US debt saga makes Contact a 'good buy'

By ELLEN READ

Shares in Contact Energy are being tipped as a good buy, as concerns about its cornerstone investor fade.

Analysts said yesterday that Edison Mission, which has a 40 per cent stake in the local electricity generator, is likely to keep its investment, although its sister company, Southern California Edison, is on the brink of bankruptcy in the United States.

Both Edison Mission and Southern California Edison are owned by Edison International, which is under pressure from mounting debts that it blames on Californian state-imposed electricity price caps.

Southern California Edison faces a debt payment this week amid speculation it may default, triggering other defaults and possible bankruptcy.

It had been reported that Edison might be forced to sell its Contact stake to help pay debts estimated at more than $US10 billion ($22.42 billion).

Californian officials have asked power generators to consider deferring bills to ease the situation. They also propose that the state buys wholesale electricity, which it can do at a lower price than the power companies, and sell it to them at cost.

Edison Mission's senior vice-president for Asia, Robert Driscoll, has been reported as saying that the company was pleased with its investment in Contact and had no intention of selling.

ABN Amro energy analyst James Miller said that Contact would not have to be sold because Southern California Edison would survive.

"Some of the problems that have happened are more related to the way the California market was deregulated."

Mr Miller said that Contact presented a great buying opportunity. "I don't see why Contact should have fallen just because they're having problems in California. It's a big step to say they're related in any shape or form. Contact's profitability and operations are going just fine."

Another analyst, who declined to be named, agreed that a Contact sale was unlikely. Edison would survive, and a Contact sale at the present share price and New Zealand exchange rate would not reap great returns.

"In order to say that Edison would have to sell its stake in Contact, then you have to think about what would cause that. One thing would be if it was put into receivership. The market price of Edison at the moment tells you that that's unlikely."

The analyst said that the existing constraints did make it much more unlikely that Edison would increase its stake in Contact.

A Contact Energy spokesman said the situation with Southern California Edison was not an issue for Contact.

Its shares closed up 6c at $2.72.