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>Electricity Sector<br>Water Winners &amp; Water Woes&nbsp;— FY21 Preview</h2>
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<p>We expect Contact Energy (CEN) to report the strongest earnings in FY21 and be the only generator/retailer to grow 2H21 EBITDAF vs. 2H20. Its hydro generation was less affected than most by the dry 2H21 period, but CEN also positioned itself well and has been able to take advantage of strong wholesale electricity prices. We are forecasting sector EBITDAF to fall -2.6% to NZ$2,083m, the second year in a row of reduced earnings, albeit Genesis Energy's (GNE) recent one-off carbon-related adjustments and the lower NZAS electricity price are key factors. With significant variation in market forecasts for FY22, there could be greater outlook commentary surprises for the market than normal.</p>
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<h3>Key points for this earnings season:</h3>
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<li>CEN has had the stand out financial year, and we forecast FY21 EBITDAF growth of +23%. GNE also had a strong year, marred by its arbitration loss announced early August 2021, wiping most of its FY21 EBITDAF gains. We forecast Meridian Energy's (MEL) FY21 EBITDAF is -15% down on the record FY20&nbsp;year, with a lower&nbsp;NZAS contract price and&nbsp;dry hydro conditions the main factors. Mercury (MCY) had a 2H21 it will want to put behind it, with low hydro generation and a late plant outage hurting earnings</li>
<li>There should be no earnings surprises as GNE and MCY provide guidance, and CEN and&nbsp;MEL's&nbsp;operating statistics enable a close approximation of EBITDA</li>
<li>CEN has the potential to pay a higher final dividend (22cps) than&nbsp;guidance (21cps) given strong 2H21 earnings and in our view, a strong FY22 outlook. GNE, MCY and MEL&nbsp;have less scope for a dividend surprise</li>
<li>Key talking points are likely to be:
<ul>
<li>High wholesale electricity prices and the regulatory/political risks that follow</li>
<li>Overbuild risk concerns (a theme from 1H21) are overstated</li>
<li>Update from MEL and CEN on NZAS replacement demand, with a particular focus on hydrogen</li>
</ul>
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<li>There is significant variation in market FY22 EBITDAF forecasts, raising the potential for FY22 outlook/guidance surprises. From our perspective, CEN has the greatest upside. MCY guidance should show the most growth as FY22 will see first time earnings from the acquired Tilt Renewables' assets and Turitea windfarms. We expect MCY guidance to exclude TPW retail earnings.</li>
</ul>
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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>
</div>
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Electricity Sector Water Winners &amp; Water Woes&nbsp;— FY21 Preview


We expect Contact Energy (CEN) to report the strongest earnings in FY21 and be the only generator/retailer to grow 2H21 EBITDAF vs. 2H20. Its hydro generation was less affected than most by the dry 2H21 period, but CEN also positioned itself well and has been able to take advantage of strong wholesale electricity prices. We are forecasting sector EBITDAF to fall -2.6% to NZ$2,083m, the second year in a row of reduced earnings, albeit Genesis Energy's (GNE) recent one-off carbon-related adjustments and the lower NZAS electricity price are key factors. With significant variation in market forecasts for FY22, there could be greater outlook commentary surprises for the market than normal.



Key points for this earnings season:



CEN has had the stand out financial year, and we forecast FY21 EBITDAF growth of +23%. GNE also had a strong year, marred by its arbitration loss announced early August 2021, wiping most of its FY21 EBITDAF gains. We forecast Meridian Energy's (MEL) FY21 EBITDAF is -15% down on the record FY20&nbsp;year, with a lower&nbsp;NZAS contract price and&nbsp;dry hydro conditions the main factors. Mercury (MCY) had a 2H21 it will want to put behind it, with low hydro generation and a late plant outage hurting earnings
There should be no earnings surprises as GNE and MCY provide guidance, and CEN and&nbsp;MEL's&nbsp;operating statistics enable a close approximation of EBITDA
CEN has the potential to pay a higher final dividend (22cps) than&nbsp;guidance (21cps) given strong 2H21 earnings and in our view, a strong FY22 outlook. GNE, MCY and MEL&nbsp;have less scope for a dividend surprise
Key talking points are likely to be:

High wholesale electricity prices and the regulatory/political risks that follow
Overbuild risk concerns (a theme from 1H21) are overstated
Update from MEL and CEN on NZAS replacement demand, with a particular focus on hydrogen


There is significant variation in market FY22 EBITDAF forecasts, raising the potential for FY22 outlook/guidance surprises. From our perspective, CEN has the greatest upside. MCY guidance should show the most growth as FY22 will see first time earnings from the acquired Tilt Renewables' assets and Turitea windfarms. We expect MCY guidance to exclude TPW retail earnings.




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





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



Electricity Sector: Water Winners & Water Woes — FY21 Preview