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</h2>
<p><strong>Regulation Matters — July 2020</strong></p>
<div id="m_-8618929376444792111ijseatd-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2">
<p>June 2020 was dominated by the Electricity Authority's (EA) transmission pricing methodology (TPM) decision and on 30 June, its undesirable trading situation (UTS) preliminary decision. Meridian Energy (MEL) was the big winner (as expected) from the&nbsp;TPM, but is the generator in the gun for the&nbsp;UTS. However, with&nbsp;Transpower's&nbsp;decision to upgrade the lower South Island transmission network, it has overall been a positive news month for MEL. We retain our positive view on the sector, both in terms of the long-term outlook and the attractive dividend yields the sector offers relative to alternatives.&nbsp;​​​​​​​</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/144/091/original/image_1409669421593735193404.png?1593735196" class="editor-image img-responsive" data-smartkarma-image-id="144091"></figure>
</div>
<div>
<h3>EA front and centre in the past month</h3>
</div>
<div id="m_-8618929376444792111inogz">
<p>In early June the EA releases its&nbsp;TPM&nbsp;decision (finally), with little change from the previous draft. MEL remained the biggest winner with its transmission charges expected to fall&nbsp;~NZ$27m vs. the status&nbsp;quo&nbsp;pricing methodology.&nbsp;NZAS&nbsp;also benefits ~-NZ$10m, however, it has the added carrot of being able to apply for a discount if stand-alone costs would be lower than its current transmission charges. The new&nbsp;TPM&nbsp;will take effect on 1 April 2023 (subject to possible court action and other delays).</p>
<p>The EA's other big announcement is the preliminary decision that MEL caused a UTS in late-2019, resulting in higher than would be expected wholesale electricity prices and spilling more water than would be expected. Whilst this is a negative for MEL, we believe the reputational damage is likely to be bigger than the financial damage.</p>
</div>
<div>
<h3>Wholesale electricity prices continue to surge as winter demand kicks in and hydro storage falls</h3>
</div>
<div id="m_-8618929376444792111ijysx">
<p>Otahuhu (OTA) wholesale electricity prices averaged NZ$163/MWh in June 2020, up +22% on May 2020 as electricity demand remains firm (up +0.5% vs. June 2019 despite warmer temperature than the pcp.) and national hydro storage volumes declined to ~-15% to 75% of average. June 2020 is further evidence that COVID-19 is having little effect on electricity demand, with certain segments (such as residential) seeing significant demand growth.</p>
</div>
<div>
<h3>Yield and decarbonisation stories hold</h3>
</div>
<div id="m_-8618929376444792111ic6kwf">
<p>There is no change to our positive investment thesis for the sector. Long-term decarbonisation and the associated electrification will grow electricity demand. In the short-term we expect sector earnings to hold up well despite the economic downturn, providing sustainable dividends. We also maintain our view that NZAS will remain open, and the decision by Transpower to upgrade the lower South Island transmission grid derisks MEL and Contact Energy's (CEN) earnings were NZAS to close. We have OUTPERFORM ratings on the whole sector, although CEN offers the best value.</p>
</div>
<div>
<div>
<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>
<div></div>
</div>
</div>
<div>
<div>
<div><strong>Scott Anderson</strong></div>
<div><a href="mailto:scott.anderson@forsythbarr.co.nz" target="_blank" rel="noopener">scott.anderson@forsythbarr.co.<wbr>nz</a></div>
<div>+64 4 914 2219</div>
</div>
</div>

Power Points
Regulation Matters — July 2020

June 2020 was dominated by the Electricity Authority's (EA) transmission pricing methodology (TPM) decision and on 30 June, its undesirable trading situation (UTS) preliminary decision. Meridian Energy (MEL) was the big winner (as expected) from the&nbsp;TPM, but is the generator in the gun for the&nbsp;UTS. However, with&nbsp;Transpower's&nbsp;decision to upgrade the lower South Island transmission network, it has overall been a positive news month for MEL. We retain our positive view on the sector, both in terms of the long-term outlook and the attractive dividend yields the sector offers relative to alternatives.&nbsp;​​​​​​​



EA front and centre in the past month


In early June the EA releases its&nbsp;TPM&nbsp;decision (finally), with little change from the previous draft. MEL remained the biggest winner with its transmission charges expected to fall&nbsp;~NZ$27m vs. the status&nbsp;quo&nbsp;pricing methodology.&nbsp;NZAS&nbsp;also benefits ~-NZ$10m, however, it has the added carrot of being able to apply for a discount if stand-alone costs would be lower than its current transmission charges. The new&nbsp;TPM&nbsp;will take effect on 1 April 2023 (subject to possible court action and other delays).
The EA's other big announcement is the preliminary decision that MEL caused a UTS in late-2019, resulting in higher than would be expected wholesale electricity prices and spilling more water than would be expected. Whilst this is a negative for MEL, we believe the reputational damage is likely to be bigger than the financial damage.


Wholesale electricity prices continue to surge as winter demand kicks in and hydro storage falls


Otahuhu (OTA) wholesale electricity prices averaged NZ$163/MWh in June 2020, up +22% on May 2020 as electricity demand remains firm (up +0.5% vs. June 2019 despite warmer temperature than the pcp.) and national hydro storage volumes declined to ~-15% to 75% of average. June 2020 is further evidence that COVID-19 is having little effect on electricity demand, with certain segments (such as residential) seeing significant demand growth.


Yield and decarbonisation stories hold


There is no change to our positive investment thesis for the sector. Long-term decarbonisation and the associated electrification will grow electricity demand. In the short-term we expect sector earnings to hold up well despite the economic downturn, providing sustainable dividends. We also maintain our view that NZAS will remain open, and the decision by Transpower to upgrade the lower South Island transmission grid derisks MEL and Contact Energy's (CEN) earnings were NZAS to close. We have OUTPERFORM ratings on the whole sector, although CEN offers the best value.



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





Scott Anderson
scott.anderson@forsythbarr.co.nz
+64 4 914 2219



Power Points: Regulation Matters — July 2020