Contact cans offshore geothermal plans, gives 50cps special dividend

Monday 25th May 2015

By Pattrick Smellie

May 25 (BusinessDesk) - Contact Energy has dropped any immediate plans to invest in offshore geothermal energy projects in favour of paying a 50 cents per share special dividend to shareholders, raising its target dividend payout to 100 percent of underlying earnings and dangling the prospect of share buybacks if free cash flow allows an even higher payout ratio.

"Contact has concluded there are no material investment opportunities at this time that would sufficiently reward shareholders and that the company can support increased distributions to shareholders," chief executive Dennis Barnes said in a statement to the NZX.

"To reflect the fact that Contact will have limited capital requirements in the near term, Contact's amended dividend policy will be to target an average ordinary dividend equivalent to approximately 100 percent of underlying earnings after tax."

The company has been targeting an 80 percent payout ratio until now.

"To the extent free cash flow exceeds the distributions outlined above, and absent new domestic growth opportunities or adverse market events, additional distributions will be made and are likely to take the form of share buybacks."

This morning's announcement comes after a backlash from institutional investors, who had been led to expect Contact would make capital repayments in some form after completing some $3 billion of investment in recent years on new and upgraded power stations and were stunned when Contact's chief executive, Dennis Barnes, announced in February that the company was reviewing its capital structure, with a view to finding offshore projects where it could use its expertise in geothermal power projects.

That led to what Barnes described in a March 26 letter to shareholders as "a negative response from investors through a drop in our share price."

The shares last traded at $5.55, and have dropped 13 percent this year. The stock is rated an average 'buy' according to seven analyst recommendations compiled by Reuters, with a mean target price of $6.66.

The 50 cents per share special dividend will be paid on June 23 to New Zealand-resident shareholders on the Contact share register on June 10. Origin Energy, Contact's Australian majority shareholder, is unable to access imputation credits, but non-resident shareholders will receive a "supplementary dividend" of 8.8235 cents per share, which effectively matches the value of imputation credits attached to the dividend, a company spokesman confirmed.

Barnes indicated that Contact has not completely abandoned thoughts of offshore generation builds, in the absence over the next few years of any large new power stations being required in New Zealand.

"Contact believes that we have a strong capability in renewable energy, in particular geothermal, and we will continue to explore how we may leverage these skills to grow earnings over the long term," said Barnes.

Origin has prospective geothermal steamfield investments in both Indonesia and Chile.

(BusinessDesk)

BusinessDesk.co.nz

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