Whose money is it?
06 March, 2015
One of our Property & Infrastructure Fund companies, Contact Energy, has been indicating for some time that, given its large capital expenditure program has come to an end, it will begin generating considerable free cash flows. Further, it said this would enable the company to increase dividends and potentially return excess cash to shareholders. In a market hungry for yield, the Contact share price rose strongly heading into its interim result last month, in anticipation of increased distributions.
Shareholders were understandably shocked when, not only was the interim dividend not increased, but the company said it is considering investing $1 billion of shareholders' money in international geothermal operations over the next five-eight years. With considerable irony, competitor Mighty River Power announced the following week that it will sell all of its offshore geothermal assets having been unsuccessful in developing these operations. The Contact share price has fallen by over 10% since announcing the potential change of plan.
This begs the question of "whose money is it"? Shareholders are entitled to clarity around a company's intended capital structure, so that they can have a reasonable expectation of future dividends. After all, it's their money and they quite rightly want to know how it is going to be invested and/or distributed.
To be fair to Contact, it has not yet committed to investing the money offshore. However, clearly it is favouring this avenue of investment, which is at odds with what shareholders' were led to believe previously and represents a definite change in strategy. To cloud the issue, Contact Energy is owned 52% by Australian listed company Origin Energy. Major shareholders can, and often do, have a different view than minority shareholders on future investments/distributions. This is where the independent directors are tasked with ensuring that investment intentions are clearly articulated well in advance, so that there are no shocks and/or disgruntled shareholders. Shareholders' funds are called that for a reason.