Origin Energy to take A$270M impairment as it exits Contact Energy

Wednesday 5th August 2015

Origin Energy will book a A$270 million impairment in the process of exiting its majority shareholding in Contact Energy, the company said in announcing it has completed the sale of the 53.1 percent stake in the Wellington-headquartered electricity and gas company.

Contact Energy shares will resume trading at 10am this morning after being suspended throughout yesterday's bookbuild, which raised total proceeds of $1.8 billion as Origin quit the controlling stake it had held in Contact since 2003.

The sale, at $4.65 a share, was at a 7.9 percent discount to the $5.02 closing price for Contact shares on Monday. Traders are expecting an upward re-rating for the entire electricity sector of perhaps 10 percent in coming months, now that Origin has removed the overhang created by its long-signalled intention to quit its Contact stake and by the successful conclusion of new electricity contracts for the Tiwai Point aluminium smelter, which uses one-seventh of all electricity generated in New Zealand.

The size of the discount was a notable factor, said Grant Swanepoel, head of research at Craig's Investment Partners.

"Who would have thought in the last five years that Contact Energy would be offloaded by Origin at a price of $4.65? It's not a desperate price, but it's certainly a willing seller."

The retention of Origin secondee Dennis Barnes as chief executive, with Barnes becoming a Contact employee, was a major plus, he said. "That would have been my one concern: if Dennis went with the sale," Swanepoel said. Barnes was "probably the number one risk manager in the market."

"He understands how the market works, understands cause and effect. He seems to put the pieces together to move Contact forward under whatever circumstances," he said. "This is a very, very positive outcome."

In its statement to the ASX, Origin said the sale was fully underwritten, with the shares sold to a broad range of New Zealand, Australian and international equity market institutional investors, and New Zealand retail investors.

"Origin Group will receive net cash proceeds of NZ$200 million and approximately A$1.4 billion upon settlement on 10 August 2015, which will be used to redeem NZ$200 million of redeemable preference shares and repay debt," said managing director and departing Contact chair Grant King. “In deconsolidating Contact from its account, "it is expected an impairment charge of approximately A$270 million will be included in Origin’s 2015 financial results".

Origin chose to dispose of its Contact stake because of pressure on its investment grade credit rating created by its A$25 billion investment in the ALNG liquefied natural gas plant in Queensland, which has experienced cost over-runs coinciding with a drop in global gas prices.

Origin shares fell 1.6 percent to A$11.01 in trading on the ASX yesterday.

BusinessDesk.co.nz

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