Contact acts on credit watch

By CHRIS DANIELS energy writer

Details of corporate governance changes at Contact Energy are expected to be unveiled to shareholders in the next week, in response to the company's being put on a negative credit watch.

The move by credit rating agency Standard & Poor's came after Edison Mission Energy, the US energy giant that owns 51 per cent of Contact, was downgraded to "junk status".

The credit watch will be resolved once Standard & Poor's sees the details of the changes that the Contact board proposes and whether, as is expected, the changes are supported by shareholders at their next annual meeting, in February.

Standard & Poor's associate director Mark Legge said a combination of factors was used to try to assess how much a subsidiary's credit rating should be affected by a downgrading of its parent.

Contact could be rated higher than its weaker parent for several reasons, including the large percentage of shares held by minorities, the presence of independent directors, the degree of ring-fencing between Contact and Edison and Contact's size compared with Edison.

Another reason given by Standard and Poor's to keep Contact's credit rating so much higher than its parent was Edison's "track record of attempting to protect its credit rating by selling its subsidiaries".

Contact chairman Phil Pryke said one benefit of the governance improvements was that they would help insulate Contact from the effects of Edison's downgrade.

These changes to "entrench the level of independence" may also help Contact comply with proposed changes to New Zealand Stock Exchange listing rules.

Of Contact's six directors, three represent Edison.

The company's role in running Contact has been a source of friction in the past.

A proposed joint venture deal with Edison Mission to buy a power station in Victoria, Australia, was called off this year, after incurring the wrath of many Contact shareholders.

The deal would have initially committed $81 million of shareholder funds, just under the 5 per cent threshold to require special shareholder approval and an independent appraisal.

Edison Mission failed in a takeover attempt last year for all of Contact, offering New Zealand shareholders $4.14 per share.

Shares in the company, which last week announced a solid $107 million profit, have been trading over the past few months between $3.80 and $3.90.