Contact Energy given credit warning

The ratings agency has revised CEN's outlook from stable to negative following a drop in financial performance last year, and says similar financial results for the current year will result in a ratings downgrade.

For the present the ratings have been affirmed at BBB+ long-term and A-2 short term.

Mark Legge of Standard & Poor's says the dramatic fall in Contact Energy's earnings in fiscal 2000 and the possibility of continued performance at this level is a major concern for its ratings.

"This concern is magnified by the detrimental effect of continued high payout of dividends on the company's financial position in the face of such a large fall in profitability."

In the year ended September 2000, Contact paid or provided for $102 million dollars of dividends on a net profit of $97 million.

Standard & Poor's says its ratings for CEN factor in reduced financial flexibility because of the need for dividends to cover the debt-servicing obligations of the intermediate holding companies of cornerstone investor, Edison Mission Energy.

Mr Legge says Contact's credit quality will also be affected by any rating downgrade Edison Mission Energy, and any substantial increase in Edison Mission Energy's shareholding of Contact Energy will result in CEN's ratings being downgraded to meet the ratings of its cornerstone shareholder.

Edison Mission, along with other power utilities, has been under pressure in California as wholesale prices for electricity have soared but the price hikes have not been permitted to be passed onto consumers, raising speculation about the importance of cashflow from its New Zealand investment.

For the 2000 financial year Contact's group earnings per share fell to 16 cents from 25 cents per share the previous year.

CEN's share price, which has been building steam in the past week and at one stage broke its $3.10 issue price, fell back following today's S&P announcement.

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