Record fall for Contact shares

Shares in Contact Energy suffered their biggest ever one-day fall after the country's second biggest listed company warned annual profit would fall by almost one-quarter as it generates less electricity.

The power generator said today its underlying earnings after tax for the June 2009 year will fall by between 20 percent and 23 percent from last year's $232.8 million. That is a fall of up to $53.54 million to about $179.26 million.

Tower equities fund manager Paul Robertshawe said the size of Contact's earnings downgrade had caught the market by surprise. This was especially so given Contact was a so-called defensive stock with predictable earnings.

"If it was a retailer you might expect that but for Contact it's a bit of a surprise that it can get that big that quickly," Robertshawe said.

 "Should this company be able to miss earnings by that much?"

Contact shares fell 69 cents, or 9.4 percent, to $6.66. That exceeds their previous biggest one-day slump of 41c on November 21 last year. The company listed on the sharemarket in 1999.

Robertshawe added that most analysts had forecast Contact earnings would fall by between three percent and five percent from last year.

Contact blamed extreme hydrological conditions, high gas costs and transmission constraints for its lowered profit outlook.

As well as lower net profit, Contact said its earnings before interest, taxation, depreciation and financial instruments (EBITDAF) would be about 15 percent lower than the last year's $567.2 million.

Transmission constraints it had been hit by included the unexpected removal of pole one of the inter-island HVDC link in November 2007, Contact said.

Higher than average inflows into its South Island hydro dams Clyde and Roxburgh, which are at their highest levels in 10 years, combined with the unexpected and continued reduction in aluminium production from Rio Tinto's Tiwai Point aluminium smelter, had resulted in significant spillage across the South Island hydro dams.

This had been exacerbated by the absence of pole one which in such situations had limited the volume of lower priced electricity that could be transferred from southern hydro systems to the North Island.

The lower aluminium production had resulted in about 180 megawatts of hydroelectric power being unable to "find a path to demand" due to transmission constraints.

"All of these issues have contributed to Contact's hydro stations generating 274 gigawatt hours less in the first half of the financial year than the prior corresponding period."

Robertshawe said the hydrology, or weather, issues Contact was facing were one-offs so not of major medium to long-term concern. But the gas price rises - which Contact says mean it will pay about 25 per cent more per gigajoule for gas in the 2009 financial year - and transmission constraints were.

"The question is how much over supply is there over the next two or three years if industry cuts [electricity use] back, if Tiwai stays down for a while whilst there's significant hydro flows," said Robertshawe.

Contact was also hit last winter when South Island wholesale electricity prices were significantly higher than North Island prices due to southern drought and significant transmission constraints limiting the delivery of lower-priced electricity from the North Island to the South Island.

Contact said this meant it had sold electricity to its lower North Island and South Island customers at a loss during winter.

The company said transmission constraints highlighted how important a modern and robust transmission network was to the efficient operation of the market. The loss of pole one would continue to result in constraints between the two islands.