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Contact battles supply failure legal decision

By Michele Simpson

Thursday 20th April 2000

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As its share price continues to drop, Contact Energy has hit a legal snag over its $75 million take or pay Stratford gas supply agreement with Fletcher Challenge and TransAlta.

Contact is fighting hard to overturn an arbitration ruling that found TransAlta and Fletcher Challenge did not have to pay the energy company after mechanical failures halted production at the station. The contract began in July 1998.

Contact chief executive Paul Anthony said it was a matter of principle to try to recoup the money allegedly owed. He would not say how much was in dispute but said it was a "small quantity on the grand scale."

The gas supply contract lasts until the end of the Maui contract, which does not have a defined end. But if the appeal is turned down, the unpaid gas supply to Fletcher Challenge and ultimately TransAlta could affect the company's bottom line.

In the past four months Contact's share price has steadily slipped from $3.40 to $2.43 this week. Despite the drop, analysts believe the stock is a good buy. Merrill Lynch head of research Mark Benseman blamed disinterest in New Zealand stocks, disinterest in utilities shares worldwide and wholesale electricity rates falling below expectation as reasons for a weakened Contact share price. "Having said that, I still think it is quite good value at current levels," Mr Benseman said.

Small investors have not thought so and many have sold out. Investors in Contact have dropped from 220,000 when the share floated last year at $3.10 to 175,000.

Mr Anthony said the "non-habitual" investors had bailed out after responding to a negative spin on Contact and uncertainty on what cornerstone shareholder Edison Mission Energy was going to do with its 40% stake.

Edison has suffered a drop-off in its own share price and has not raised its shareholding in Contact. Market speculation in Edison could even look to sell off its stake.

Mr Anthony has not pushed for answers from Edison on its future plans for its Contact investment.

He said the company's share buyback programme and a $29 million injection from stamp duties had been played down. One energy analyst said the company had become particularly sensitive to negative press coverage.

Contact announced yesterday it had bought the gas trading business from Orion for $10.2 million. Large amounts of capital have been taken out of New Zealand and invested in growth markets, such as Asia, Mr Anthony said.

Mr Benseman said there could be a shift by shareholders back to old economy stocks, which might lift the share price.

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