Brokers downplay Contact slide

By Mark Reynolds

Fears of further regulation in the electricity industry have caused Contact Energy shares to slither under the price for which they were sold to the public last month.

Contact shares ended local trading at $3.08 yesterday. That is below the $3.10 a share that 225,000 New Zealanders paid for the company just five weeks ago. The shares have been sliding steadily from the high of $3.55 each they touched earlier this month.

The slump has re-ignited suggestions that the Government overpriced the public sale, but Treasurer Sir William Birch declined to comment on that last night. A spokesman for the Treasurer said, however, that Auckland Airport shares had also dipped below their issue price following their privatisation but had recovered spectacularly since.

Sharebrokers said there were a host of factors putting pressure on the Contact share price - none of which were exclusive to the electricity retailing and generation company. The most notable of those factors yesterday was concern that new regulations might be imposed on the power production sector.

That spectre was raised by Labour's energy spokesman Pete Hodgson, who said Labour wanted the Commerce Commission to deal with anti-competitive practices in the generation sector, along with planned price controls on the energy transmission business.

Contact generates about a third of New Zealand's power needs, and would be hit more than any other company by regulation of that sector. Sharebrokers said talk of a possible regulatory clamp on generation startled institutional investors who had already been pulling out of Contact because of rising interest rates.

"Contact has been caught by the general mood of a market where interest rates are moving north, so shares are moving south," said Warburg Dillon Read energy analyst Paul Richardson.

Contact is regarded by most institutions as a company that will pay a modest dividend relative to fixed deposit interest rates, so a rise in rates had caused investors to sell out of the stock and put the cash in the bank.

Sentiment toward the company was not helped by confirmation on Wednesday that the Standard & Poor's ratings agency had lowered Contact's credit rating. S&P said it expected the company's new 40 per cent shareholder, Edison Mission of the United States, to maximise Contact's dividends to cover debt servicing obligations.

Mr Richardson said that even though Contact shares were sliding, there were favourable factors that should underpin the stock over time. It was benefiting from a recovery in wholesale power prices and first-half financial results issued last week showed earnings were ahead of forecast.