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Contact shares hit 7-month low on price rise announcement

Thursday 11th February 2010

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Shares in Contact Energy Ltd sank to a seven month low of $5.65 a share on thin volumes in NZX trading today, following disclosure that the company is raising tariffs for around 75% of its 479,000 customers by around 5%.

Fewer than 200,000 Contact shares had changed hands by late in trading today, making it an average trading day for the country's largest listed energy retailer, but the 2.5% fall compared with 0.5% for the NZX50 index. The share price was last lower, at $4.63, last July 10.

In less competitive times, the Contact share price has tended to rise on news of tariff increases, especially applied so widely. 

However, dramatic customer losses and unprecedented retail market competition since late 2008 may have reduced investors' confidence that the company execute price increases ahead of the rest of the market without sustaining further customer losses, said Andrew Harvey-Green at broker Forsyth Barr.

"Maybe they're scared of the customer haemorraging," he said, although the volumes suggested there was no institutional activity driving the share price fall.

Energy Minister Gerry Brownlee also made careful but critical comments about the increase, questioning why the electricity industry expected to be able to charge prices reflecting the cost of plant that not yet been built.

Contact is due to report its first half on Feb. 23, and spokesman Jonathan Hill said the company was planning detailed disclosure on the impact of rising transmission and local monopoly network charges on tariffs.

An increase of 5% in Contact's Far North incumbency in January reflected a 20% increase in charges from the local network operator, Top Energy, while the national grid operator, Transpower, is making multi-billion investments in upgrades to improve security of national supply. These upgrade costs will also be feeding into tariffs which Contact says are too low to make it economic to run efficient natural gas-fired plant.

Listed competitor TrustPower's spokesman Graeme Purches said the Tauranga-based firm had not recently notified increases and had nothing planned until a likely 3% increase in tariffs in Nelson City in June.

However, TrustPower had instituted no price freezes in the past year, unlike Contact and state-owned Meridian and Mercury Energy. A quarter of Contact's customers in four areas have their tariffs frozen until October.

Contact has been unwilling to provide earnings guidance for the half-year, owing to the volatility of wholesale electricity market conditions and retail competitor activity.


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