Contact Energy is expected to report a pickup in underlying earnings, but faces headwinds from state asset sales and Meridian's contract negotiations with the Tiwai aluminium smelter.

New Zealand's largest private sector electricity company, Contact is due to report results for the year to June 30 tomorrow.

Forsyth Barr analyst Andrew Harvey-Green has forecast that the Wellington-headquartered company will report earnings before interest, tax, depreciation and amortisation (ebitda) of $496.4 million, an increase of 12.5 per cent on the previous year.

Craigs Investment Partners head of research Grant Swanepoel has even stronger forecasts, predicting ebitda of about $511m.

With Contact reporting an increase in first-half underlying earnings of just 2.4 per cent, the forecast implies an increase in second-half earnings of about 30 per cent, and would be Contact's strongest earnings since 2008.

However, shares in the company, majority owned by Origin Energy of Australia, are down 16 per cent from the high hit last October, and are flat compared to six months ago.

On Thursday the shares suffered one of the worst falls in the past 12 months, dropping 20c to $4.80, before closing on Friday at $4.83

The fall on Thursday came in the hours after the announcement by Meridian Energy that Rio Tinto, majority owner of New Zealand Aluminium Smelters, was seeking to renegotiate its electricity purchase contract.

Although the market has little insight into the contract, which takes effect from next year, it was signed in 2007, when the outlook for demand for both aluminium and electricity were stronger.

Rio Tinto has made it clear that it may close smelters on which it cannot make a profit, and industry sources are concerned that if Meridian does not "take one for the team" and renegotiate the contract, it faces a massive oversupply.

Tiwai uses about 14 per cent of New Zealand's electricity generation.

Contact shares may also come under selling pressure if the Government pushes ahead with the part-sale of Mighty River Power, as investors look to buy into the state-owned company without increasing their exposure to utilities.

Craigs' Swanepoel played down the likelihood of the move, saying exposure to utilities would not be a problem if Contact continued to offer value as an investment.

"This country, 10 years ago, had 30 per cent of the market exposed to forestry. Nobody cared about that. So why should you worry about having 20 per cent exposure to utilities, if that's offering value in the near term?"

- © Fairfax NZ News