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Source: Reuters
Contact Energy is expecting its underlying earnings after tax for the current financial year to be 20-23% lower than in the last financial year.
The company says its earnings for the year to June 2009 were hit by extreme hydrological conditions and transmission constraints.
Those constraints arose particularly from the unexpected removal of pole one of the inter-island cable link in November 2007.
Most recently, higher than average inflows into the South Island hydro dams combined with an unexpected and continued reduction in aluminium production from the Tiwai Pt aluminium smelter from early November had resulted in significant spillage across the South Island hydro dams. The dams were at their highest levels in 10 years.
The extent of the spill was worsened by the absence of pole one, which had limited the volume of lower priced electricity that could be transferred from the southern hydro systems to the North Island, Contact says.
The company said previously that earlier this year South Island wholesale prices were significantly higher than North Island prices.
That was due to a 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.
That resulted in Contact selling electricity to its lower North Island and South Island customers at a loss during the winter.
The lower aluminium production had resulted in up to 180 megawatts of hydro-electric power, which would have otherwise been used at Tiwai, being unable to find a path to demand due to transmission constraints, Contact says.
All the issues had contributed to Contact's hydro stations generating 274 fewer gigawatt hours in the first half of the financial year than the previous corresponding period.
Chief executive David Baldwin says the transmission constraints highlighted how important a modern and robust transmission network was 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," he says.
"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."
Contact says it had also been affected by recent producer price
index (PPI) increases which had resulted in significantly higher
than expected gas costs for the 2009 financial year.
Movement in the PPI is applied to adjust gas prices in most of
Contact's gas purchase contracts.
The recent increases would contribute to Contact paying about 25% more per gigajoule for gas in the 2009 financial year.
"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," Baldwin says.
The combination of those extremes and increased gas costs was expected to result in Contact's earnings before interest, taxation, depreciation and financial instruments for the current year being about 15% lower than the last financial year.
Despite the lower earnings forecast, Contact continued to be well placed to execute its growth strategy, Baldwin says.
"Construction is under way on both the first phase of the Tauhara geothermal power project near Taupo and Contact's new gas-fired peaking station at Stratford."
Last month Contact also started injecting natural gas into its recently acquired Ahuroa reservoir which, when fully developed in 2010, would be New Zealand's first underground gas storage facility.
Front-end engineering and design of the 220 MW Te Mihi geothermal power project was also under way.
