South Island hydro rules

South Island hydro-electric generation stations are powering the country, brokers say. With the first of the listed electricity generators set to report on Tuesday, Business editor Dene Mackenzie previews their prospects.

Andrew Rooney
Andrew Rooney
Generation from South Island hydro assets historically accounts for about 41% of total monthly generation. But in December and January, it accounted for more than 50%, the most since January 2007.

By comparison, North Island hydro generation was weak while outages at thermal plants constrained thermal generation over the past few months.

Geothermal output remains at near record highs, although Contact Energy's Te Mihi plant continued to have teething issues.

With Maui's Oaonui production situation expected to be out for two more weeks, output from Contact's Taranaki Combined Cycle (TCC) plant, Genesis' Huntly Unit 6 and Mighty River Power's Southdown would be restricted this month.

The threat of the Labour-Green single electricity-buying authority continues to hang over the electricity sector, spooking some investors. Shares in the Government-controlled Meridian and Mighty River Power have not traded as expected after their listings.

Genesis Energy, which reported a 72% fall in its profit on Wednesday, is expected to be put up for a partial sale and listing in the first quarter of this year. The Government is now expected to heavily discount the shares in Genesis to attract investors wary after the poor performance of the company.

Forsyth Barr broker Andrew Rooney said the South Island hydro domination had been reflected in company market share.

Meridian Energy's generation surged to a record high in December, which was eclipsed in January with its 41.1% market share.

Chris Timms
Chris Timms
Canal work at Genesis' Tekapo assets and thermal plant outages saw its market share dive, while TrustPower remained around the 5% market share on the back of weak hydro output, he said.

Craigs Investment Partners broker Chris Timms said he expected to get a view from Meridian, Mighty River Power and Contact on how the improved HVDC link across Cook Strait was affecting their business models.

Also, he would be expecting comment on the level of competition in electricity retailing.

Meridian cut prices in the second half of 2013 and it appeared Contact was also offering select customers a further discount. Mighty River Power was losing residential customers and had allowed its overall hedged position to decline as it waited for better pricing.


Contact Energy's Clyde dam spilling excess supply. Photo by Lynda van Kempen. Contact Energy (reporting February 18)
• Craigs Investment Partners: First-half operating earnings forecast is $270 million, up 6.8% on the previous corresponding period.

• Forsyth Barr: First-half operating earnings forecast is is $269 million, up 6% on the pcp.

Craigs broker Chris Timms said Contact's first half was operationally sound but the delay in Te Mihi was a drag on earnings.

Contact's performance was driven by a reduced need to fire up gas-powered generation because of wet weather and an uplift in July from the DC link working efficiently.

While near-term industry overcapacity and lack of demand growth was expected to keep industry earnings growth subdued in coming years, Contact was expected to continue delivering solid results in the 2014-15 financial year.

''We expect Contact to be less susceptible to a regulatory change under a Labour-led government, due to its ability to optimise its generation portfolio under various market conditions,'' Craigs broker Chris Timms saidForsyth Barr broker Andrew Rooney said much of Contact's ''outperformance'' came in July. He was forecasting operating earnings of $18 million for the ''other segment'' of the company's operations, $4 million lower than the pcp due to the sale of the gas metering business to Vector.

''We have an outperform rating on Contact. While we recognise the regulatory issues facing the sector, we believe the market is pricing in too much risk.''


Meridian Energy's Manapouri power station. Photo supplied. Meridian Energy (reporting February 19)
• Craigs Investment Partners: First-half operating earnings forecast is $277 million, flat on the pcp.

• Forsyth Barr: First-half operating earnings forecast is $273 million, down 1.6% on the previous corresponding period.

Forsyth Barr broker Andrew Rooney said the first half had been good for Meridian, from a generation and electricity sales point of view. Wholesale electricity prices had been lower and Meridian had absorbed significant cost increases, in particular transmission costs which were forecast to be $11 million higher in the current half compared with the first half last year.

Forsyth Barr focused on the normalised profit, which it was forecasting to be $80 million, $8 million lower than the pcp. The interim dividend was forecast to be 4.2c per share, up 0.2cps on the pcp.

''Our rating is neutral. Meridian is the 'gentailer' that faces the greatest downside from the implementation of a single-buyer model, due to its high levels of hydro generation. On the positive side, Meridian also has the greatest upside from changes to transmission pricing and the closure of the aluminium smelter,'' Mr Rooney said.

Craigs broker Chris Timms said Meridian's first half was excellent, due to very strong hydro inflows which did not completely decimate whole prices.

''We expect Meridian to have benefited from an improved generation performance as its excess generation can be offloaded in the spot market at modest wholesale prices.''

First-half retail sales tracked well, helped by a higher irrigation load. Elevated storage levels should assist a strong second half for the company, he said.

The risk for the company included the implementation of a Labour-Green regulatory change, a surprise full closure of the Tiwai aluminium smelter and operational risks from low inflows into Meridian's South Island catchment.


Mighty River Power's Karapiro power station on the Waikato River. Photo by The New Zealand Herald. Mighty River Power (reporting February 26)
• Craigs Investment Partners: First-half operating earnings forecast is $265 million, up 2% on the previous corresponding period.

• Forsyth Barr: First-half operating earnings forecast is $251 million, down 3.4% on the pcp.

Craigs broker Chris Timms said Mighty River Power had a difficult half from a hydro perspective and also had some slippage in its hedged retail position.

Generation output was poor, affected by an ''amazingly strong'' South Island hydrological environment. That led to Mighty River tactically holding back hydro storage in a weak wholesale pricing environment.

''While Mighty River enters the third quarter with an increased hydro storage, it continues to face a wet South Island that has an improved ability to push electricity into the North Island due to the DC link improvement.

''We are concerned Mighty River has been losing residential customers while it appears to be finding difficulty in retaining its commercial and industrial contracts as they progressively roll off over time.''

In the year, retail customers had fallen 2.4%.

Forsyth Barr broker Andrew Rooney was forecasting the company's reported profit would fall about $39 million to $94 million on the back of increased depreciation and increased interest expense due to there being little capitalised interest. The dividend forecast of 5.2c per share was 0.4cps higher than the first half of last year.

''We have an outperform rating on Mighty River. It offers investors an excellent dividend yield and modest dividend growth. Like all electricity stocks, we believe Mighty River has been oversold, due to the regulatory risks facing the sector.''


 

 

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