By Geoff Senescall
Contact Energy's cornerstone shareholder Edison Mission is looking to reduce its funding costs by offering $240 million worth of redeemable preference shares to New Zealanders.
The offer is also designed to take advantage of imputation credits that the United States energy giant is unable to use because of its
foreign status. Ausdoc resorted to similar financial engineering when it took over Freightways' courier services.
It is understood that details of the issue will be released in a week's time through a special purpose vehicle called Edison Contact Finance.
This is a subsidiary of Edison Mission, which earlier this year paid $1.2 billion to the Government for a 40 per cent stake in Contact. The balance of the Government's holding in Contact was floated to the public.
Details of the preference share offering were given to brokers last week, just days before they had to decide their firm allocations for the $150 million St Lukes capital notes issue.
While the yield on the preference shares has not been fixed, indicative ranges have been given for the three expiry periods; the two year between 7.33 per cent and 7.58 per cent; the three year between 8.02 per cent and 8.27 percent; and the four year between 8.6 per cent and 8.85 per cent.
Contact is forecast to pay tax of $39.5 million in its next financial year, ending September 2000. Assuming an 80 per cent dividend payout rate, Edison's share of the imputation credit would amount to $12.64 million.
Using a gross interest rate of 7.5 per cent on the redeemable preference shares, the imputation credit would be able to support a $505 million redeemable share funding programme.
But Edison is likely to gauge the appetite for this before offering any more preference shares.
The saving for Edison on its funding costs from the issue amounts to around $5 million a year on the $240 million. This is simply because it is able to pass on the imputation credits.
