ABN-Amro values Contact at $5.31

By Nick Stride

Friday 26th October 2001

Investment bank ABN-Amro New Zealand yesterday upgraded its valuation of Contact Energy shares to $5.31 using views contained in the generator's own submission to the Electricity Post-Winter Review.

Contact is the subject of a $3.85 a share takeover offer from 51% owner Edison Mission Energy. Contact's submission argued that, for new generation to be economic, it was likely electricity prices would have to be higher than $50 a megawatt hour.

ABN's research, which also drew on comments this week from state-owned generator Genesis Power, showed hedge contracts were now being struck at $50-$65 a MWh. If the long- run marginal cost of electricity (LRMC) was $55, Contact shares would be valued at $6.30. The minimum value of the shares, based on $48 a MWh, was $4.91.

"The consensus view of the electricity market has changed materially since Grant Samuel wrote its first (May) independent valuation report valuing the company at $3.10. Sure proof of this has been provided in the (Electricity) Market Surveillance Committee's report and in Contact's own assessment of the LRMC at $50-plus a MWh," the research report said.

Genesis Power chief financial officer Steve Rudd said this week that the new power station the company was building would be in the $50 to $55 a MWh LRMC range.

"We believe Edison Mission Energy is well aware the market has been 'anchored' in the perception of the past and has astutely launched a takeover bid exploiting this inefficiency in the market," ABN's report said. "Unfortunately for EME, the soaring electricity prices this winter exposed Contact's awesome pricing power for all to see."

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