Contact Energy profits set to plunge by a third

Contact Energy is expecting full year underlying earnings after tax to fall by as much as a third, due to lower than expected wholesale electricity prices.

Managing director David Baldwin today said short term market conditions were expected to mean Contact's 2009 full year underlying earnings after tax coming in at 30 per cent to 33 per cent less than the year to June 2008.

That was lower than guidance given in January primarily as a result of wholesale prices being lower than expected.

"The forecast as at January 2009 represented a mid-point of a range of outcomes," said Baldwin .

But extremes in hydrology were reflected in low wholesale electricity prices, resulting in this financial year's ebitdaf (earnings before net interest expense, income tax, depreciation, amortisation, financial instruments and other significant items) being 20 to 22 per cent less than last year.

Consequentially, underlying earnings after tax would be 30 to 33 per cent less than last year.

In January Contact said underlying earnings after tax for the 2009 financial year would be between 20 and 23 per cent lower than the 2008 financial year.

Baldwin said extremely high hydro inflows in the South Island combined with lower electricity demand, largely due to an unscheduled outage at the Tiwai Point aluminium smelter, had seen hydro lakes frequently spilling water during the past three months.

That led to the low wholesale prices which had in turn limited the requirement for thermal generation.

South Island hydro storage was at 136 per cent of mean and inflows during the past three months were at the top 16 per cent of historical records.

The recent high inflows had resulted in the outlook for wholesale prices remaining low for the remainder of the financial year.

With New Zealand's hydro storage capacity limited to around three months of electricity demand, a return to more normal rainfall patterns would see a reversion to more normal hydro storage levels and an expectation of higher wholesale electricity prices, Mr Baldwin said.

Also, Contact did not expect the significant adverse impact which it incurred during July and August of the current financial year due to the combination of extreme weather and the unavailability of pole 1 of the high voltage direct current (HVDC) transmission system to reoccur this winter.

- NZPA