Parent troubles puts pressure on Contact's credit rating

By NZPA

Tuesday 26th November 2002

Contact Energy's standing with credit ratings agency Standard & Poor's is being reviewed with negative implications.

Contact's triple B-plus and A2 credit ratings are under scrutiny after the ratings of its major stakeholder Edison Mission Energy (EME) were lowered with a negative outlook.

EME holds 51 percent of Contact Energy.

"The resolution of the creditwatch will be determined by the extent to which Contact Energy improves the level of ring fencing of the company from EME," S&P spokesman Mark Legge said.

The ratings action on EME follows a series of events and market developments that have materially weakened the company's credit profile.

In October, financing covenants triggered cash traps of distributions from EME's largest subsidiary, Edison Mission Midwest Holdings Co and its affiliates.

Interest payments at the Midwest holdings company have increased, and operating margins are under pressure in the US and Britain where power markets are depressed.

The cash trap is restricting EME's ability to continue reducing its debt.

Contact Energy, which has a foot in both electricity and gas sectors, has a stronger rating than EME because, among other reasons, minorities hold a large percentage of Contact shares .

Contact also scores well because of a high level of transparency required by the Stock Exchange and its tough shareholder approval process, its independent directors and its relatively small scale compared with the EME group.

S&P noted EME had a track record of trying to protect its credit rating by selling its subsidiaries, rather than upstreaming cash.

Any change in Contact Energy's financial policy that could result in less cash being retained at the company would put downward pressure on its rating, Mr Legge said.

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