Contact Shares Fall by Record on Profit Drop Forecast

By Gavin Evans

Jan. 20 (Bloomberg) -- Contact Energy Ltd., New Zealand’s biggest publicly traded power generator, fell the most since its listing in Wellington after saying full-year profit may plunge 23 percent because hydropower output slumped and gas costs rose.

Profit before interest, tax, depreciation and changes in the value of financial instruments may fall 15 percent from last year, Chief Executive Officer David Baldwin said in a statement to the stock exchange today. Underlying profit may drop as much as 23 percent, he said. The stock fell as much as 10 percent.

Contact, half-owned by Sydney-based Origin Energy Ltd., said in August profit growth may stall as transmission constraints reduce its ability to profit from power produced at its dams on New Zealand’s South Island. Since then, high lake levels and an output cut at Rio Tinto Group’s Tiwai Point aluminum smelter have forced generators to release water from their dams.

“This has taken a lot of people by surprise,” said Rickey Ward, who helps manage the equivalent of $1.9 billion at Tyndall Investment Management Ltd. in Auckland. “It just throws up another red flag” for what was previously considered a defensive, utility stock, he said.

Contact fell 68 cents, or 9.3 percent, to NZ$6.67 at 12:30 p.m. in Wellington, after earlier touching a seven-week low of NZ$6.60. The stock is headed for its biggest one-day decline since trading started in May 1999.

Profit Expectations

Investors had been expecting full-year profit of about NZ$230 million, according to the average of six analyst estimates compiled by Bloomberg News. Contact’s forecast implies underlying after-tax profit of about NZ$180 million. It reported underlying profit of NZ$232.8 million in the year ended June 30 on earnings before interest, tax, depreciation and financial adjustments of NZ$567.2 million.

Contact’s customers are divided almost equally between each of the country’s two major islands, which it supplies from a mix of gas-fired, geothermal and hydro-electric generation. The utility usually makes about a third of its electricity at two dams on the lower South Island.

Their output the past six months is down about 14 percent from a year earlier, Baldwin said. Drought early in the period cut production, while generation since has been constrained as reduced transmission capacity to the North Island, the highest lake levels in 10 years and a 30 percent reduction in processing at the Tiwai Point smelter combined to force spilling from dams.

Extremes, Prices

New Zealand “has experienced two extremes of hydrology within six months, each at opposite ends of the scale,” Baldwin said.

Contact got about NZ$8.69 a megawatt-hour for generation from its dams on the South Island’s Clutha River at 11:30 a.m. At its Otahuhu plant in Auckland on the North Island, it got NZ$69.83 the same time.

Inflation-adjusted supply contracts will also contribute to a 25 percent increase in per-unit fuel costs for the gas-fired Otahuhu and Stratford plants this year, Baldwin said.

While the company can’t be blamed for the weather and transmission problems, management may have lost some credibility with investors given the timing and size of today’s forecast cut, Tyndall’s Ward said. Tiwai Point, the country’s biggest power user, cut production in November and a month later, national hydro storage reached a two-year high.

“How come it has taken so long when some of these issues have been pretty obvious for some time?”

Modeling the various impacts the company is exposed to at the moment is “not an insignificant task” spokesman Jonathan Hill said.

To contact the reporter on this story: Gavin Evans at gavinevans@bloomberg.net