Contact Energy - is this as good as it gets?

Friday 24th August 2001

Shoeshine was among the Contact Energy shareholders struggling to make sense of Standard & Poor's latest pronouncement. The rating agency took the generator-retailer off creditwatch and affirmed the BBB plus long-term rating but gave the company a "negative outlook."

From shareholders' perspective the outlook has never been so good. The cold, dry winter is expected to furnish bumper profits this year. And Treasury meteorological experts predict worse power shortages next winter.

The shares have at least climbed above the 310c punters paid in the May 1999 float but only by 15c. Is this as good as it gets?

S&P's problem is with Edison Mission Energy, Contact's cornerstone shareholder. The agency reckons the extra debt Edison's intermediate holding company took on moving from 40.7% to 51% could affect Contact's financial flexibility.

Reading between the lines S&P seems to suspect the proceeds of the winter bonanza, instead of being used to reduce bank debt, will be paid out to Edison and the minority shareholders by way of a special dividend.

Pandering to the major shareholder rather than building long-term strength would not be a good look for a board already under fire, rightly or wrongly, for the quality of its governance.

On the plus side the policy of paying a 10% higher dividend each year looks viable for at least the next two years, so on the current share price the yield should climb from 5.4% to 6.5%, four times the average for top-10 companies.

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