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Daily ShareChat: Contact Energy

By Jenny Ruth

Thursday 27th August 2009

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Contact Energy's 50.4% fall in annual net profit to $117.5 million was no surprise and reflected both drought and deluges in the South Island and rising gas prices, says John Kidd, an analyst at McDouall Stuart.

With national hydro station water storage levels currently about 118% of average, the drought which affected Contact during winter 2008 is unlikely to be repeated this year.

However, the seasonally strong hydrology is drawing a strong price response with Contact's 2009 spot prices averaging less than $50 a megawatt hour, about $20 a megawatt hour below the short-run marginal cost of operating its gas-fired plants.

"In other words, wholesale prices to date in Contact's 2010 financial year have not been high enough to cover the direct operating costs, largely fuel, of running Contact's thermal stations, let alon to recover indirect soft costs such as overhead and capital charges," Kidd says.

Even worse, the most recent pricing trend has been sharply downward with wholesale prices averaging below $30 a megawatt hour since the beginning of August.

This, and transmission constraints though to the second quarter of 2012 when the HVDC Pole 3 link between the North and South Islands is scheduled to begin operating, could keep Contact's revenue volatile, Kidd says.

BROKER CALL: Investors over-weight in Contact (NZX: CEN ) should re-weight in favour of TrustPower. ("This should not be taken as an outright sell recommendation on Contact, rather a recommendation that over-weight Contact holders should diversify their sector risk across both players, particularly given TrustPower's currently attractive pricing metrics," Kidd says.)

Daily ShareChat articles report how the main experts in the market might view a certain share and we provide this commentary as a useful resource for investors. Content on this site does not in any way constitute a recommendation to buy, hold or sell any particular share. Investors should always seek professional advice before making any investment decisions.

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