Contact Energy predicts profit slide as costs rise

Tuesday 20th January 2009

Contact Energy, the biggest utility of the NZX 50 Index, said full-year profit may fall as much as 23% as hydro dams in the South Island spill water, the Tiwai Point aluminium smelter reduces output and gas costs rise.

Underlying profit may fall by 20% to 23% this year, chief executive David Baldwin said in a statement. That's a deterioration from the company's forecast in October that profit growth would stall this year and wouldn't beat last year's $237 million.

The decline reflects "extreme hydrological conditions this year, combined with transmission constraints," including the unexpected removal of pole one of the Cook Strait cable in November, he said.

Reduced capacity on the cable is limiting Contact's ability to send lower-priced South Island power to the north. The company generates about 28% of New Zealand's electricity.

The announcement highlights the ongoing difficulties Contact has faced with disparities between the North and South islands as a result of the cable constraints. During the drought last year, when lake levels were low in the South, Contact was limited in its ability to send power south to supply customers and ended up selling electricity at a loss to southern and lower North Island customers.

Since then, reduced production at the smelter has lessened demand for power at a time when lake levels are high, resulting in "significant spillage across the South Island hydro dams."

Reduced demand at Tiwai Point meant as much as 180 megawatts of hydroelectric power was essentially wasted, it said. Output from Contact's hydro stations generated 274 gigawatt hours less in the first half of the financial year than in the same period a year earlier.

"These transmission constraints highlight how important a modern and robust transmission network is to the efficient operation of the market," Baldwin said. "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."

At the same time, prices of natural gas are expected to rise this year, boosting costs for Contacts gas-fired power stations in the North Island. The increases mean Contact will pay about 25% more per gigajoule for gas in 2009, the company said.

By Jonathan Underhill

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