lockdown period. Under its electricity contract with MEL, volumes are expected to step up again on 1 November, but the additional 50MW could be brought back at 5-days notice from 9 August. At full production NZAS electricity demand would increase +60MW (+525GWh per annum) vs. current levels.



Andrew Harvey-Green
andrew.harvey-green@forsythbarr.co.nz
+64 4 495 8185





Mark Robertson
mark.robertson@forsythbarr.co.nz
+64 4 495 5264



Power Points: Rain Refills Southern Lakes — July 2021