Forsyth Barr is forecasting operating earnings for the year ended June 30 to $498 million, up 4.1%, but has lowered the 2013 forecast by 8.1% to $514 million.
Mr Young has also dropped the valuation of the company by nearly $1 a share to $5.89.
Contact last traded at $4.80.
The revised 2012 forecast was "comfortably below" market consensus following Contact's 2011 result of $520 million and even more so given the lift Contact was receiving from running its thermal fleet hard and collecting the current high wholesale prices, he said.
The second half of the 2012 financial year had been an interesting period to analyse because it was the first period since 2008 when hydrology had been dry for a prolonged period of time, conditions that should suit Contact.
However, things had not worked out as expected. Since the beginning of February, hydro inflows had been substantially lower than 2008.
In 2008, inflows were 77% of average compared to 72% in 2012.
"In fact, lake inflows are creating new record lows and we expect Clutha generation to be in the bottom 1% of outcomes.
The inflows Contact is experiencing are a one-in-100-year event," he said.
Despite the record low inflows, wholesale prices in 2008 were substantially higher in 2012. Only since the start of May had 2012 prices started to show any significant increase.
In the case of Benmore prices, that was aided by a weekend outage and some "interesting pricing" in the South Island reserves market, Mr Young said.
There were two reasons why lake levels were holding up significantly better in 2012 than 2008.
First, demand was weaker and secondly, lake levels were substantially higher than 2008 because of the level of new building that had taken place and strong North Island hydrology.
Since the start of February, there had been an an additional 1600GWh produced from new geothermal and wind construction and North Island hydro compared to 2008.
"In simple terms, better-than-expected lake levels have translated into lower-than-expected wholesale prices, which has meant Contact's second-half earnings, while good, are lower than we would have thought."
Mr Young said that since 2008, Contact had struggled to meet earnings expectations.
Looking ahead, the electricity market was facing two fundamental problems - it was oversupplied and demand was low.
In addition, new generation was continuing to come on stream.
At the end of this year, Todd Energy was commissioning its 100MW gas-fired peaking plant and in the middle of next year, Contact would commission its 114MW (net generation) Te Mihi geothermal plant and Mighty River Power its 82MW Ngatamariki geothermal plant.
Since 2007, nine "must-run" generation plans had been built and no significant plant had been decommissioned and demand had flat-lined, he said.
Must-run generation was typically bid into the electricity market at or close to $0 per MWH, pushing out of the market more expensive generation and lowering spot market prices.
While new must-run generation continued to be built, it appeared there was a risk the market might continually underprice thermal generation.
The closure of the first Huntly coal unit would help but for most of the year, there had always been one Huntly coal unit out of action and the wholesale electricity market had not spiked very high, Mr Young said.
"Until demand picks up and mops up the excess generation in the market, we believe wholesale prices will remain suppressed.
"We could be looking at four to five years before the market starts to get back to equilibrium and that assumes no new generation is built during the interim."
That was an issue for Contact given it had long-generation assets and a large thermal fleet not well suited to excess generation in the market.
Thermal fleet made most of its money in dry years when generation was short.
It was the reason why Contact was keen to increase gas flexibility and lower the average cost of generation, Mr Young said.
