Contact shares rocket on capital return plans

Contact Energy's share price fell after the company released its result and outlines its plans.

Contact Energy shares jumped more than 14 per cent after the energy generator and retailer said it had ditched plans for now to invest in geothermal schemes offshore and will increase returns to shareholders, including a special dividend.

Contact announced a 50 cents per share fully imputed special dividend, payable June 23, and a new ordinary dividend payout ratio of 100 per cent of underlying earnings after tax.

It also flagged the prospect of share buybacks if free cash flow allows larger distributions in the next few years, when Contact has no significant investment plans in New Zealand, where there is currently an over-supply of electricity generation.

The shares jumped 80 cents to $6.35 when trading opened on the NZX, having fallen 13 per cent this year.

They spiked as high as $7.30 in early February in anticipation of a capital return at the half-year results on February 16, only to plunge when chief executive Dennis Barnes surprised investors by raising the prospect of offshore investment in offshore geothermal plants rather than the expected capital return.

"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," Barnes said in a statement to the NZX today.

"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 per cent of underlying earnings after tax."

The company had previously targeted an 80 per cent payout.

"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," Barnes said.

After initially saying a supplementary dividend of 8.8235 cents per share on the special dividend would compensate non-resident shareholders for their inability to access New Zealand imputation credits, the company said the supplementary payment was to account for non-resident withholding tax.

Contact cans offshore geothermal plans, gives 50cps special dividend

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 per cent 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 per cent 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 per cent 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.