Contact plays power politics

By Shoeshine

Friday 20th February 2004

Annual meetings are usually dull affairs. About the most real information shareholders can expect is an update on first quarter trading and perhaps an earnings forecast for the half year.

Not so this week's Contact Energy meeting in Dunedin.

Chairman Phil Pryke and chief executive Steve Barrett used the platform to fire off a barrage of news and opinion that will keep analysts busy for days.

By far the most significant was Pryke's somewhat extraordinary hint that Contact might be a buyer for Edison's other assets in this part of the world.

One curious aspect to this pronouncement was the timing.

Only minutes later, Barrett announced to shareholders an expansion into the Victorian retail market.

Sensitive no doubt to market scepticism about Australian forays, Barrett stressed how painstakingly Contact had checked things out.

"This is a modest and measured move," he assured. "We are not expecting to take over the town."

Then Pryke dropped his bombshell, raising a whole battalion of questions that will remain unanswered until the end of this year, when Edison, Contact's 51% owner, hopes to announce its plans.

First, what, if anything, will Contact buy?

Edison's Australian assets are the 1000 megawatt, coal-fired Loy Yang B station and 60% of the 300MW Valley Power Peaker natural gas station, both in Victoria. It also has 70% of the 116MW Kwinana combined cycle plant in Perth.

Analysts value this lot at about $A2.5 billion ($2.8 billion), far more than Contact's balance sheet could bear.

Does this mean Contact could take an a la carte approach, taking, for example, its 40% stake in Valley Power to 100%? Not unless Edison has changed its mind. Edison has said, and it repeated it on Tuesday, that it wants to sell its 6658MW global portfolio in one chunk but will look at bids for regional packages.

Bids for single assets, it has said, will not be considered.

Australian analysts are taking that with a pinch of salt. No one, they opine, will want the whole ragbag of assets.

Pryke's kite-flying appears also to have made life a lot more complicated for Edison's salesmen, Credit Suisse First Boston and Lehman Brothers.

Both trade buyers for the 51% Contact stake, and institutions assessing the share placement option, have presumably until now been doing their numbers on Contact as is.

They probably won't be too worried if Contact announces it has exercised pre-emptive rights over Edison's Valley Power stake and gone to 100%. As Edison's Australian portfolio is highly geared, the equity portion of the purchase price wouldn't be too onerous.

But if Pryke's comments mean Loy Yang is on the shopping list, that's another story.

For one thing, an acquisition of that size would change Contact's balance sheet and risk profile dramatically.

For another, buying Loy Yang would shorten the list of viable bidders for Contact for competition reasons.

Whatever, Pryke's comments knocked another 5c off the share price straight away.

From their $5.77 peak in late January the shares have fallen to $5.13, an 11% drop. The lower they fall, the more likely a trade deal, rather than a share placement, becomes.

Pryke and Barrett also used the annual meeting, less surprisingly, to urge the government and gasfield operators to get on with it in the face of "potential electricity shortages looming in three to five years."

Expect to hear more of this. Pryke told the meeting "one of our key tasks over the coming months is to convey to you and to the rest of the country the sense of urgency that we bring to this question of secure, reliable electricity supply."

Barrett took a poke, not for the first time, at the operators of the Pohokura and Kupe gas fields Shell Todd Oil Services and Genesis Power, respectively for "delaying the development of known resources."

But he fired his heaviest ammunition at the government. The industry, he said, had to make huge investment decisions in the face of already major uncertainty about where generation fuel was to come from as Maui ran out.

The government was adding to that uncertainty with the carbon tax, lack of action over the long delays caused by the Resource Management Act and the nebulous powers of the new Electricity Commission.

On the last he was presumably referring to the potential for the commission to investigate industry pricing and, horror of horrors, recommend a price control regime along similar lines to that already adopted for the power lines companies.

It's possible he need not worry. Energy Minister Pete Hodgson is on the record saying governments have tried to control electricity prices in the past and it hasn't worked to the nation's advantage.

Be that as it may, it's hardly overstating the case to say Contact has thrown down a challenge to the government. Crudely interpreted, it's telling ministers to stuff their commission, stuff their carbon tax and get on with the job of removing the road blocks to investment in the new generation capacity that nobody but an idiot would deny is needed, and fast.

It might be drawing a long bow to suggest that, by going on in the same breath about a possible multibillion-dollar spend-up in Australia, Contact is reinforcing the message: a private company can invest its money wherever the returns are greatest.

Of course the other three big generators are state (taxpayer)-owned, so there is considerable muscle on both sides of the arm-wrestle.

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