Dry weather hits Contact earnings

DRY conditions and the resulting low hydro lake levels have taken a toll on Contact Energy, further compounded by surging wholesale electricity prices and Contact’s support deal with Meridian Energy to supply the Bluff aluminium smelter.

The lacklustre end to the last month of Contact’s 201617 financial year looks likely to spill over into the start of the new financial year.

Dry conditions have reduced Contact’s hydro generation while the more expensive thermal generation is up, raising generation costs almost 60%.

Forsyth Barr broker Damian Foster said Contact’s operating report for June delivered an ‘‘overall tough finish to the year’’.

‘‘The bad news is that hydro conditions continue to be poor and that will be impacting on full year 2018 earnings as well,’’ he said.

Contact’s report said North Island hydro storage was at 95% of the mean average, but the South Island’s was at only 53% of mean. Its Clutha storage was only 15% of mean.

Mr Foster said given the impact of low hydrology on earnings during Contact’s final quarter, the brokerage was reviewing its forecasts and a further cut to earnings before interest, tax, depreciation, amortisation and financial instruments (Ebitdaf) was ‘‘likely’’.

The dry conditions meant Contact’s earnings saw the energy ebitdaf for June $18 million down on a year ago, which meant the full year energy ebitdaf would be $27 million down on last year.

‘‘The cost of generation is the main issue, although the hedging contract with Meridian is also impacting Contact negatively,’’ Mr Foster said.

He said generation volumes were down by 35GWh on a year ago, but the biggest issue has been the mixchange required between hydro and thermal generation.

Hydro generation was down 238GWh, but thermal generation was up 206GWh.

‘‘That meant the cost of generation was up 57% against last year to $41 per megawatt hour, the highest by some margin during 2017,’’ he said.

An additional issue was the cost of energy for Contact, which includes hedging gains, or losses, in addition to the cost of generation.

‘‘With wholesale electricity prices surging, Contact will be paying significant sums to Meridian Energy under its 80MW New Zealand Aluminium Smelter support contract.

‘‘That has been a driver of the cost of energy increasing 101% against last year to $46 [per] MWh,’’ he said.

In August 2015 a variation on the existing power deal was struck between NZAS and Meridian Energy; with the support of Contact Energy, Genesis Energy and others.

NZAS uses about 13% of the country’s electricity, from Meridian’s Manapouri generation plant, and under the then threat of considering closure that would have left excess power in the market; a scenario which has already resulted in the mothballing of several generation projects around the country.

Mr Foster said Contact’s sales volumes during June totalled 711GWh, up 1.1% on the same period a year ago ‘‘with good gains in the mass market’’.

simon.hartley@odt.co.nz