Contact soars on payout talk

Contact Energy shares have moved to record highs amid speculation that the company has enough money in the bank to start handing it back to shareholders in a capital return.

Shares in the energy generator and retailer rose 12c yesterday to $6.54before falling 2c to close at $6.52.

The increase appears to result from reporting of research by First NZ Capital, written in October last year. The report was written hot on the heels of Australian giant Origin taking over 51 per cent ownership of Contact, but it has only been widely circulated this week.

The First NZ Capital research said there was scope for Contact's board to restructure its finances and return capital to shareholders - up to $1.15 billion, or $2 per share.

First NZ Capital's research head Rob Bode said there was a lot of financial capacity for a share buyback, "which would be quite an efficient way for Origin to restructure the finances - to assist in the financing of the transaction".

"It also makes sense from a Contact perspective. The question is whether they need funds for any expansion or investment in New Zealand. There's lot of balance sheet capacity."

Contact has become popular with New Zealand shareholders for its capital growth and its high dividend payouts - nearly 100 per cent of profits last year. It has already shelved plans for a new gas-fired power station at Otahuhu, but has moved to help fund gas exploration projects.

Without new supplies of cheap gas, there will not be anything to fuel its power stations, which is why Contact is also moving towards importing liquefied natural gas (LNG). Along with state-owned power generator Genesis, Contact is investigating possible sites for an LNG storage terminal and processing plant.

An Origin spokesman yesterday said he had yet to read the research report, but decisions about capital structure were a matter for the Contact board. While Origin was a major shareholder, Contact was still a separate company, listed on the NZX.

The importance of the debt Origin took on to buy its half share in Contact was highlighted yesterday by ratings agency Standard & Poor's, which reaffirmed its ratings on the company.

Origin's A- long-term and A-2 short term ratings stay, but it remained on "creditwatch with negative implications".

This is pending "finalisation of the structure, and execution, of the refinancing of the NZ$1.4 billion bridge debt and cumulative undated preference shares (CUPS) used to initially finance the acquisition."

It said that if Origin failed to improve its creditworthiness, its long-term could be at risk.

Origin has already said it is looking at raising capital through issuing new equity in a rights issue. In the short-term, said S&P, Origin had less financial flexibility because of the Contact purchase, and would also face refinancing risk.

"Origin's successful track record of executing and realising value from acquisitions, however, indicates that the Contact acquisition (despite its relatively large size in relation to Origin itself) can be successfully undertaken without a downturn in the operating or financial performance of Origins existing business," said S&P.