Dry weather in New Zealand reduces hydroelectric output in Q1 2025; Morningstar downgrades earnings forecasts for Contact, Meridian, and Manawa as wholesale prices surge to $300/MWh

May 1, 2025 (The New Zealand Herald) –

The dry weather in the first quarter of 2025 has crimped hydroelectric generation in New Zealand and will hit power company earnings, equities research firm Morningstar says.

While recent rain has helped, the hydro lakes have stayed low and wholesale prices have remained elevated at over $300 per megawatt hour, compared with an average winter price between 2018 and 2023 of $180 /MWh.

Morningstar noted that ongoing gas shortages have affected gas-fired power generation.

Earnings for Mercury, Meridian, and Manawa, which rely heavily on hydroelectricity, are hurt most by drought, it says.

"They are forced to source expensive electricity to cover contracted sales and, in some cases, pay customers to reduce demand.

"Contact can offset some of the impact by ramping up gas-fired power, depending on gas availability.

"Genesis is least hurt by droughts thanks to increased profitability of its flexible Huntly gas- and coal-fired power station.

"But lower gas sales and higher gas purchase costs are a headwind."

Morningstar downgraded fiscal 2025 earnings before interest, tax, depreciation and amortisation (ebitda) forecasts for Contact, Meridian, and Manawa.

"Our 2025 forecasts are largely unchanged for Mercury (having lowered our expectations in mid-April) and Genesis (given it is tracking well toward full-year guidance)," it said.

Morningstar's longer-term forecasts are largely unchanged.

It estimates that for the nine months to March 2025 , Contact's ebitda (excluding Manawa acquisition costs) were up nearly 20% year-on-year on completion of new geothermal power stations.

Genesis' ebitda was up more than 10% on good electricity generation performance over the same period.

In contrast, fully renewable utilities Mercury, Meridian, and Manawa were tracking lower.

Mercury's recent profit downgrade suggests its fiscal 2025 ebitda will be down 13% on last year, Morningstar said.

"Producing the vast majority of their power from hydro, Meridian and Manawa are worst hit by the drought," Morningstar said.

"We estimate Meridian's ebitda is down more than 30% in the nine months to March, while we expect Manawa's ebitda for the year to March to be down about 40%."

Fonterra vs Bega

Forsyth Barr analyst Matt Montgomerie does not see this week's New South Wales Supreme Court decision, which favoured Bega Cheese , as a big setback for Fonterra's planned sale of its consumer business, Mainland.

The co-op currently makes product for Bega in Australia under a licensing agreement that dates back to 2001.

This week, Fonterra said its plans to divest its global consumer and associated business were unchanged after the court dismissed proceedings.

Fonterra had sought a determination of its rights regarding its licensing agreement with ASX-listed Bega, but the court said it did not have jurisdiction.

The court dismissed the proceedings and ordered Fonterra to pay Bega's costs.

Bega itself has declared an interest in picking up Fonterra's Oceania assets.

"We don't think it should be a large setback -- and possibly not at all -- with Bega being relatively small (6%) in the context of Mainland Group's revenue," Montgomerie told Stock Takes.

"Bega have allegedly not been willing to engage in the trade sale process until this has been resolved, so it may now bring them back into the frame," Montgomerie said.

"The actual costs of this that Fonterra now have to bear aren't likely to be material," he said.

Some of Fonterra's Australian factories are understood to be almost entirely devoted to making Bega products.

"This does not change Fonterra's divestment plans for its global consumer and associated businesses and Fonterra may seek a court determination at a later date," the co-op said.

Clearing the way for Rakon sale?

A Rakon shareholder update earlier this week said the firm expected to hit the mid-point of its underlying operating earnings guidance of $5-$15 million despite FY25 being "one of our most demanding years, marked by sharp geopolitical shifts and commercial headwinds".

The firm also said chairwoman Lorraine Witten would retire at the annual shareholders meeting on July 31 .

The board has yet to nominate a successor. And it reiterated that "only 1 to 2%" of revenue was exposed to the new US tech tariffs.

Rakon has progressively moved some of its manufacturing from NZ and Europe to a new facility in India .

But for activist investor Mike Daniel , the most intriguing element of the update was Rakon's statement that: "We have made the decision to discontinue commercial relationships with a Chinese telecommunications-infrastructure customer that accounted for approximately 5% of group revenue in FY25."

"This strategic decision strengthens our compliance profile and reduces our risk exposure in shifting regulatory environments."

Daniel said: "The interesting thing to me is they've dropped all Chinese customers -- which seems to have been the major barrier to completion of any of the bids from the US."

The Rakon update reiterated that it received a non-binding bid of $1.70 per share or a 174% premium in December 2023 .

It added that "other indications of interest received by Rakon remain confidential but were for substantial premium multiples".

The update said none of the non-binding bids -- all from undisclosed parties -- led to a binding offer.

It added: "As disclosed on June 19, 2024 , negotiations ended with the first potential bidder when the parties could not resolve complexities identified in due diligence -- principally regulatory and geopolitical factors which are a particular focus of all prospective US acquirers."

For Daniel at least, that barrier has now been removed.

Rakon shares were recently trading at 49c. The stock is down 53% over the past 12 months.

Auckland Airport regulatory risk rises

Another Government arm is looking into the effectiveness of the regulatory regime for airports raising the regulatory risk for Auckland Airport another notch.

The Ministry of Business, Innovation and Employment has been reviewing the Commerce Act and, as part of that, wrote to airport stakeholders on April 11 asking for their views on the effectiveness of the current information disclosure regime for airports.

It comes after the Commerce Commission's PSE4 report released on March 31 found Auckland Airport's forecast investment was within a reasonable range, but its targeted returns were unreasonably high over its current five-year pricing period.

Auckland Airport announced it would cut its airline charges for FY26 and FY27 immediately after the report was released.

The MBIE letter has prompted Forsyth Barr's Andy Bowley to slap an underperform rating on the company's shares.

"Regulatory risk for Auckland Airport (AIA) has increased," he said in a note this week.

"The worst-case scenario for AIA is a potential change to its favourable dual till regulatory model (which provides for its commercial activities -- retail and car parking -- to be unregulated, in contrast to regulated aeronautical activities), as proposed by the OECD ."

Bowley said if this were to be changed it would reduce the robust returns generated by Auckland Airport's commercial operations through cross-subsidisation of aeronautical prices.

"While we acknowledge that regulatory risk overall has increased, we believe that material changes to the current information disclosure regime are unlikely."

Airport stakeholders have until May 23 to give feedback to MBIE.

Bowley has a target price of $7.95 . AIA currently trades at around $7.50 .

Additional reporting Tamsyn Parker , Chris Keall .