Contact cuts forecast a second time

Monday 8th June 2009

Contact Energy, the biggest utility on the NZX 50 Index, cut its earnings forecast for a second time, as surplus capacity in South Island hydro lakes and reduced demand weigh on wholesale prices.

Underlying earnings after tax will be 30% to 33% below last year’s $232.8 million ($146 million), the Wellington-based company said in a statement. That’s a deterioration from its January prediction of a 23% slide in earnings and worse than its forecast last October for profit growth to stall.

Storage in South Island hydro lakes is currently at 136% of its mean levels while demand has been reduced in the south by transformer outages at the Tiwai Point smelter, which took out a third of production at New Zealand’s biggest consumer of electricity. Ample water has led to hydro lakes “frequently spilling water” in the past three months, driving down wholesale prices and limiting demand for higher priced thermal generation, Contact said today.

“The extremes we have seen in hydrology are reflected in low wholesale electricity prices,” chief executive David Baldwin said. A return to more normal rainfall patterns in the South Island would see lake levels abate, lifting wholesale prices.Contact also doesn’t expect a repeat of supply constraints across Cook Strait because of the unavailability of pole 1 of the HVDC link this winter as it experienced last July and August.

The shares fell 2.2% to $5.67 and have declined 21% so far this year. Thermal plants, mainly from natural gas, makes up about 40% of Contact's generation capacity and demand for the power dips when hydro capacity is plentiful.

Reduced demand at Tiwai Point meant as much as 180 megawatts of hydroelectric power was essentially wasted, the company said in January.

Businesswire.co.nz

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