Contact Energy profit falls 1% on South Island costs

Tuesday 26th August 2008

Contact Energy, the biggest utility on the NZX 50 Index, said annual profit fell 1% decline as constraints on the Cook Strait cable and low hydro-lake levels forced it to buy electricity at higher prices to supply South Island customers.

Profit fell to NZ$237 million in the 12 months ended June 30 from NZ$239.6 million a year earlier, the Wellington-based company said in a statement today. Operating revenue rose 38% to NZ$2.76 billion.

Lack of water for hydro plants in the South Island forced Contact to buy power on the spot market at high prices, it said today. So far this year, the company has remained short of capacity and the first two months of trading is "well below expectations."

"These conditions are having a significant impact on Contact's current performance," chief executive David Baldwyn said. Profit growth this year may stall, he added.

Shares of Contact are little changed this year, outperforming the benchmark index, which has dropped 18%. The utility is half owned by Australia's Origin Energy Ltd., which is fending off a hostile takeover attempt from the UK's BG Group. The British company has said it may seek a buyer for its Contact stake.

Baldwyn today flagged the possibility of reviving plans to build combined-cycle gas generators at Otahuhu and Stratford as the company grapples with South Island constraints. His comments may signal expectations a National Party-led government would end restrictions on such plants imposed by Labour on the basis of carbon emissions.

"We expect these conditions to improve once either transmission constraints ease, South Island demand eases as temperatures rise, or South Island hydro inflows increase," he said. "Contact is undertaking further work to assess the possible medium-term implications on the market of continued transmission constraints."

By Jonathan Underhill

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