Contact pulls plug on bid for power station

By FIONA ROTHERHAM

Contact Energy has pulled out of the bidding for the coal-fired Flinders power station complex in South Australia.

The decision follows the resignation of chief executive Paul Anthony and comes as the company warns it will meet its full-year profit forecast only through asset sales.

Although shortlisted with three other bidders, Contact said it decided against making a final bid once the numbers were crunched because it "did not meet its risk/shareholder value criteria."

It had earlier said the investment would give it the ability to build a marketing and trading operation in Australia.

Contact spent $1.5 million advancing the Flinders bid yet missed out on any state Government help with costs because it did not make a final bid.

Corporate affairs manager David Hunt said Contact was close to making decisions on two other investments in Australia. These are understood to be lifting its stake in the Oakey gas-fired station in Queensland and a joint-venture greenfield Queensland co-generation plant.

Analysts have this week downgraded their profit forecasts for the September year by several million dollars. Contact is still forecasting a $100 million after-tax profit but $25 million of this is expected to be from abnormal gains.

These one-off gains include profit from the sale of its gas turbines from the decommissioned Stratford station to a US-based buyer for $23 million and $6 million from a cross-border lease on its Otahuhu site.

Revenues are down because of the warm, wet winter lowering wholesale electricity prices while reducing consumer demand.

The company has indicated it will incur operating losses of $12 million after-tax associated with "teething problems" in the more competitive electricity market.

One-off operating losses include $5 million incurred because of the misallocation of charges through the industry's monthly reconciliation system. Under the system, the amount of power used by new retailers is deducted and the incumbent retailer foots the remaining bill regardless of what its customers used.

Losses of $4 million relate to network constraints forcing dramatic increases in the price of the redirected power.

Contact has threatened TransPower with court action because it rebates these constraint costs to network operators rather than the retailers paying the higher prices, despite electricity reform splitting retailers from network operators.

An unexpected blow was a $3 million bill from TransPower relating to the market costs of providing instantaneous reserve power.

A lack of transparency in the bidding process and a delay in sending the bill meant Contact was unaware of the amount it was to be charged.

Salomon Smith Barney analyst Stephen Shoobert said the expected result would be disappointing.

However, he had not altered his $3.65 per share valuation of the company.

Contact is still expected to achieve a progressive 10 per cent growth in dividend in line with the prospectus.

Contact's share price is trading at $2.60 after flagging last week and the revised profit forecast could drag it down further.

Main shareholder US-based Edison Mission Energy has given no firm indication whether it will lift its 40 per cent stake.

It is subject to a covenant on its redeemable preference shares triggered if Contact's share price drops below $2.55 for 15 working days.

The debt of its NZ subsidiary Edison Mission Energy Taupo must not exceed 65 per cent of the valuation of the Contact shares.

Fiona Brown of Tower Trust, monitoring the preference shares, said Edison Mission had a letter of credit in place "ready to go" since it came close to having to act when the debt-to-valuation provision first kicked in on May 14.

The preference share issue was used to help refinance Edison Mission's purchase of its controlling stake in Contact.