KEY POINTS:
The market should have seen it coming, the NZX-50's second
biggest company Contact Energy said after a big downgrade to its
full-year earnings guidance sent its share price sprawling yesterday.
Contact, which has oft been touted as a good defensive stock during
the current difficult economic conditions, said its June-year earnings
might fall by about 15 per cent and underlying net profit by 20 to 23 per cent due to low South Island power prices, transmission constraints, reduced demand from
the Tiwai Point aluminium smelter and a big rise in gas prices.
The announcement sent the company's share price sprawling and it ended the day 6c off its lows but still down 69c or 9.4 per cent at $6.66 - its biggest-ever one day loss.
"It would be fair to say that the market wasn't expecting this," said
Forsyth Barr analyst Andrew Harvey-Green. In a statement to the market Contact said "extreme hydrological conditions this year, combined with transmission constraints, particularly arising from the unexpected removal of pole one of the interisland HVDC link in November 2007, have had a negative impact on earnings for the current financial year".
Early in the financial year, Contact warned full-year earnings would
likely be flat or slightly down due to low lake levels and the ongoing
problem that the interisland transmission constraint meant wholesale prices in the South Island, where the company was at the time selling more electricity
than it generated, were unusually high.
However the situation was reversed late last year as crucial South Island
hydro lakes filled so quickly that generators were forced to begin spilling water.
Yesterday Contact Energy chief executive David Baldwin also pointed to reduced production at the Tiwai Point smelter which can consume up to one-third of New Zealand's entire generation capacity. With the smelter cutting
back consumption overall demand was much lower.
Furthermore, transmission constraints meant that power generated in the lower South Island could not be transported to consumers elsewhere. The overall
effect has been unusually low South Island wholesale power prices.
While its retail customer base and wholesale contracts with big industrial users mean about 85 per cent of its generation is effectively hedged against wholesale price volatility, Baldwin said the remaining 15 per cent was subject to vagaries of the market and the revenue derived from it could swing by about $100 million from year to year.
Adding to Contact's woes, it has been forced to pay more for gas supplies, during the current financial year, by as much as 25 per cent.
Meanwhile, the South Island factors that have hit Contact Energy will
inevitably affect big state-owned power company Meridian which is
even more exposed, having more hydro generation in the South along
with a closer relationship with Tiwai Point.
Meridian spokesman Alan Seay confirmed constrained transmission, unusually heavy inflows into its catchments "which you're now seeing reflected in the form of spill down the Waitaki chain" along with reduced demand from Tiwai Point were "impacting us as well in a material way".
He acknowledged profit could be affected.
