New Zealand's largest listed power generator, Contact Energy, has warned profits could fall as much as 23% because heavy rainfall had lowered wholesale power prices in the South Island and the removal of a Cook Strait power cable had restricted power sales into the North Island. The news is a fresh blow for thousands of small investors, who have seen Contact's share price fall 25% over the last year at the same time as directors increased fees. Residential customers will also be curious, given hefty hikes in power bills. Contact Energy told the stock exchange in a statement that low winter rainfall, high summer rainfall, transmission constraints and the unexpected cut in aluminium output and power demand from the Tiwai Point smelter in Southland had combined to hurt earnings in the current year. "In August South Island wholesale prices were significantly higher than North Island prices due to the combination of severe drought in the South Island and significant transmission constraints limiting the delivery of lower-priced electricity from the North Island to the South Island," Contact said. "This resulted in Contact selling electricity to its lower North Island and South Island customers at a loss during the winter period," it said. "More recently, higher than average inflows into the South Island hydro dams, which are currently at their highest levels in 10 years, combined with the unexpected and continued reduction in aluminium production from the Tiwai Point aluminium smelter from early November 2008, has resulted in significant spillage across the South Island hydro dams." The size of the spill has been worsened by the absence of the "pole one" Cook Strait cable, which limited the amount of lower priced electricity that could be transferred from the southern hydro systems to the North Island, Contact said. The lower aluminium production reduced power demand by 180 megawatts of hydroelectric power. The power could not be onsold because of transmission constraints from the Manapouri dam, which generates the power for Tiwai Point. All this meant Contact's hydro stations generated 274 gigawatt hours less in the first half of the financial year than the prior corresponding period. "These transmission constraints highlight how important a modern and robust transmission network is to the efficient operation of the market. We expect that the loss of pole one will continue to result in constraints between the islands and therefore volatility in wholesale prices, as well as increased risk of wholesale price separation between the North and South Islands. Until pole one is replaced and other transmission constraints are resolved, the wholesale electricity market will continue to be impacted during periods of very high and very low hydro inflows," said Contact Chief Exective David Baldwin. Gas prices had also increased 25% in the financial year, Contact said. "The current financial year is somewhat unique in that New Zealand's hydro system has experienced two extremes of hydrology within six months, each at opposite ends of the scale. The combination of these extremes and increased gas costs is expected to result in Contact's Earnings before Interest, Taxation, Depreciation and Financial Instruments (EBITDAF) for the current year being approximately 15 per cent lower than the last financial year. As a consequence, Underlying Earnings After Tax is expected to be approximately 20 to 23 per cent less than the last financial year." * This article was first published yesterday in our daily subscription newsletter for the banking and finance industries. The email costs NZ$365 per annum and carries exclusive news and analysis for New Zealand banking and finance industry executives, regulators and investors. Sign up for a free trial here.
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