Contact on CreditWatch after Edison move

Edison Mission Energy plans to stand in the market from May 22 to increase its stake in Contact by 49 million shares, or another 8.5% of the company, taking it to a majority position of 51.16%.

It's proposing an offer of between $2.90 and $3.25 per share.

Last month S&P downgraded Contact's outlook from stable to negative, reflecting the significant deterioration in its recent performance and continued high dividends.

S&P says depending on the funding structure chosen by Edison Mission, a successful move to increase its shareholding has the potential to negatively affect the creditworthiness of Contact Energy or leave the rating unchanged.

The agency says its rating on Contact Energy factors in reduced financial flexibility because of EME dedicating its share of the dividends to servicing debt at the intermediate holding company level.

"As such, if debt at the holding company level is increased significantly to assist in funding the increased shareholding, a rating downgrade of Contact Energy's long-term rating to triple-'B' would be likely," the agency says.

"On the other hand, if the additional shareholding was funded by EME issuing additional equity, Contact Energy's long-term rating may be affirmed at triple-'B'-plus."

Standard & Poor's says the CreditWatch will be resolved once the details of the funding structure for the additional shareholding are ascertained and the likely success of Edison's actions becomes clear.

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