To Company Announcements Office Facsimile 1300 135 638
Company ASX Limited Date 22 September 2009
From Bill Hundy Pages 206
CONTACT ENERGY – RETAINS FURTHER CASH UNDER PROFIT DISTRIBUTION Subject PLAN; ANNUAL REPORT AVAILABLE
Attached herewith is a copy of an announcement released to the NZX by Contact Energy today.
Origin Energy holds 51.42% of quoted ordinary shares in Contact Energy Limited.
Regards
Bill Hundy Company Secretary
02 8345 5467 – [email protected]
Origin Energy Limited ACN 000 051 696 • Level 45 Australia Square, 264-278 George Street, Sydney NSW 2000 GPO Box 5376, Sydney NSW 2001 • Telephone (02) 8345 5000 • Facsimile (02) 9252 1566 • www.originenergy.com.au
22 September 2009
Contact retains further cash under profit distribution plan; annual report available
Contact Energy Limited today said the introduction of the company’s profit distribution plan (PDP) has been successful in retaining $120 million of cash within the business for the 2009 financial year.
Of the total number of bonus shares issued in respect of the 2009 final distribution, 72 per cent are being retained, and 28 per cent were today bought back by Contact.
This has resulted in approximately $71 million of cash being retained within Contact in respect of the final distribution that would otherwise have been paid as cash.
Contact Managing Director, David Baldwin, said he was pleased with the level of shareholder support for the profit distribution plan.
“The profit distribution plan is an important initiative that, in 2009, has retained $120 million in cash with Contact, allowing for further investment in Contact’s capital growth initiatives, such as new geothermal power stations, gas-fired peaking power stations and the country’s first underground natural gas storage facility.”
Annual report available Contact’s 2009 annual report and sustainability report are now available on the company’s website. The notice of annual meeting, to be held on 22 October in Wellington, will be provided to shareholders in the coming weeks.
Jonathan Hill 04 462 1285 021 440 090
22 September 2009
Bonus shares issued and shares bought back pursuant to the Contact Energy Limited Profit Distribution Plan
Contact Energy Limited (Contact) advises that it has issued 16,091,878 new ordinary shares in the company pursuant to Contact’s Profit Distribution Plan (Plan) relating to its FY09 final distribution of $0.17 per share.
The issue price per share is $6.1998719.
Under the Plan, shareholders can elect to have the company buy back shares issued to them at the issue price of $6.1998719 per share. As a result of shareholder elections the company has today completed an off-market buy back of 4,554,184 shares.
Of the total number of bonus shares issued in respect of the final distribution, 71.7% of shares are being retained, with 28.3% electing the buy back option.
The 4,554,184 shares bought back will be cancelled.
The total number of quoted ordinary shares on issue following the issue of new shares and the buy back is 596,852,318.
The following information is supplied pursuant to Listing Rule 7.12.1:
Notice of allotment of Ordinary Shares Class of securities issued Ordinary Shares
ISIN NZCENE0001S6
Number of securities issued 16,091,878
Issue price $6.1998719
Payment in cash? Yes
Any amount paid up (if not in full) Fully paid
Percentage of total class issued 2.75%
Reasons for the issue Pursuant to entitlements under the Contact Energy Limited Profit Distribution Plan
Specific authority for the issue Pursuant to Listing Rule 7.3.4(b)
Terms or details of the issue Non-taxable bonus shares issued pursuant to the Contact Energy Limited Profit Distribution Plan, which will, from the date of issue, rank equally with all other shares on issue as at that date.
Total number of securities of the 601,406,502 quoted ordinary shares class in existence after the issue (Note: this excludes 2,571,104 shares held as treasury stock)
Date of issue 22 September 2009
2 Notice of buy back of Ordinary Shares Class of securities issued Ordinary Shares
ISIN NZCENE0001S6
Number of securities bought back 4,554,184
Acquisition price $6.1998719
Payment in cash? Yes
Any amount paid up (if not in full) Fully paid
Percentage of total class bought 0.76% back
Reasons for the buy back Pursuant to shareholder elections under the Contact Energy Limited Profit Distribution Plan
Specific authority for the buy back Pursuant to Listing Rule 7.6.1(b)
Terms or details of the buy back Non-taxable bonus shares issued pursuant to the Contact Energy Limited Profit Distribution Plan, which will, from the date of issue, rank equally with all other shares on issue as at that date.
Total number of securities of the 596,852,318 quoted ordinary shares class in existence after the buy back (Note: this excludes 2,571,104 shares held as treasury stock)
Treasury Stock? No - the shares bought back will be cancelled and will not be held as treasury stock.
Date of buy back 22 September 2009
Jonathan Hill Communications Manager Contact Energy 04 462 1285 021 440 090
Contents
1 Summary 2 Performance indicators 4 Chairman’s review 6 Managing Director’s review 10 Management discussion of financial results 24 Company overview 27 Governance 40 Remuneration report 51 Security holder information
Financial contents 56 Financial statements 61 Notes to the financial statements 110 Audit report
111 Corporate directory
The 2009 Annual Meeting of Contact Energy Limited shareholders will be held at the Michael Fowler Centre, 111 Wakefield Street, Wellington on Thursday 22 October 2009, commencing at 10:30am NZDST. The Notice of Annual Meeting and shareholder voting/proxy form have been provided separately to shareholders. Contact Energy Limited Annual Report 2009 1
Summary For the financial year ended 30 June 2009
• Weather extremes, transmission constraints and reduced electricity demand combined to impact on earnings, with underlying earnings after tax of $161 million, down from $233 million for the 12 months to 30 June 2008 • Generators and turbines delivered for the 200 megawatt gas-fired peaking power station under construction at Stratford • Commenced injection of natural gas into the Ahuroa natural gas storage facility near Stratford • Continued construction of the 23 megawatt Tauhara phase one geothermal power station at Taupo • Secured final resource consents for the company’s 220 megawatt Te Mihi geothermal power station • Continued to develop wind, hydro and geothermal generation options • Completed the installation of more than 42,000 smart meters in Christchurch customers’ houses • Celebrated 50 years of renewable geothermal generation at the Wairakei power station with a community open day and celebration • Raised $550 million in Contact’s first retail bond issue – the most successful issue raising in New Zealand for a non ‘A’ rated company • Introduced a profit distribution plan that allows retention of cash for investment in the business • Total distributions to shareholders equivalent to 28 cents per share, under the profit distribution plan
For more information, please visit our website at www.contactenergy.co.nz or contact: Investor Relations PO Box 10742 Wellington Phone: 64 4 499 4001 Email: [email protected] 2 Contact Energy Limited Annual Report 2009
Performance indicators
Underlying earnings for the period Total operating revenue
300 3,000 2,757 250 241.6 2,500 231.2 232.8 2,330 2,222 197.1 2,000 1,998 200 1,759 160.6 150 1,500 $ Millions $ Millions
100 1,000
50 500
2005 2006A 2007B 2008B 2009B 2005 2006 2007 2008 2009
EBITDAF1 Operating cash flow per share2
90 84.1 600 567.2 557.0 543.7 80 71.6 73.8 72.3 500 489.1 70 445.3 60 400 50.3 50 300 $ Millions
Cents per share Cents 40
200 30 20 100 10
2005 2006 2007 2008 2009 2005 2006 2007 2008 2009
Underlying earnings per share2 Net debt/debt+equity
45 41.10 35 39.32 39.60 40 30 30 27 35 33.52 25 30 27.35 23 23 23 25 20
20 cent Per 15 Cents per share Cents 15 10 10 5 5
2005 2006A 2007B 2008B 2009B 2005 2006 2007R 2008 2009
Capital and investment expenditure Underlying return on total assets
600 6 5.3 500 488.8 5 4.5 4.6 4.4 400 4 3.0 300 cent Per 3 $ Millions 282.0 200 2 138.7 149.2 100 90.5 1
2005 2006 2007 2008 2009 2005 2006A 2007RB 2008BC 2009B
CEN relative to the NZX50 Shareholder return
180 100% 10.0 160 140 80% 8.0
120 60% 6.0 Base Base 100 40% 4.0 80
60 20% 2.0 YE share price (bar) Cumulative return (YE) (line) Cumulative 0% 0.0
01/07/04 01/10/04 01/01/05 01/04/05 01/07/05 01/10/05 01/01/06 01/04/06 01/07/06 01/10/06 01/01/07 01/04/07 01/07/07 01/10/07 01/01/08 01/04/08 01/07/08 01/10/08 01/01/09 01/04/09 01/07/09 2005 2006 2007 2008 2009
CEN NZ NZX50 Contact Energy Limited Annual Report 2009 3
Generation by fuel source Wholesale electricity price
14,000 125 12,000 6,649 5,413 5,351 106.90 4,702 4,094 10,000 100 92.84
8,000 75 56.08 6,000 54.72 53.70 Gigawatt hours 1,765 1,968 2,180 2,311 50 4,000 1,820 $ per Megawatt hour 25 2,000 3,982 3,065 3,639 3,504 3,543
2005 2006 2007 2008 2009 2005 2006 2007 2008 2009
Hydro Geothermal Thermal
Retail electricity sales Customer numbers (including LPG franchisees)
700 10,000 49 51 85 54 600 79 75 75 8,000 7,564 7,800 7,609 67 7,213 7,361 500
6,000 400
300 513 515 513 520 479 Gigawatt hours 4,000 200
2,000 (000s) numbers (ICPs) Customer 100
2005 2006 2007 2008 2009 2005 2006 2007 2008 2009
Electricity Gas LPG
Underlying return on shareholders’ equity Total assets
6,000 10 9.47 5,432 5,241 5,000 4,985 8.28 8.02 4,580 8 7.96 4,381 5.46 4,000 6
Per cent Per 3,000 $ Millions
4 2,000
2 1,000
2005 2006A 2007RB 2008B 2009B 2005 2006 2007R 2008C 2009
Profit distribution and dividends per share3 Shareholders’ equity
30 28.0 3,500 27.0 28.0 2,904 2,904 2,942 25.7 26.0 3,000 2,552 25 2,381 2,500 20 2,000 15 $ Millions 1,500 Cents per share Cents 10 1,000
5 500
2005 2006 2007 2008 2009 2005 2006 2007R 2008 2009
Notes to the graphs Comparatives have been restated to reflect current period presentation where appropriate. • The 2005 reporting period was for the nine months ended 30 June 2005 and the results of that period have been annualised where appropriate for the purposes of the above graphs; for 2006 and subsequent years the reporting period is the year ended 30 June. • The above financial statistics, returns and ratios are based on Financial Statements prepared in accordance with New Zealand equivalents to International Financial Reporting Standards (NZIFRS). R Denotes years in which Contact’s property, plant and equipment were revalued. The revaluation affects total assets, shareholders’ funds and related ratios. A Excludes gain on disposal of subsidiaries and change in fair value of financial instruments, both net of tax. B Excludes change in fair value of financial instruments and other significant one-off items both net of tax where appropriate. C The 2008 total assets have been adjusted to reflect the presentational changes of financial instruments and deferred financing costs. 1 Earnings before net interest expense, income tax, depreciation, amortisation, financial instruments and other significant items. The year ended 30 June 2006 was the first year in which changes in the fair value of financial instruments were recognised within the Income Statement in accordance with NZIFRS. 2 The number of shares used for the current and prior year comparatives in the ‘underlying earnings per share’ and ‘operating cash flow per share’ analysis has been adjusted for the impact of the bonus shares issued under the profit distribution plan (PDP). 3 The number of shares used in the ‘profit distribution and dividends per share’ analysis has not been adjusted for the impact of the bonus shares issued under the PDP and represents the number of ordinary shares on issue at the dividend declaration date less any shares held as treasury stock. The total distribution paid is in respect of each financial year. Prior to 2009, all distributions were fully imputed cash dividends. For the 2009 financial year the PDP operated as a non-taxable bonus issue, with any shares bought back being fully imputed cash dividends. 4 Contact Energy Limited Annual Report 2009
Chairman’s review Weather and transmission present challenges to performance
The financial year ended 30 June 2009 was challenging for Contact, largely as a result of unusual weather conditions, transmission constraints, and the effects of economic recession on energy demand growth. Despite this, the company has taken important steps to strengthen its financial position and has advanced its strategy of investing for future growth.
The full year result and contributing factors Contact achieved Earnings Before Net Interest Expense, Income Tax, Depreciation, Amortisation, Financial Instruments and Other Significant Items (EBITDAF) of $445.3 million, down 21 per cent from $567.2 million in the 2008 financial year. Underlying earnings were $160.6 million, down 31 per cent from $232.8 million. The key drivers of the reduction in EBITDAF were: • a decrease in net contribution from electricity as a result of high electricity purchase costs to service retail customers in the South Island in the first quarter, and a significant drop in generation revenue over the remainder of the year due to a combination of low wholesale prices, transmission constraints (which limited hydro generation) and some unplanned thermal generation outages • a 25 per cent per unit increase in gas costs and a loss of gas supply flexibility following the roll-off of gas supply contracts from the Maui field. While the period was challenging and the full year result disappointing, Contact took a number of significant decisions over the financial year – supported by the company’s strong financial position – that will enable us to restore valuable flexibility of fuel supply and generation. This positions the company well to continue to grow and deliver value to shareholders, as well as making a significant contribution to New Zealand’s long term energy security.
Distribution to shareholders Notwithstanding the full year result, Contact’s Board of Directors resolved to hold the 2009 final distribution to shareholders at the equivalent of 17 cents per share, made under the company’s profit distribution plan, which was introduced during the 2009 year. Under the plan, all shareholders receive distributions in the form of bonus shares, with the option to have those shares, or a portion of them, bought back by Contact for cash as a fully imputed dividend. As a consequence, shareholders have the choice between retaining shares and/or receiving cash. The decision to maintain the distribution level was based on the expectation that the company’s financial performance will return to normal trends. Any reoccurrence of extreme hydrology, transmission constraints, adverse government policy changes or a prolonging of the economic recession could impact Contact’s financial performance in the near to medium term. To the extent such impacts do occur, the company would be unlikely to maintain distributions at this year’s level.
Financial position Over the year, Contact undertook a number of steps to enhance the company’s financial strength, including issuing $550 million of fixed rate unsecured, unsubordinated retail bonds – after seeking to raise $300 million and closing well oversubscribed – and implementing the profit distribution plan, which enabled $50 million of cash to be retained in the business in respect of the interim distribution. The capital raised by the bond issue and the profit distribution plan are being used to fund investments in new generation projects and the Ahuroa natural gas storage facility. During the financial year, Contact also increased and extended the terms of its bank facilities, and as at 30 June 2009 had $685 million of undrawn bank facilities. At the end of the 2009 financial year, Contact’s net debt stood at $1,124.2 million. With a gearing of net debt to net debt plus equity of 27 per cent, Contact’s financial strength continues to position the company well in terms of navigating the complexity of the current economic circumstances and executing growth options when economic conditions are conducive. Contact Energy Limited Annual Report 2009 5
Governance There have been a number of changes to the Contact Board over the year. In March 2009, highly respected company director Sue Sheldon joined the Board as an independent director, and Contact’s Chief Executive, David Baldwin, was appointed to the Board as Managing Director. At the end of the financial year Tim Saunders retired from the Contact Board as an independent director. With the exception of a two year period, Tim has been involved in Contact’s governance since the company was first formed and has made a significant contribution to building the company. On behalf of the Board, I thank Tim for his contribution and commitment and wish him all the best for the future.
Outlook When the country emerges from recession, increasing demand for energy will require new sources of generation to be built in order to maintain security of supply. This will create upward pressure on electricity prices to support investment in new generation. Contact is well placed to support New Zealand’s requirement for new generation. Over the coming year, Contact’s capital expenditure is forecast to exceed the $490 million invested over the last year (almost double the level of capital expenditure in the previous year) as the company continues to execute its strategy of investing in projects that both restore portfolio flexibility and expand geothermal generation.
Grant King Chairman 6 Contact Energy Limited Annual Report 2009
Managing Director’s review Navigating complexity
Introduction While Contact has always faced earnings fluctuations as a result of weather and managed that risk through our geographic and fuel diversity, the confluence of extreme weather conditions and other external factors impacted Contact’s result for the financial year ended 30 June 2009. Key among the factors influencing the result was the loss of pole one of the High Voltage Direct Current (HVDC) transmission system, which constrained the company’s ability to manage the volatility associated with fluctuations in hydrology. This occurred in a year that saw both extremes of drought and deluge in the South Island, where Contact’s hydro assets are located. During the severe winter drought in the South Island, transmission constraints north of Wellington and across the HVDC prevented Contact from transmitting thermal generation from the North to the South Island, requiring the company to purchase very high priced power from the market to meet South Island customer demand. When the situation reversed in the spring and the southern hydro lakes rapidly filled, transmission constraints in the lower South Island, combined with the loss of electricity demand from the Tiwai Point aluminium smelter, forced Contact to spill more than 400 gigawatt hours of potential generation – enough to power more than 40,000 homes for a year – as the transmission system could not take any additional generation. At the same time, the anticipated changes to Contact’s gas supply arrangements also impacted the business. As well as gas being more expensive, current contractual arrangements also limit the company’s ability to vary the amount of gas Contact takes throughout the year. During periods of high hydro inflows and low wholesale prices in the year to 30 June 2009, gas supply inflexibility constrained the company’s ability to reduce higher- priced thermal generation. This lack of gas supply flexibility is being addressed through Contact’s investment in an underground gas storage facility at Ahuroa – a first for New Zealand – which will be operational from mid 2010. While the financial result for the year to 30 June 2009 was disappointing, significant progress was made in a number of important areas that position Contact well to execute its growth strategy over the coming months and years.
Strategy for growth Contact’s strategy for new generation development is to pursue a range of options across the major fuel types – thermal, geothermal, wind and hydro – that we can execute at the right time to suit the changing operating environment. This way, we can develop the lowest cost generation options first, ensuring the best outcomes for shareholders and New Zealand.
Geothermal Among those available options in the current environment, Contact’s priority is geothermal generation investment, given its current costs relative to other generation options and Contact’s expertise in geothermal development. In the year to 30 June 2009, we made pleasing progress on a number of key geothermal developments: • Construction of Contact’s $100 million, 23 megawatt Tauhara phase one geothermal binary plant is on track, with commissioning of the plant expected around mid 2010 (on time and within budget). • In September 2008, final resource consents were granted for Contact’s 220 megawatt Te Mihi geothermal power station. • Development of Contact’s proposed Tauhara phase two power station, a geothermal plant of up to 240 megawatts, was advanced. The sequencing and timing of both the Te Mihi and Tauhara phase two projects is dependent on a number of factors including electricity demand growth, credit conditions, carbon policies, currency rates and resource consents. Consents exist for the operation of the Wairakei power station until 2026, enabling Contact to appropriately time the Te Mihi development to achieve optimal value. Contact Energy Limited Annual Report 2009 7
Gas Contact’s investment in a 200 megawatt fast-start gas-fired peaking power station and a gas storage facility will be key to restoring some of the operational flexibility lost through the end of the Maui gas contract, the increasing exposure to fixed take or pay, high-cost gas supply contracts and the decommissioning of the company’s gas-fired New Plymouth power station. The Ahuroa gas storage project, a $250 million development, will enable Contact to switch off its gas-fired baseload power stations when market conditions do not support them running, and store the gas for later use. Contact’s $250 million gas-fired peaking power station at Stratford will enable us to respond to increasing levels of volatility in electricity demand peaks that result in price volatility.
Wind As part of Contact’s strategy to secure generation development options across the range of key fuel sources, the company continues to advance resource consent applications for two wind farms – one in the Waikato and the other in southern Hawke’s Bay – for development when economic conditions support them.
Hydro In Contact’s view, new hydro projects will be required in New Zealand’s medium to long term energy future, especially if the country is to meet its climate change obligations and avoid the need to import thermal fuels. Following a review of plans inherited when Contact was formed, Contact began engaging with local communities in April 2009 on four options for new hydro development on the Clutha River, with a view to selecting a preferred option for further development. The process of community engagement, together with engineering design and review, and the consenting of an eventual option will take some time, but will be in step with the country’s need for new large-scale hydro development towards the end of the next decade. Contact also holds resource consents for the 17 megawatt hydro power station at the Lake Hawea control gates and will continue to review the economic feasibility of this project for development.
Creating an environment that is conducive to investment The extent to which Contact’s generation growth options can be executed, and the benefits for shareholders and New Zealanders realised, is dependent on a number of factors, including transmission investment, regulatory certainty and acceptance of the need for prices to rise appropriately over time to support new generation investment. Contact is committed to working with stakeholders in all these areas to positively contribute to an environment that is conducive for investment.
Transmission Investment in the national transmission grid is urgently required to ensure the electricity market can operate optimally and play its role in delivering the efficiencies required to meet public expectations around reliability of supply and the prices end-consumers pay for electricity. As the events of the 2009 financial year have clearly demonstrated, a key priority is the replacement of pole one of the HVDC by April 2012 (by what is known as pole three) to enable electricity to be moved freely between the North and South Islands. Wider upgrading of the grid – in which there has been no major investment since the 1980s – is also critical to ensuring that the transmission system can deliver electricity from new sources of generation to end-consumers and cope with increased load. Positive advances in this area include Transpower’s enhancements to regional transmission capacity in Southland by the end of this calendar year. I will continue to participate as a member of the HVDC Procurement Advisory Group and to support Transpower’s project to replace pole one of the HVDC, in addition to supporting Transpower’s efforts to strengthen and hasten transmission investment across the network. 8 Contact Energy Limited Annual Report 2009
Regulatory certainty Certainty in key areas of policy is a necessary precondition of any investment decision. Notwithstanding this, Contact continues to support workable improvements to the efficient operation of the electricity market and is participating fully in the Ministerial Taskforce review of the sector. In particular, Contact supports the Government’s commitment to streamlining regulatory functions to enable more efficient oversight of the sector and improvements to the transmission investment process. Securing resource consent for a power station – particularly a renewable wind farm or hydro power station – remains challenging. While there should always be a careful independent consideration of a project’s impacts and benefits, Contact supports the focus of the current review of the Resource Management Act and the development of a Government Policy Statement that places greater weight on the benefits of renewable projects. While the emissions trading scheme has been delayed from a 1 January 2010 implementation date for the stationary energy sector, the introduction of a carbon pricing regime remains highly likely. Contact believes an emissions trading scheme remains the most appropriate way to price carbon and to shift investment decisions in new generation from thermal to renewable technologies. Contact remains well positioned to capitalise from opportunities in a carbon pricing environment.
Pricing to support investment Without appropriate investment in new generation, there will likely be greater demand for electricity than available supply from around 2014 onwards. This will have significant impacts on individuals as well as businesses and industries that are the bedrock of New Zealand’s economy, particularly in terms of reliability of supply. However, while electricity is an essential part of our lives, its value is only obvious when it is not there, and it is therefore generally taken for granted. In this context, there is consistently strong resistance from consumers and other stakeholders to electricity price increases. Like others in the industry, we have a role to play in better articulating the rationale for electricity price increases and communicating the value of electricity, so that the retail market is priced not only competitively but also realistically to support new investment.
Our people Our people’s health and safety is of paramount importance in maintaining the highest standards of operational excellence. Contact performed well in the 2008 financial year in terms of health and safety, but this performance has slipped in the 2009 financial year, which is not acceptable to us. In this context, a key priority for the current financial year is new or improved initiatives to foster the company’s health and safety culture and rigorous target setting and reporting on all relevant measures. More detailed information on Contact’s health and safety performance can be found in Contact’s 2009 Sustainability Report, available on the company’s website.
Our customers Last year, our customers made it clear they perceived a link between price increases and a proposed increase to the fee pool from which directors are paid, which was not acceptable to them. The result was a loss of retail customers over the course of the year, which was a major disappointment for everyone at Contact that we are working hard to reverse. We have been focused on rebuilding the trust and confidence of our customers by providing a range of new offers such as fixed price plans and the two winter price freeze for certain areas, in addition to the usual outstanding customer service from our dedicated team across New Zealand.
Our communities We recognise that like others in this industry, Contact has a relatively large footprint, particularly in terms of our impact on communities where we have generation interests. In this context, we are committed to development and operational excellence, and we give back to national and local communities in ways that are meaningful to them. Contact Energy Limited Annual Report 2009 9
A highlight for this financial year was the 50th anniversary celebrations for Contact’s Wairakei power station, the first geothermal plant of its kind anywhere in the world. As well as hosting a series of community events, Contact commissioned a large sculpture to be gifted to the Taupo community to mark the 50 year milestone and the special relationship between the people of the Taupo region and geothermal energy. For more detailed information on Contact’s social and environmental performance, please see our Sustainability Report, available on the company’s website.
Conclusion A number of the factors that contributed to the financial result for the year ended 30 June 2009 – hydrology, wholesale prices and electricity demand – are now moving back towards more normal patterns. Supported by the important steps taken to strengthen the company’s financial position in the year to 30 June 2009, we remain focused on completing and commissioning the Ahuroa gas storage and Stratford peaker projects to restore operational flexibility, continuing to develop other growth options, attracting and retaining retail customers and fostering Contact’s health and safety culture. It’s been a tough year for Contact but I’m proud to lead such a talented and committed team, and I would like to thank the Board and everyone at Contact for their considerable efforts in navigating the company through a challenging period. I’m excited about Contact’s future and I’m looking forward to working with all of our stakeholders as we work to accomplish our goals.
David Baldwin Managing Director 10 Contact Energy Limited Annual Report 2009
Management discussion of financial results for the financial year ended 30 June 2009
Despite a particularly challenging year, Contact remains well positioned to invest in New Zealand’s most important energy projects, and deliver growth for the company’s shareholders.
Introduction New Zealand’s electricity system depends on a robust and reliable transmission backbone to transmit electricity from power stations across the country to customers. New Zealand has a heavy reliance on hydro generation with significant potential for increasing quantities of wind generation, and major load centres geographically isolated from key generation sources. These conditions require a modern transmission grid that accommodates changing electricity generation and demand patterns to ensure efficient operation of the electricity market. Investments made over the preceding decades, particularly the 1970s and 1980s, were oriented towards strengthening New Zealand’s transmission backbone to support the movement of energy between the South and North Islands and within the islands. However, in the last decade there has been very little investment in transmission while electricity demand has continued to grow. New Zealand has had three reasonably dry winters since 2000. In each of those years the inter-island high voltage cable (the HVDC) has played a critical role in enabling North Island thermal generation to support the South Island during the periods of low hydro generation. In the wetter years, the HVDC has allowed cheaper hydro generation to be transmitted to the north resulting in lower thermal generation. Contact’s financial performance over the past 10 years has reflected this inherent flexibility. During dry periods such as 2001, 2003 and 2006, Contact was able to access flexible, relatively cheap natural gas from the Maui field to offset the reduction of hydro generation. Equally, during periods of high hydro inflows, the flexibility of legacy Maui gas supply arrangements enabled Contact to reduce gas take to balance generation from its gas-fired stations in order to maximise use of the cheaper hydro generation. Accordingly Contact’s financial performance has grown over time despite the volatility in wholesale electricity prices.
EBITDAF and wholesale electricity prices
600 120
500 100
400 80
300 60 $/MWh
NZ$ Millions per FY NZ$ Millions 200 40
100 20
0 0 1999 2000 2001 2002 2003 2004 2005* 2006 2007 2008 2009 Financial year
EBITDAF Average wholesale electricity price * 2005 shown as the 12 months to June 2005 Contact Energy Limited Annual Report 2009 11
In the financial year ending 30 June 2009 we have seen the impact of changes which have undermined this flexibility: • Demand has continued to rise across both islands while the South Island has seen very little increase in new generation. As a result, in dry conditions there is an increasing dependence on the HVDC to ensure security of supply to the South Island. Transmission constraints across the alternating current (AC) part of the grid are also more prevalent. • Flexible low-cost legacy Maui gas supply arrangements have now expired (although Contact still retains further ongoing rights to other Maui gas). Current gas supply contracts have relatively flat and fixed daily take requirements, which constrain the ability of gas-fired power stations to adjust their output in response to fluctuating hydro inflows. During the second half of this financial year the impact of inflexible and high priced gas began to impact the operation of Contact’s portfolio with the gas-fired plant operating at times when prices were insufficient to cover the variable costs of operation. • Pole one of the HVDC was unexpectedly decommissioned in November 2007. For the majority of the time, the remaining pole (pole two), together with available generation capacity in each island, is sufficient to ensure North and South Island electricity demand is met at a similar cost. However, during periods of extreme weather, such as the drought last winter and the high inflows over the summer and autumn, the absence of a second Cook Strait cable can result in the islands operating as separate markets, often with a significant loss of system efficiency. During periods of extreme drought in the South Island, the system needs a robust grid, including two poles to move energy from the North Island to the South Island. Equally, when inflows into the southern lakes are very high as we saw in the second half of the financial year, hydro becomes the cheapest source of electricity for the country, and requires two poles to maximise flow to the North Island to minimise both the spilling of water and the use of thermal fuels. Contact has implemented a series of strategies to help to mitigate the impact of transmission system constraints and gas supply inflexibility. These include: • In 2008, Contact acquired the rights to the largely depleted Ahuroa gas reservoir to convert the field into an underground gas storage facility. Contact commenced injecting gas into the Ahuroa field in December 2008 and a total of 5.6 petajoules (PJ) (excluding LPG) is now held in the reservoir. Although the gas storage project is not expected to be fully operational until 2010, the storage facility has already provided Contact with a valuable source of fuel flexibility by providing an ability to inject and store ‘must-take’ gas during the low demand and high hydro inflow summer months. With the addition of a more powerful compressor during September 2009 the daily volume capable of being injected will increase. • Also in 2008, Contact commenced the development and construction of a 200 megawatt (MW) gas-fired peaking plant near Taranaki, which is on schedule to be completed in mid 2010. As the market experiences increasing volatility due to transmission constraints, and weather-related intermittency, fast-start plant of this nature will enable Contact to respond to those events. Combined with access to gas in storage, this will provide opportunities for Contact to leverage volatile market conditions. Market conditions in the second half of the financial year which exhibited a high degree of intra-day volatility confirm that the peakers combined with storage will be valuable additions to the Contact portfolio. • Contact is actively supporting Transpower in its efforts to execute transmission upgrades across the country, including participating in a Transpower procurement advisory group in relation to the project to replace pole one of the HVDC. Pole three (the replacement for pole one) is currently expected to be operational by April 2012. • In September 2008, Contact adjusted tariffs to reflect the significant risk of inter-island price separation during periods of low hydro inflows, arising as a consequence of the decommissioning of pole one. Unsurprisingly, other South Island retailers have adjusted tariffs to similar levels. 12 Contact Energy Limited Annual Report 2009
In addition, Transpower is implementing a series of transmission upgrades which, when complete, are expected to largely alleviate system constraints. These include a project which, upon completion in the spring of 2009, is expected to increase the amount of hydro power that can be transferred out of the Southland/Otago area by up to an additional 150 MW.
Financial results to 30 June 2009 The events and conditions described above presented Contact with extremely challenging trading conditions and significantly contributed to a disappointing annual result for the period ended 30 June 2009.
EBITDAF Contact achieved Earnings Before Net Interest Expense, Income Tax, Depreciation, Amortisation, Financial Instruments and Other Significant Items (EBITDAF) of $445.3 million, down 21 per cent from $567.2 million for the financial year ended 30 June 2008. The key drivers of the $122 million reduction in EBITDAF in the 2009 financial year were: • a decrease in net contribution from electricity (after electricity purchase cost) of $101 million. The main causes of this were high purchase costs for the retail customers in the South Island in the first quarter and a significant drop in generation revenue in the remainder of the year due to low wholesale prices, transmission constraints, which limited hydro generation, and some unplanned thermal generation outages; • a 25 per cent per unit increase in gas costs – this added $1.40 to every gigajoule (GJ) which Contact used. This increased cost combined with loss of gas flexibility placed a large burden on the business in a year in which wholesale electricity prices averaged $56 per megawatt hour (MWh); and • the impact of the recession which dampened demand growth and limited the ability of Contact to reflect the increased costs of generation through appropriate tariff movements.
Depreciation Depreciation increased by $15.4 million (11 per cent) to $162 million largely due to increases associated with the long term maintenance costs for the gas-fired plants at Otahuhu and Taranaki Combined Cycle (TCC) and the geothermal drilling undertaken to increase output at Wairakei and Ohaaki.
Interest expense Net interest expense for the period reduced by $7.3 million or 10 per cent to $62.6 million for the financial year ended 30 June 2009. While the total net debt increased, interest costs were lower primarily due to the fact that interest on strategic investment projects such as the Stratford peaker project, the first phase of the Tauhara geothermal project, and the Ahuroa gas storage project, is capitalised until construction is completed. In the financial year ended 30 June 2009, $21.5 million of interest has been capitalised.
Income tax expense Income tax for the period at $46.5 million is $55.6 million lower than for the financial year ended 30 June 2008. This is due to the reported profit for the period being significantly lower at $117.5 million (compared with $237.1 million) and the lower statutory tax rate of 30 per cent.
Underlying earnings after tax Underlying earnings after tax for the financial year to 30 June 2009 were $160.6 million, down 31 per cent from $232.8 million for the prior financial year. Contact Energy Limited Annual Report 2009 13
Capital expenditure and investments Contact’s capital expenditure and investments for the financial year ended 30 June 2009 were $488.8 million (including capitalised interest). Of this, $103.2 million was ‘stay in business’ and $385.6 million was growth capital expenditure. This compares with $81.5 million and $200.5 million respectively for the financial year ended 30 June 2008. The increase in growth capital expenditure is primarily due to the previously announced investment in generation projects – the 23 MW Tauhara geothermal binary plant, the 200 MW gas-fired peaking plant at Stratford and gas storage. The increase in the stay in business capital expenditure is primarily due to a major inspection and plant overhaul undertaken at Otahuhu and TCC during November and December 2008.
Net debt During the financial year ended 30 June 2009, Contact took steps to strengthen its financial position by extending and increasing its debt facilities and raising capital through a $550 million domestic retail bond issue. Based on the NZD equivalent of borrowings, after foreign exchange hedging, and net of short term deposits, net debt as at 30 June 2009 was $1,124.2 million, compared with $878.4 million as at 30 June 2008. This is largely due to the significant increase in growth capital expenditure as well as a reduction in cash flows from ongoing operations. Contact’s committed credit facilities total $685 million; all were undrawn at 30 June 2009. With a gearing of 27 per cent as at 30 June 2009, Contact’s financial strength continues to position the company well in terms of navigating the complexity of the current economic circumstances and executing growth options when economic conditions are conducive.
Profit Distribution Plan In addition to increasing available liquidity, Contact introduced a Profit Distribution Plan (Plan), effective from (and including) the interim and final distributions for the year ended 30 June 2009. Under the Plan, all shareholders receive distributions in the form of non-taxable bonus shares, with the option to have those shares, or a portion of them, bought back by Contact for cash to be received on a fully imputed basis. As a consequence, shareholders have the choice between retaining shares and/or receiving cash. The Plan enabled Contact to retain approximately $49 million in respect of the interim distribution to support the execution of Contact’s strategic initiatives, with 77 per cent of the shares issued retained by shareholders. Notwithstanding the events of the 2009 financial year, Contact’s Board of Directors resolved to hold the 2009 final distribution at the equivalent of 17 cents per share. The decision to maintain the distribution level was based on the expectation that the company’s financial performance would return to normal trends. Any reoccurrence of extreme hydrology, transmission constraints, adverse government policy changes, or a prolonging of the recession could impact Contact’s financial performance in the near to medium term. To the extent such impacts do occur, the company would be unlikely to maintain distributions at this year’s level.
Outlook In respect of the 2010 financial year, the extreme weather events which affected the business in July and August 2008 will not recur given current hydrological conditions. However, wholesale prices are currently below both the variable costs of operating thermal plant, and the price required to support investment in new generation. In addition, current economic conditions are expected to continue to dampen demand growth and, consequently, tariff movements. 14 Contact Energy Limited Annual Report 2009
While the construction of the Ahuroa gas storage and Stratford peaker projects are on schedule for completion in mid 2010, Contact will have limited ability to manage gas inflexibility during the current financial year (although Contact is continuing to inject gas into Ahuroa to build up the cushion gas). Ahuroa gas storage, together with the Stratford gas-fired peakers, will make a material difference to Contact’s ability to manage and leverage wholesale price volatility. When the country emerges from recession, energy demand will also grow. As demand grows, so will the need for new generation. The lack of certainty of domestic gas resources and prices beyond the second half of next decade means that renewable options remain at the forefront of new generation development. Accordingly, Contact continues to develop its portfolio of renewable generation options (geothermal, wind and hydro), whilst maintaining its existing consented gas-fired generation options at Otahuhu and Taranaki in the scenario that new gas is discovered and new gas-fired generation becomes the preferred choice. Contact holds consents to construct the 220 MW Te Mihi geothermal station and is preparing resource consent applications to expand the Tauhara geothermal project by an additional 240 MW. The sequencing and timing of the Te Mihi and Tauhara projects is dependent on a number of factors including electricity demand growth, credit conditions, carbon policies, currency rates and resource consents. However, we currently anticipate both projects will be implemented over time. On the expectation that the market will continue to experience price volatility through intermittency of generation, the construction of Contact’s fast-start gas-fired peaking plant and its gas storage project, both located near Stratford, Taranaki, also remain central to the company’s renewables strategy, in addition to deriving value from electricity market volatility. Given that almost all of the market’s new generation options are higher cost than current generation, electricity prices will need to rise to meet the cost of that new generation. This is likely to require tariff increases over time, possibly at rates higher than inflation in the years through to the middle of the next decade, to support new generation investment. Contact remains well positioned in the longer term. New generation decisions are dependent on a number of economic and market factors, which can change over time. Accordingly Contact’s strategy of securing a range of fuel options places it in a great position to grow market share in generation as underlying growth supports new investment and/or as a substitute for existing generation as legacy fuel declines. Over the next year, Contact will complete the first tranche of its investment to restore fuel and generation flexibility, and will also complete the first new geothermal plant on the large Tauhara geothermal field; an investment across the three projects of $600 million in key infrastructure which will support New Zealand’s economic growth and security of supply for decades to come.
Overview of performance for the period As the following graph illustrates, the extreme movements in hydrology and the loss of pole one of the HVDC led to a number of periods of North and South Island price separation which impacted on Contact’s financial performance. For example, in August and September 2008 when the South Island was in drought, Contact was short of generation in the South Island, and this resulted in Contact supplying electricity to its South Island customers at a significant loss. While wholesale prices dropped towards the end of the first half of the financial year, and were low throughout the second half of the financial year, the transmission constraints continued to limit the ability to move hydro energy to the North Island, resulting in South Island prices being lower than those in the North Island. At times, this led to spilling of water from Contact’s and other generators’ hydro generation assets in the South Island. Contact Energy Limited Annual Report 2009 15
North Island prices rise well above South Island prices reflecting North Island capacity constraints Prices drop dramatically as South Island storage increases – north/south flows constrain
South Island prices remain high as drought continues with transmission constraints Wholesale prices rise as storage drops
4,500 $450
4,000 $400
3,500 $350
3,000 $300
2,500 $250 Price ($/MWh) Storage (GWh) (GWh) Storage 2,000 $200
1,500 $150
1,000 $100
500 $50 01/07/07 30/07/07 28/08/07 26/09/07 25/10/07 23/11/07 22/12/07 20/01/08 18/02/08 18/03/08 16/04/08 15/05/08 13/06/08 12/07/08 10/08/08 08/09/08 07/10/08 05/11/08 04/12/08 02/01/09 31/01/09 01/03/09 30/03/09 38/04/09 27/05/09 25/06/09 National mean storage National storage North Island prices South Island prices
Later in the financial year, the North Island wholesale prices rose well above the South Island as the HVDC continued to constrain and the North Island was also short of capacity at certain times. Given that Contact is generally long generation in the North Island, Contact was able to benefit from such conditions. Due to the low wholesale electricity prices in the second half of the financial year, total electricity revenue was $1,881 million; $512 million (21 per cent) lower than in the financial year ended 30 June 2008. This was driven by a 48 per cent decrease in wholesale electricity revenue (as a result of a 48 per cent decrease in average wholesale electricity prices and a 10 per cent reduction in generation volume), offset by a three per cent increase in retail electricity revenue. After netting off retail electricity purchases, total retail and wholesale (net) electricity revenue was $101 million lower than for the period ended 30 June 2008, which is largely attributable to wholesale market conditions. By way of illustration of the impact of hydrology, the average price earned by Contact’s generation in the second half of the financial year ended 30 June 2009 was $40 per MWh – compared with an average of $173 per MWh earned in the second half of the financial year ended 30 June 2008. The average wholesale price for the 2009 financial year of $56 per MWh is both well below the long run cost of electricity and the variable operating cost of the gas-fired generation plant.
Total electricity revenue
3,000
2,500
2,000 955 1,244 544 1,500 NZ$ Millions 1,286 1,000
500 1,148 594
June 2008 June 2009 Financial year ended
Retail purchases Retail electricity revenue Wholesale electricity revenue 16 Contact Energy Limited Annual Report 2009
During the financial year, there were two significant increases in the quarterly producer price index (PPI). The PPI is applied to adjust gas prices in most of Contact’s gas purchase contracts. These recent increases, as well as the completion of Contact’s low cost Maui 367 gas entitlements, resulted in the company paying about 25 per cent more per GJ for gas over the 2009 financial year. This was significantly higher than expected.
Key financial information
Variance
12 months ended 12 months ended 30 June 2009 30 June 2008 $ million $ million $ million %
Operating revenue 2,222.2 2,756.7 (534.5) (19%)
Operating expenses (1) (1,776.9) (2,189.5) 412.6 19%
EBITDAF (2) 445.3 567.2 (121.9) (21%)
Depreciation and amortisation (162.0) (146.6) (15.4) (11%)
Equity accounted earnings of associates 3.6 2.8 0.8 29%
Change in fair value of financial instruments (57.5) (1.9) (55.6) 2,926%
Removal of New Plymouth asbestos and related costs – (33.7) 33.7 (100%)
Impairment of investments (2.8) – (2.8) –
Gain on sale of Mokai geothermal land and rights – 21.3 (21.3) (100%)
Earnings Before Net Interest Expense and Income Tax (EBIT) 226.6 409.1 (182.5) (45%)
Net interest expense (62.6) (69.9) 7.3 10%
Income tax expense (46.5) (102.1) 55.6 54%
Profit for the period 117.5 237.1 (119.6) (50%)
Underlying earnings after tax (3) 160.6 232.8 (72.2) (31%)
Underlying earnings per share (3) 27.35 39.60 (12.25) (31%)
Shareholders’ equity 2,942.3 2,904.1 38.2 1%
1 Includes electricity purchases. 2 Earnings before net interest expense, income tax, depreciation, amortisation, financial instruments and other significant items. 3 Underlying earnings after tax removes significant one-off items and the non cash change in fair value of financial instruments.
Profit for the period ended 30 June 2009 was $117.5 million. This was negatively affected by a non-cash post-tax movement of $40.3 million in the fair value of financial derivatives. With the introduction of International Financial Reporting Standards (IFRS), the accounting standards require that certain changes in the fair value of financial instruments be reflected in the Income Statement. This can introduce significant volatility to the earnings reported for the year. This impact is primarily driven by financial instruments Contact utilises in order to hedge various price and interest rate risks to which it is exposed. The intention of hedging is to reduce these risks and deliver a higher level of certainty to the cash flows of the business. While Contact utilises valid economic risk management instruments to hedge these risks, these instruments must also meet the criteria prescribed under IFRS in order to qualify for hedge accounting where fair value changes are carried in equity. For those instruments which do not qualify for hedge accounting the change in fair value is recognised in the Income Statement. The most notable instruments in Contact’s portfolio that do not qualify for hedge accounting are interest rate swaps. With the significant drop in the forward yield curve over the first six months of the financial year, the fair value of the interest rate book has correspondingly decreased and will fluctuate with movements in interest rates. Contact Energy Limited Annual Report 2009 17
Retail segment
Variance
12 months ended 12 months ended 30 June 2009 30 June 2008 $ million $ million $ million %
Retail electricity revenue 1,286.3 1,244.4 41.9 3%
Gas revenue wholesale 72.8 97.4 (24.6) (25%)
Gas revenue retail 82.2 84.1 (1.9) (2%)
LPG revenue 153.8 145.2 8.6 6%
Other retail revenue 15.8 11.9 3.9 33%
Total retail revenue 1,610.9 1,583.0 27.9 2%
Retail electricity purchases (537.9) (1,012.5) 474.6 47%
Electricity transmission, distribution and levies (431.8) (442.1) 10.3 2%
Gas purchases and transmission (148.2) (159.4) 11.2 7%
LPG purchases (112.1) (105.2) (6.9) (7%)
Labour costs and other operating expenses (144.0) (142.0) (2.0) (1%)
Total operating expenses (1,374.0) (1,861.2) 487.2 26%
EBITDAF 236.9 (278.2) 515.1 185%
Depreciation and amortisation (19.8) (20.3) 0.5 2%
Segment result 217.1 (298.5) 515.6 173%
Average electricity purchase price ($ per MWh) (1) (65.79) (122.07) 56.3 46%
Retail electricity sales (GWh) 7,609 7,800 (191) (2%)
Electricity customer numbers 479,000 520,000 (41,000) (8%)
Gas sales wholesale customers (PJ) 11.1 17.0 (5.9) (35%)
Gas sales retail customers (PJ) 3.9 4.1 (0.2) (4%)
Gas sales LPG customers (tonnes) 77,228 84,334 (7,106) (8%)
Gas customer numbers 67,000 75,000 (8,000) (11%)
LPG customer numbers (including franchisees) (2) 53,700 50,800 2,900 6%
1 This price excludes contracts for differences. 2 LPG customer numbers have been restated down by approximately 1,800 customers. These 1,800 customers are closed or non-active accounts that had been historically recorded as customers. 18 Contact Energy Limited Annual Report 2009
Contact’s retail segment EBITDAF of $236.9 million was $515.1 million higher than the negative $278.2 million for the financial year ended 30 June 2008. This is predominantly due to the change in wholesale conditions which reduced the retail electricity purchase cost from $1,012.5 million to $537.9 million, a 47 per cent decrease.
Retail purchase costs
1,200 140 122 120 1,000 100 800 66 80
600 $/MWh
NZ$ Millions 1,013 60 400 40 538 200 20
June 2008 June 2009 Financial year ended
Spot purchases Purchase price
Set out in the table below are the North and South Island average retail electricity purchase prices by quarter. These prices illustrate the stark changes in hydrology conditions which occurred within the financial year as well as the differences between the North and South Islands.
Variance
12 months ended 12 months ended 30 June 2009 30 June 2008 Average electricity purchase price $/MWh $/MWh $/MWh %
Q1 North Island 102 57 45 79%
Q2 North Island 47 45 2 3%
Q3 North Island 46 124 (78) (63%)
Q4 North Island 70 228 (158) (69%)
FY North Island 68 113 (45) (40%)
Q1 South Island 149 60 89 146%
Q2 South Island 38 43 (5) (12%)
Q3 South Island 25 114 (89) (78%)
Q4 South Island 25 305 (280) (92%)
FY South Island 63 133 (70) (53%)
Q1 National 124 59 65 112%
Q2 National 43 45 (2) (5%)
Q3 National 37 119 (82) (69%)
Q4 National 49 265 (216) (81%)
FY National 66 122 (56) (46%) Contact Energy Limited Annual Report 2009 19
Total retail electricity revenue rose three per cent to $1,286.3 million, with total sales of 7,609 gigawatt hours (GWh) compared with 7,800 GWh in the financial year ended 30 June 2008. This two per cent drop consists of a two per cent decrease in mass market volumes and three per cent reduction in time of use (large commercial/ industrial customers) volumes. The time of use reduction is largely due to the economic conditions that have driven a per customer decrease in energy consumption in the second half of the 2009 financial year. Set out below is a summary of the North and South Island electricity purchase volumes for the financial years ended 30 June 2008 and 2009.
Variance
12 months ended 12 months ended 30 June 2009 30 June 2008 GWh %
North Island retail electricity purchases (GWh) 4,354 4,447 (93) (2%)
South Island retail electricity purchases (GWh) 3,755 3,857 (102) (3%)
Retail GWh purchased 8,109 8,304 (195) (2%)
North Island purchases (GWh) as a percentage of total purchases 54% 54% 0%
South Island purchases (GWh) as a percentage of total purchases 46% 46% 0%
Retail electricity customers reduced to 480,000 compared with 500,000 as at 31 December 2008 and 520,000 as at 30 June 2008. As a result of the marketing activities which Contact has undertaken in the past few months, Contact is once again acquiring customers and, together with LPG gains, the customer base is now growing.
Wholesale and retail gas revenue
100 97.4 22 84.1 17.0 82.2 18 80 72.8 11.1 14 60 PJ 10 NZ$ Millions 40 4.1 6 3.9 20 2
-2 June 2008 June 2009 Financial year ended
Wholesale gas revenue Retail gas revenue Wholesale gas volume Retail gas volume 20 Contact Energy Limited Annual Report 2009
Contact’s gas revenue from wholesale customers reduced by $24.6 million to $72.8 million in the period ended 30 June 2009. This was largely due to the non recurrence of short term sales which were executed in the second half of the financial year ended 30 June 2008 resulting in a decrease in sales volume of 6 PJ. Retail gas revenue was slightly lower at $82.2 million, compared with $84.1 million in the financial year ended 30 June 2008. The sales volume was four per cent lower at 3.9 PJ compared with 4.1 PJ in the financial year ended 30 June 2008. Gas customer numbers have decreased to 67,000, compared with 70,000 as at 31 December 2008 and 75,000 as at 30 June 2008. The average cost of gas (excluding transmission) increased 25 per cent from $5.55 per GJ in the financial year ended 30 June 2008 to $6.94 per GJ in the financial year ended 30 June 2009. This increase has been driven by a change in the underlying mix of gas used, as the use of cheaper Maui 367 legacy gas ceases and is replaced by more expensive gas, and the impact of escalation in gas prices in gas contracts within Contact’s portfolio. During the period, the PPI, which is the index used to escalate the prices under most gas contracts, increased significantly more than Contact expected. The average gas transmission and distribution costs for retail also increased by six per cent from $10.43 per GJ to $11.13 per GJ for the financial year ended 30 June 2009. Revenue from LPG sales grew by six per cent to $153.8 million. This was in part offset by an increase in LPG cost of goods of $7 million or seven per cent. The main driver of this cost increase is the underlying purchase cost of LPG which increased by 16 per cent from $1,248 per tonne to $1,451 per tonne in the financial year ended 30 June 2009. This was largely due to the imported cost of LPG which tends to move with oil prices. LPG volume decreased by eight per cent to 77,228 tonnes, reflecting a drop in the overall market for LPG as increasing costs result in fuel switching by some customers. Contact’s market share remains consistent at approximately 50 per cent. Contact Energy Limited Annual Report 2009 21
Generation segment
Variance
12 months ended 12 months ended 30 June 2009 30 June 2008 $ million $ million $ million %
Wholesale electricity revenue 594.3 1,148.0 (553.7) (48%)
Steam revenue 12.9 11.0 1.9 17%
Other wholesale revenue 4.1 14.7 (10.6) (72%)
Total wholesale revenue 611.3 1,173.7 (562.4) (48%)
Wholesale electricity purchase contracts for differences (6.3) 57.6 (63.9) 111%
Electricity transmission, distribution and levies (47.3) (44.7) (2.6) (6%)
Gas purchases and transmission (251.3) (253.0) 1.7 1%
Labour costs and other operating expenses (98.0) (88.2) (9.8) (11%)
Total operating expenses (402.9) (328.3) (74.6) (23%)
EBITDAF 208.4 845.4 (637.0) (75%)
Depreciation (142.2) (126.3) (15.9) (13%)
Segment result 66.2 719.1 (652.9) (91%)
Average wholesale electricity price ($ per MWh) (1) 56.08 106.90 (50.8) (48%)
Gas used in internal generation (PJ) 33.4 42.0 (8.6) (20%)
Thermal generation (GWh) 4,094 5,351 (1,257) (23%)
Geothermal generation (GWh) 2,311 2,180 131 6%
Hydro generation (GWh) 3,543 3,504 39 1%
Total generation (GWh) 9,948 11,035 (1,087) (10%)
1 This is the price received by Contact for its generation. It excludes contracts for differences.
As discussed earlier, the financial year ended 30 June 2009 saw hydrology extremes which, together with the loss of pole one of the HVDC and a loss of approximately 180 MW of demand at the Tiwai Point aluminium smelter in Southland, resulted in unprecedented volatility in the wholesale electricity market. This led to the EBITDAF contribution of the generation segment decreasing by 75 per cent to $208.4 million, a $637.0 million decrease from the financial year ended 30 June 2008. The average wholesale electricity price for the financial year ended 30 June 2009 was $56 per MWh, a 48 per cent decrease over the average wholesale price for the financial year ended 30 June 2008 of $107 per MWh. Within the period the prices were extremely volatile as illustrated in the following table. 22 Contact Energy Limited Annual Report 2009
Variance
12 months ended 12 months ended 30 June 2009 30 June 2008 Average wholesale electricty price $/MWh $/MWh $/MWh %
Q1 North Island 96 54 42 78%
Q2 North Island 43 44 (1) (2%)
Q3 North Island 41 110 (69) (63%)
Q4 North Island 60 212 (152) (72%)
FY North Island 64 107 (43) (40%)
Q1 South Island 117 56 61 107%
Q2 South Island 34 40 (6) (16%)
Q3 South Island 20 102 (82) (80%)
Q4 South Island 21 279 (258) (93%)
FY South Island 43 107 (64) (60%)
Q1 National 101 55 46 85%
Q2 National 39 42 (3) (8%)
Q3 National 33 107 (74) (69%)
Q4 National 45 229 (184) (80%)
FY National 56 107 (51) (48%)
During the financial year ended 30 June 2009, Contact was, on average, hedged about 90 per cent, compared with 84 per cent for the financial year ended 30 June 2008. In respect of the South Island Contact was about 111 per cent hedged compared with the financial year ended 30 June 2008 where Contact was 116 per cent hedged in the South Island. This reflects the change in hydro conditions after September 2008. Conversely in the North Island Contact was about 79 per cent hedged – this is higher than the North Island hedge level of 71 per cent in the prior financial year due to the significant reduction in thermal generation in the 2009 financial year. Contact’s thermal generation for the financial year ended 30 June 2009 was 4,094 GWh, 1,257 GWh lower than the financial year ended 30 June 2008. This was largely due to a scheduled six week outage at Contact’s Otahuhu B gas-fired power station and additional outages of both TCC and Otahuhu B during the second half of the financial year when wholesale prices enabled Contact to take the plants out of service at certain times to undertake preventative maintenance. This activity contributed about $5 million in additional operating costs for the financial year ended 30 June 2009. Contact Energy Limited Annual Report 2009 23
Generation by type
12,000
10,000 3,504 8,000 3,543
GWhs 6,000 5,351 4,000 4,094
2,000 2,180 2,311
June 2008 June 2009 Financial year ended
Geothermal generation Thermal generation Hydro generation
Contact’s geothermal generation increased six per cent or 131 GWh in the period ended 30 June 2009 to 2,311 GWh as a result of Contact’s geothermal drilling and development programme. Contact’s hydro generation at 3,543 GWh was 39 GWh more than in the financial year ended 30 June 2008. Despite the increase over the prior financial year, hydro generation was well below what might be expected given the hydro conditions. This was due to the fact that Contact was forced to spill in excess of 400 GWh due to transmission constraints. Contact used 33.4 PJ of gas in generation in the financial year ended 30 June 2009, an 8.6 PJ reduction from the financial year ended 30 June 2008. Despite this, the total gas cost including transmission was relatively flat at $251 million, compared with $253 million in the financial year ended 30 June 2008. Accordingly the average cost of gas used in generation increased from $6.03 per GJ to $7.55 per GJ, a 25 per cent increase.
Gas purchases for generation
50 10
40 8 $7.55
$6.03 30 6 $/GJ Volume (PJ) Volume 20 42.0 4 33.4
10 2
June 2008 June 2009 Financial year ended
Gas purchased for generation (PJ) Average cost per GJ for generation (including transmission) 24 Contact Energy Limited Annual Report 2009
Company overview
Contact Energy is one of New Zealand’s leading publicly listed companies, with around 83,000 shareholders, a national staff of about 1,000 and the ability to supply electricity and gas products across New Zealand.
Retail Contact Energy has approximately: • 479,000 retail electricity customers • 67,000 reticulated natural gas customers, and • 54,000 LPG customers.
Generation • Contact owns and operates nine power stations across the North and South Islands. • In the 2009 financial year, these power stations provided around 25 per cent of New Zealand’s total electricity annual generation. • Contact is also contracted to operate the Crown-owned reserve generation plant at Whirinaki in Hawke’s Bay and holds a minority interest in the Oakey power station in Australia. • Contact is currently constructing a 200 megawatt gas-fired peaking power station and the country’s first underground natural gas storage facility near Stratford, as well as a 23 megawatt geothermal power station at Taupo. • Contact is also advancing development options in geothermal, wind and hydro generation projects.
Otahuhu B – combined-cycle gas turbine, 400 megawatts Commissioned in 1999, the Otahuhu B power station is a high-efficiency combined-cycle gas-fired power station. Located in South Auckland, Otahuhu B provides electricity directly into the country’s largest load centre.
Otahuhu A Commissioned in 1968, this gas-fired power station provides reactive power, which supports the stable operation of the electricity transmission system.
Te Rapa – cogeneration, 44 megawatts Commissioned in 1999, the Te Rapa cogeneration plant is efficient, using natural gas to generate steam and electricity for Fonterra’s Te Rapa factory, with surplus electricity being exported into the electricity network.
Ohaaki – geothermal, 105 megawatts Commissioned in 1989, the Ohaaki geothermal power station is currently producing around 65 megawatts of electricity.
Wairakei – geothermal, 157 megawatts plus 15 megawatt binary plant Commissioned in 1958, the Wairakei geothermal power station marked its 50th anniversary in the 2009 financial year.
Poihipi Road – geothermal, 50 megawatts Purchased by Contact in 2000, the Poihipi Road power station draws its steam from the Wairakei steamfield. Contact Energy Limited Annual Report 2009 25
Taranaki – combined-cycle gas turbine, 377 megawatts Commissioned in 1998 and upgraded during 2008, the Taranaki combined-cycle power station is a modern, efficient plant.
Clyde – hydro, 432 megawatts Commissioned in 1992, the Clyde dam on the Clutha River in Central Otago is the largest concrete gravity dam in New Zealand, generating electricity from four large generator turbines.
Roxburgh – hydro, 320 megawatts Commissioned in 1956, the Roxburgh dam was the first large-scale hydro dam on the Clutha River.
Oakey – distillate/gas-fired peaking station, 282 megawatts Commissioned in February 2000, Contact owns 25 per cent of this peaking power station, based in Queensland, Australia. Contact is also the operator of this station.
Whirinaki – distillate-fired peaking station, 155 megawatts Contact operates the Whirinaki peaking station on behalf of the Crown. Contact owns the land upon which the power station is located in Hawke’s Bay.
New Plymouth Over the 2009 financial year the New Plymouth gas-fired power station was decommissioned, following the discovery of asbestos at the plant. While the plant is decommissioned, the site remains of value to Contact as a potential location for a future gas-fired power station. 26 Contact Energy Limited Annual Report 2009
National overview
Contact is one of New Zealand’s largest publicly listed companies, with the ability to supply electricity and gas products across the country. We have reticulated natural gas customers across much of the North Island, reticulated LPG customers in Christchurch, Queenstown and Wanaka, and we can supply bottled and automotive LPG nationwide.
Contact Energy Limited Annual Report 2009 27
Governance
Contact Energy Limited is a limited liability company registered under the New Zealand Companies Act 1993.
Contact’s company registration number is 660760. The company is listed on, and its shares are quoted on, the New Zealand Stock Market (NZSX) and has retail bonds listed on the New Zealand Debt Market (NZDX). The company’s listing is under the trading code ‘CEN’. Contact’s constitution is available on the company’s website.
Distribution Policy Contact’s Distribution Policy is to maintain or grow distributions on a year-to-year basis while targeting an average distribution equivalent to approximately 80 per cent of net surplus over time.
Ethics Contact’s Code of Ethics sets out the ethical and behavioural standards expected of the company’s directors, officers, employees and contractors. Contact has established internal procedures to monitor compliance with the Code of Ethics. Every six months, a report is provided to the Board Audit Committee highlighting any matters raised by staff under the Code of Ethics. In the financial year ended 30 June 2009, there were no issues to report in relation to the Code of Ethics. A copy of the Code of Ethics is available on the company’s website.
Health, safety and environment Health, safety and environment (HSE) is a key priority at Contact and is an integral factor in assessing management’s achievement of annual goals, which are measured against key performance indicators. Contact’s Health and Safety Policy and Environmental Policy are available on the company’s website. For further information on Contact’s HSE performance, see the 2009 Sustainability Report, available on the company’s website. Whistleblowing Policy Contact’s Whistleblowing Policy, available on the company’s website, facilitates the disclosure and impartial investigation of any serious wrongdoing. This policy advises employees of their right to disclose serious wrongdoing and sets out Contact’s internal procedures for receiving and dealing with such disclosures. The policy is consistent with and facilitates the Protected Disclosures Act 2000.
Role of the Board of Directors The Board is responsible for setting the strategic direction of Contact, with its ultimate goal being to protect and enhance the value of Contact’s assets and business in the interests of the company and for all of its shareholders. The Board’s role includes approving the budget and strategic plan; approving major investments; monitoring financial performance of the company, including approval of half year and annual financial statements; appointing and reviewing the performance of the Managing Director; and ensuring the integrity of corporate governance. The Board has delegated certain of its powers to sub-committees of the Board, and the day-to-day management of the company to the Managing Director. The ambit of these delegations is documented in the Board Committee charters, the company’s Delegated Authorities Policy, and by relevant minuted resolutions of the Board. 28 Contact Energy Limited Annual Report 2009
The Board has a statutory obligation to reserve to itself responsibility for certain matters, such as the payments of distributions and the issue of shares. It also reserves responsibility for significant matters, including those described above, such as the approval of business plans and budgets and the incurring of significant obligations. In addition, under the Companies Act 1993 and the NZSX Listing Rules, Contact is required to seek the approval of its shareholders prior to entering into certain types of transactions. The Board’s role, responsibilities, operation, delegations and committees are set out in Contact’s Board Charter, which is available on the company’s website.
Operation of the Board The Board meets regularly on a formal scheduled basis and otherwise as required. The Chairman and the Managing Director establish the agenda for each Board meeting. Each month, as a standing item, the Managing Director prepares a report to the Board that includes disclosure of performance against key HSE benchmarks and a summary of the company’s operations, together with financial and other reports. In addition, the Board receives regular briefings on key strategic issues from management, either as part of the regularly scheduled Board meetings or in separate dedicated sessions. New directors appointed to the Contact Board receive induction training. This training primarily involves written and oral presentations by the Managing Director and senior management team on the key strategic and operational business issues facing Contact.
Compliance with NZX Best Practice Code and other guidelines Contact complies fully with the corporate governance principles set out in the NZX Corporate Governance Best Practice Code. Contact also complies with all of the principles in the Securities Commission’s Corporate Governance in New Zealand Principles and Guidelines. One of the Securities Commission’s corporate governance principles is that there should be a balance of independence, skills, knowledge, experience and perspectives among a Board’s directors so that the Board works effectively. Contact considers that it complies with this principle for a number of reasons, including because: • the members of its Board hold substantial and diverse business and energy-industry experience • the Board comprises a balance of independent directors and Origin Energy-associated directors • the Chairman does not hold a casting vote • the Board regularly assesses its performance to ensure that constructive working relationships are maintained. The Securities Commission includes as a guideline relating to this principle that the Chairman should be an independent director. Contact departs from this guideline because its Chairman, Grant King, is not an independent director. Despite this departure, for the reasons set out above, Contact is satisfied that it complies with the Commission’s principle. A table summarising Contact’s compliance with the NZX Corporate Governance Best Practice Code and the Securities Commission’s Corporate Governance in New Zealand Principles and Guidelines is available on the company’s website. Contact Energy Limited Annual Report 2009 29
Board composition The composition of the Board has changed during the financial year. On 16 March 2009, David Baldwin and Sue Sheldon were appointed to the Contact Board, and effective from 30 June 2009, Tim Saunders retired from the Contact Board. Accordingly, from 30 June 2009, the Board comprises seven members as follows:
Grant King Chairman and Origin Energy associate
Phillip Pryke Deputy Chairman and Independent Director
David Baldwin Managing Director and Origin Energy associate
Bruce Beeren Origin Energy associate
John Milne Independent Director
Karen Moses Origin Energy associate
Sue Sheldon Independent Director
Biographies of the current directors are set out on the company’s website.
Independence of directors The NZSX Listing Rules and Contact’s constitution require Contact to have a minimum of two independent directors. In order to be an independent director, a director must not be an executive officer of the company, or have a ‘Disqualifying Relationship’. Having a ‘Disqualifying Relationship’ includes (but is not limited to): • being an associated person of a substantial security holder of the company (in Contact’s case, the Origin Energy group of companies), other than solely as a consequence of being a director of Contact, or • having a relationship (other than the directorship itself) with the company or a substantial security holder of the company by virtue of which the director is likely to derive, in the current financial year of the company, a substantial portion of his or her annual revenue from the company (excluding dividends and other distributions payable to all shareholders). The Board has confirmed that, at the end of the financial year, Phillip Pryke, John Milne and Sue Sheldon each held (and still hold) no ‘Disqualifying Relationship’ in relation to Contact and are therefore each independent directors. The Board also confirmed that until his retirement on 30 June 2009, Tim Saunders held no ‘Disqualifying Relationship’ in relation to Contact and was therefore an independent director. This is because none of these directors fall within the definition of ‘Disqualifying Relationship’ and, in particular, none of these directors is an associated person of a substantial security holder of the company, nor has any relationship with the company or a substantial security holder of the company by virtue of which they derive any revenue from the company, other than their respective Contact directorships and shareholdings. Grant King, Bruce Beeren and Karen Moses are not considered to be independent directors by virtue of being associated persons of substantial security holder Origin Energy New Zealand Limited. David Baldwin is not considered to be an independent director because he is an executive of Contact and is also an associated person of substantial security holder Origin Energy New Zealand Limited. Grant King, Bruce Beeren, Karen Moses and David Baldwin were therefore not independent directors as at 30 June 2009.
Residence of directors The NZSX Listing Rules and Contact’s constitution require at least two directors to be ordinarily resident in New Zealand. David Baldwin, John Milne and Sue Sheldon satisfy this requirement (as did Tim Saunders up until his retirement on 30 June 2009). 30 Contact Energy Limited Annual Report 2009
Election and re-election of directors The NZSX Listing Rules and Contact’s constitution require that directors who have been appointed to fill a casual vacancy during a financial year must stand for election at the next Annual Meeting. Accordingly, David Baldwin and Sue Sheldon will stand for election at the 2009 Annual Meeting. The NZSX Listing Rules and Contact’s constitution also require a minimum of one-third of directors (other than one executive director and any directors appointed to fill a casual vacancy) to retire at each Annual Meeting and, if appropriate, stand for re-election. The directors required to resign are those who have been in office longest since their last election. Accordingly, Grant King and Bruce Beeren will retire and stand for re-election at the 2009 Annual Meeting. (Karen Moses and Tim Saunders retired and were re-elected at the October 2007 Annual Meeting, and Phillip Pryke and John Milne retired and were re-elected at the October 2008 Annual Meeting.)
Conflicts of interest Where any Contact director has a conflict of interest or is otherwise interested in any transaction, that director is generally required to disclose his or her conflict of interest to the company, and thereafter will normally not be able to participate in the discussion, nor vote in relation to the relevant matter. The company maintains a register of disclosed interests.
Board assessment Contact’s Board follows a practice of reviewing the performance of the Board as a whole and the Board committees every two years, and of reviewing the performance of those directors standing for re-election or standing for election at the next Annual Meeting every year. In accordance with this practice, in July 2009: • Contact undertook a formal assessment of the Board and the Board committees, and • the Board reviewed the performance of Grant King, Bruce Beeren, David Baldwin and Sue Sheldon, being those directors required to retire and stand for re-election, or stand for election, at the 2009 Annual Meeting.
Board committees The Board has four formally constituted committees – the Board Audit Committee, the Health, Safety and Environment Committee, the Nominations Committee and the Remuneration Committee. Copies of the charters for these committees are available on the company’s website. Other committees of the Board are formed as and when required. For example, an Independent Directors’ Committee comprising Phillip Pryke (Chair), John Milne, Tim Saunders (until 30 June 2009) and Sue Sheldon (from 19 March 2009) meets to evaluate and approve various related party transactions with Origin Energy, which, in the financial year ended 30 June 2009, included gas processing arrangements, LPG prices and the related party transactions process. In addition, Contact formed a Due Diligence Committee to oversee the due diligence process for the March 2009 retail bond issue. John Milne (Chair) and Bruce Beeren were members of the Due Diligence Committee.
Board Audit Committee At the end of the financial year, the Board Audit Committee (BAC) comprised John Milne (Chair), Bruce Beeren, Tim Saunders (until 30 June 2009) and Sue Sheldon (from 16 March 2009). John Milne is a qualified Chartered Accountant, Sue Sheldon is a Fellow Chartered Accountant and Bruce Beeren is a fellow of CPA Australia. All members of the committee are non-executive directors. The BAC’s purpose is to oversee Contact’s financial policies and to monitor the quality of financial reporting and financial management. The BAC is responsible for approving the annual internal audit work programme, monitoring the roles, responsibilities and performance of external and internal audit, and making recommendations to the Board on matters such as new accounting policies and adopting the financial statements for public release. The Board Audit Committee Charter is set out on the company’s website. Contact Energy Limited Annual Report 2009 31
The Managing Director attends each quarterly BAC meeting at the invitation of the BAC. At the conclusion of each meeting and at any other time the BAC requires, the BAC meets separately with the head of internal audit, Contact’s external auditors and the Chief Financial Officer without any other members of management being present.
Health, Safety and Environment Committee At the end of the financial year, the Health, Safety and Environment (HSE) Committee comprised Karen Moses (Chair), Phillip Pryke, John Milne and Tim Saunders (until 30 June 2009). Prior to 31 December 2008, the HSE Committee comprised all members of the Board. The HSE Committee meets at least three times per year, and its role is to assist the Board to fulfil its responsibilities in relation to HSE-related matters arising out of the activities of Contact and its related companies. These matters relate to those activities that affect employees, contractors, communities and the environment in which the company operates. The HSE Committee is responsible for, among other matters, periodically reviewing the company’s Health and Safety Policy and Environmental Policy, monitoring the company’s compliance with those policies, reviewing and recommending to the Board targets for HSE performance and assessing performance against those targets, and reviewing HSE-related incidents and considering appropriate actions to minimise the risk of recurrence. The HSE Committee Charter is set out on the company’s website.
Nominations Committee At the end of the financial year, the Nominations Committee comprised Grant King (Chair), Phillip Pryke, Tim Saunders (until 30 June 2009) and Sue Sheldon (from 19 March 2009). The Nominations Committee’s primary purpose is to ensure that the Board is comprised of individuals who are best able to discharge the responsibilities of Directors, and it also attends to other matters put to it, including director performance assessment and Managing Director appointment. In the 2009 financial year, the Nominations Committee considered the assessment of Phillip Pryke and John Milne’s performance as directors ahead of their standing for re-election at the October 2008 Annual Meeting and considered Board composition issues (including processes for the appointment of Sue Sheldon as a director and David Baldwin as Managing Director). In July 2009, the Nominations Committee considered the assessment of Grant King, Bruce Beeren, David Baldwin and Sue Sheldon’s performance as directors ahead of their standing for election/re-election at the October 2009 Annual Meeting. The Nominations Committee Charter is set out on the company’s website.
Remuneration Committee At the end of the financial year, the Remuneration Committee comprised Phillip Pryke (Chair), Grant King, Tim Saunders (until 30 June 2009) and Bruce Beeren (from 19 March 2009). The Remuneration Committee’s primary purposes are to review directors’ fees, the Managing Director’s remuneration package and performance, and the policy for remuneration of senior management, with a view to ensuring that the interests of employees and shareholders are aligned. These reviews form the basis of recommendations to the Board. The Remuneration Committee met twice during the financial year and has met a further time since the end of the financial year to assess and make recommendations to the Board about a variety of remuneration issues that relate to directors, the Managing Director and Contact employees, including the level of directors’ fees, employee short term incentives and the long term incentive scheme for senior and key employees. Details of director and executive remuneration arrangements are set out in the remuneration report section of this Annual Report. The Remuneration Committee Charter is set out on the company’s website. 32 Contact Energy Limited Annual Report 2009
Attendance at meetings During the financial year ending 30 June 2009, the Board met 13 times. The table below sets out attendance at meetings for all directors.
Committee attendance
Director Board attendance (scheduled and Independent special purpose) BAC HSE Remuneration Nominations Directors Due Diligence
Grant King 13 N/A 1 2 1 N/A N/A
Phillip Pryke 13 N/A 3 2 1 3 N/A
David Baldwin 13 4 3 2 1 3 4
Bruce Beeren 13 4 1 1 N/A N/A 4
John Milne 13 4 3 N/A N/A 3 4
Karen Moses 13 N/A 3 N/A N/A N/A N/A
Sue Sheldon 4 1 N/A N/A N/A N/A N/A
Tim Saunders 13 4 2 1 1 3 N/A
Note: David Baldwin and Sue Sheldon were appointed to the Board on 16 March 2009. In respect of David Baldwin, the above table includes attendances as an observer on all committees, and as an observer on the Board prior to 16 March 2009.
Distribution plans Profit distribution plan Contact implemented a profit distribution plan in February 2009, which took effect from the 2009 interim distribution in March 2009. Under the profit distribution plan, instead of distributing profits in the form of fully imputed dividends in cash, all shareholders receive distributions in the form of Contact shares (as a non-taxable bonus issue), but have the opportunity to have those shares, or a portion of them, bought back by Contact for cash as a fully imputed taxable dividend. This means that shareholders have the choice between retaining bonus shares and receiving cash, or a combination of both. More detail about the profit distribution plan, including a full description of its terms and conditions, is available on Contact’s website.
Share top up plan Contact operated a share top up plan until February 2009, when it was terminated following the implementation of the profit distribution plan. The share top up plan provided shareholders holding 5,000 or fewer shares who were resident in New Zealand or Australia and who were not directors or associated persons of directors of Contact with the opportunity to acquire additional shares funded by their regular dividend payments. During the financial year ended 30 June 2009, Contact provided financial assistance in connection with the ongoing costs associated with the share top up plan until it was terminated. The disclosure document which was sent to shareholders in September 2009 sets out the details of the financial assistance provided in connection with the plan and is available on the company’s website. Contact Energy Limited Annual Report 2009 33
Current NZX waivers A summary of all waivers granted and published by NZX within or relied on by Contact in the 12 month period preceding 22 July 2009 (being two months before the date of publication of this Annual Report) is available on Contact’s website. This summary will remain on Contact’s website for at least 12 months following publication of this Annual Report.
Exercise of NZX disciplinary powers NZX did not exercise any of its powers under Listing Rule 5.4.2 in relation to Contact during the financial year.
Financial reporting Contact undertakes twice-yearly financial reporting and also provides a suite of operational data on a regular basis. Contact’s Annual and Half Year Reports are posted on Contact’s website. The annual financial statements are audited and this year the 31 December 2008 half year financial statements were also audited. In accordance with the Companies Act 1993, Contact does not automatically mail printed copies of the Annual and Half Year Reports to shareholders. A notice will be posted to shareholders when the Annual Report is available each year, and shareholders can request, free of charge, a hard copy of the Annual Report or the next Half Year Report and subsequent reports within 15 working days of receiving that notice. The Managing Director and Acting Chief Financial Officer have provided the Board with written confirmation that the company’s financial statements for the year ended 30 June 2009 have been prepared in accordance with New Zealand Generally Accepted Accounting Practice and that they comply with New Zealand Equivalents to International Financial Reporting Standards and other appropriate financial reporting standards, as appropriate for profit-oriented entities.
Auditor independence The Board Audit Committee (BAC) is responsible for considering and making recommendations to the Board regarding any issues relating to the appointment, dismissal or resignation of the external auditor. The BAC Charter prohibits the external auditor from consulting to Contact on matters that could be regarded as compromising audit independence. The BAC requires the external auditor to confirm annually that it has complied with all professional regulations relating to auditor independence. Specifically, the external auditor is required to confirm its commitment to strict procedures to ensure that: • the external auditor, its partners and current audit team do not have any financial interest in Contact • the superannuation fund of the partners or staff of the external auditor does not hold any direct financial interest in Contact • there are no business interests between Contact and the external auditor • no fee paid by Contact to the external auditor is paid on a contingency basis. In addition, the senior external audit partner and peer review partner must rotate after a maximum of five years, with suitable succession planning in place. The BAC is responsible for determining whether potential engagements of the external auditor are appropriate, documenting decisions and recommending to the Board accordingly. The Chief Financial Officer is responsible for the day-to-day relationship with the external auditor, while individual business units have a direct responsibility for their relationship with the external or internal auditor, ensuring provision of timely and accurate information and full access to company records. 34 Contact Energy Limited Annual Report 2009
Auditors The amount payable by Contact and its subsidiaries to KPMG as audit fees in respect of the financial year ended 30 June 2009 was $691,000. In addition, Contact paid $186,000 to KPMG for a statutory audit as at 31 December 2008 in relation to the retail bond issue. Contact also engaged KPMG to perform other assurance services. The amount payable in respect of the additional assurance services was $63,104, comprising work relating to assurance procedures over a commercial model, and due diligence work relating to the retail bond issue.
Credit rating As at the date of this Annual Report, Standard & Poor’s long term credit rating for Contact was BBB Stable. As at the date of this Annual Report, Fitch’s long term credit rating for Contact was BBB+ Stable. The $550 million unsubordinated, unsecured fixed rate bonds issued by Contact in March 2009 were assigned an initial rating of BBB by Standard & Poor’s.
Donations During the financial year ended 30 June 2009, in addition to the numerous sponsorships detailed in the Sustainability Report, Contact made donations amounting to $93,573. No subsidiaries made any donations during the financial year ended 30 June 2009. Donations are made on the basis that the recipient is not obliged to provide any service such as promoting Contact’s brand and are separate from Contact’s sponsorship activity. There were no political donations made during the financial year.
Risk management Contact’s Risk Management Framework aligns with recognised best practice (Australian/New Zealand Standard for Risk Management AS/NZS 4360:2004). An Executive Risk Management Committee is responsible for monitoring the ongoing effectiveness of Contact’s risk management activities and provides assurance to the Board and its committees that there is an effective framework in operation over risk-related activities. The Executive Risk Management Committee monitors trends in the company’s risk profile and considers papers on how the business manages or mitigates key risk exposures. Regular reports on the company’s risks are presented to the Board. Contact recognises the importance of effective risk management to its business success and aims to continually improve its risk profile and risk management capability.
Internal audit Contact has an independent in-house internal audit function (Internal Audit) that provides objective assurance over the effectiveness of the internal control framework. The Internal Audit Charter is included in the Board Audit Committee Charter available on the company’s website. Internal Audit assists Contact to accomplish its objectives by bringing a systematic disciplined approach to evaluate and improve the effectiveness of risk management, internal controls and governance processes. Internal Audit adopts a risk-based audit approach driven from the company’s Risk Management Framework. Internal Audit also assists external audit by reporting findings from the Internal Audit programme so the external auditors may independently assess the degree of reliance they are able to place on the control environment when providing their opinion on the financial statements. On a day-to-day basis, Internal Audit reports to the General Counsel and Company Secretary. Internal Audit has the autonomy to report significant issues to the Managing Director and the Board Audit Committee or, if considered necessary, the Chairman. The BAC oversees the audit programme and provides Internal Audit with the mandate to perform the agreed audit programme. Internal Audit has unlimited access to all other departments, records and systems of the Contact Group and to the external auditors and other third parties as it deems necessary. Contact Energy Limited Annual Report 2009 35
Securities Trading Policy Contact’s Securities Trading Policy applies to all directors, officers, employees and contractors of Contact and its subsidiaries (‘directors and employees’). Under the policy, directors and employees must not trade Contact securities, or advise or encourage others to trade or hold Contact securities, or pass on material information, if they are in possession of material information that is not publicly available. In addition: • directors and employees may not trade during the period between 1 January and the date of the announcement of Contact’s half year results to NZX (inclusive) or during the period between 1 July and the date of the announcement of Contact’s full year results to NZX (inclusive), and • directors and specified employees must adhere to further additional obligations prior to any trade of Contact securities.
Entries recorded in the interest register The following interest register entries were recorded for the company and its subsidiaries during the financial year ended 30 June 2009:
(a) Security dealings of directors Contact directors disclosed the following transactions in Contact securities in the financial year ended 30 June 2009. Note that all dealings are in ordinary shares unless otherwise specified.
Date of Consideration Number of securities Director transaction per security* acquired (disposed of) Nature of relevant interest
G King 12/06/09 $5.81 4,781 Restricted shares acquired on trust under the Contact GA King Director Remuneration Share Trust
P Pryke 27/08/08 $8.44 1,935 Restricted shares acquired on trust under the Contact 03/10/08 $7.70 1,624 PJ Pryke Director Remuneration Share Trust 24/02/09 $5.86 2,140 03/04/09 $6.00 2,083
27/08/08 NCBO (1,694) Transfer of unrestricted shares from Contact PJ Pryke 27/08/08 NCBO 1,694 Director Remuneration Share Trust to Pryke Pty Limited, 03/10/08 NCBO (1,695) as beneficiary of Contact PJ Pryke Director Remuneration 03/10/08 NCBO 1,695 Share Trust 25/02/09 NCBO (1,547) 25/02/09 NCBO 1,547 01/04/09 NCBO (1,653) 01/04/09 NCBO 1,653
31/03/09 $5.66 894 Acquisition of bonus issue shares pursuant to the Profit 31/03/09 $5.66 769 Distribution Plan (2009 interim distribution)
02/04/09 NCBO (894) Transfer of bonus issue shares acquired pursuant to the 02/04/09 NCBO 894 Profit Distribution Plan (2009 interim distribution) from Contact PJ Pryke Director Remuneration Share Trust to Pryke Pty Limited, as beneficiary of Contact PJ Pryke Director Remuneration Share Trust
D Baldwin 16/03/09 N/A 88,342 restricted Initial disclosure on appointment as Managing Director: ordinary shares beneficial interest in, and conditional entitlement to become legal and beneficial owner of, ordinary shares under Contact’s employee long term incentive scheme (Restricted Share Plan)
16/03/09 N/A 525,547 options to Initial disclosure on appointment as Managing Director: acquire ordinary shares options to acquire ordinary shares under Contact’s employee long term incentive scheme (Share Option Plan)
* NCBO means no change in beneficial ownership. 36 Contact Energy Limited Annual Report 2009
Date of Consideration Number of securities Director transaction per security* acquired (disposed of) Nature of relevant interest
B Beeren 27/08/08 $8.44 1,291 Restricted shares acquired on trust under the Contact 06/10/08 $7.50 1,111 BG Beeren Director Remuneration Share Trust 24/02/09 $5.86 1,426 03/04/09 $6.00 1,389
25/02/09 NCBO (1,032) Transfer of unrestricted shares from Contact BG Beeren 25/02/09 NCBO 1,032 Director Remuneration Share Trust to Bruce Beeren 01/04/09 NCBO (1,102) 01/04/09 NCBO 1,102
31/03/09 $5.66 238 Acquisition of bonus issue shares pursuant to the Profit 31/03/09 $5.66 21 Distribution Plan (2009 interim distribution)
02/04/09 NCBO (238) Transfer of bonus issue shares acquired pursuant to the 02/04/09 NCBO 238 Profit Distribution Plan (2009 interim distribution) from Contact BG Beeren Director Remuneration Share Trust to Bruce Beeren
J Milne 27/08/08 $8.44 644 + 645 Restricted shares acquired on trust under the Contact JHG 03/10/08 $7.70 542 + 541 Milne Director Remuneration Share Trust 24/02/09 $5.86 712 + 713 03/04/09 $6.00 694 + 694
27/08/08 NCBO (564) + (565) Transfer of unrestricted shares from Contact JHG Milne 27/08/08 NCBO 564 + 565 Director Remuneration Share Trust to John Milne Trust and 03/10/08 NCBO (565) + (565) Maureen Milne Trust, as beneficiaries of Contact JHG Milne 03/10/08 NCBO 565 + 565 Director Remuneration Share Trust 25/02/09 NCBO (515) + (516) 25/02/09 NCBO 515 + 516 01/04/09 NCBO (551) + (551) 01/04/09 NCBO 551 + 551
31/03/09 $5.66 280 + 280 Acquisition of bonus issue shares pursuant to the Profit 31/03/09 $5.66 694 Distribution Plan (2009 interim distribution) 31/03/09 $5.66 378 31/03/09 $5.66 47
02/04/09 NCBO (280) + (280) Transfer of bonus issue shares acquired pursuant to the 02/04/09 NCBO 280 + 280 Profit Distribution Plan (2009 interim distribution) from Contact JHG Milne Director Remuneration Share Trust to John Milne Trust and Maureen Milne Trust, as beneficiaries of Contact JHG Milne Director Remuneration Share Trust
06/04/09 NCBO (47) Transfer of bonus issue shares acquired pursuant to the 06/04/09 NCBO 47 Profit Distribution Plan (2009 interim distribution) from beneficially held shares into family trust, of which Mr Milne is a trustee
30/04/09 NCBO (2,415) Transfer of beneficially held shares into family trust, of 30/04/09 NCBO 2,415 which Mr Milne is a trustee
31/03/09 $1.00 70,000 bonds Acquisition of bonds as trustee and beneficiary of family 31/03/09 $1.00 50,000 bonds trusts and as spouse of registered holder 31/03/09 $1.00 30,000 bonds
* NCBO means no change in beneficial ownership. Contact Energy Limited Annual Report 2009 37
Date of Consideration Number of securities Director transaction per security* acquired (disposed of) Nature of relevant interest
K Moses 12/06/09 $5.81 2,390 Restricted shares acquired on trust under the Contact KA Moses Director Remuneration Share Trust
S Sheldon 16/03/09 N/A 540 Initial disclosure on appointment as director of shares held in a trust for which Ms Sheldon is an independent trustee
31/03/09 $1.00 10,000 bonds Acquisition of bonds by trust for which Ms Sheldon is an independent trustee
T Saunders 27/08/08 $8.44 1,288 Restricted shares acquired on trust under the Contact 03/10/08 $7.70 1,083 TEC Saunders Director Remuneration Share Trust 24/02/09 $5.86 1,425 03/04/09 $6.00 1,389
27/08/08 NCBO (1,129) Transfer of unrestricted shares from Contact TEC Saunders 27/08/08 NCBO 1,129 Director Remuneration Share Trust to TEC Saunders Family 03/10/08 NCBO (1,130) Trust as beneficiary of Contact TEC Saunders Director 03/10/08 NCBO 1,130 Remuneration Share Trust 25/02/09 NCBO (1,031) 25/02/09 NCBO 1,031 01/04/09 NCBO (1,102) 01/04/09 NCBO 1,102
31/03/09 $5.66 498 Acquisition of bonus issue shares pursuant to the Profit 31/03/09 $5.66 239 Distribution Plan (2009 interim distribution) 31/03/09 $5.66 13
02/04/09 NCBO (498) Transfer of bonus issue shares acquired pursuant to the 02/04/09 NCBO 498 Profit Distribution Plan (2009 interim distribution) from Contact TEC Saunders Director Remuneration Share Trust to TEC Saunders Family Trust as beneficiary of Contact TEC Saunders Director Remuneration Share Trust
11/03/09 $5.56 10,000 On-market disposal of shares
* NCBO means no change in beneficial ownership.
(b) Directors’ interests in transactions General disclosures As at 30 June 2009, the following directors had made the following general disclosures in the interests register of the company. Notices given or adjusted during the financial year ended 30 June 2009 are marked with an asterisk (*). Each such director will be regarded as interested in all transactions between Contact and the disclosed entity.
G King Origin Energy Limited and Group companies Managing Director/Shareholder/Employee Energy Supply Association of Australia Limited (resigned in November 2008)* Director/Chairman Australian Petroleum Production and Exploration Association Councillor 38 Contact Energy Limited Annual Report 2009
P Pryke ComTel Corporation Limited* Director/Chairman Co-Investor Capital Partners Pty Limited Director/Shareholder Frog Hollow Limited Director/Shareholder Goodman (NZ) Limited Director Goodman Property Aggregated Limited Director New Zealand Deer Farms Limited Director/Shareholder Novotech Pty Limited (resigned as director in October 2008)* Director Pauatahanui Projects Limited Director/Shareholder Pryke Pty Limited Director/Shareholder Tru-Test Corporation Limited* Director Tru-Test Pty Limited Alternate Director
D Baldwin Origin Energy Limited* Employee
B Beeren Origin Energy Limited and Group companies Director/Shareholder and former Employee/Executive Director Coal & Allied Industries Limited Director Equipsuper Pty Limited Director ConnectEast Group* Director
J Milne The New Zealand Wine Company Limited (including various wholly owned subsidiaries) (resigned as a director in October 2008)* Director/Shareholder The He Huarahi Tamariki Trust Chairman/Trustee Wellington City Council Audit and Risk Management Subcommittee Independent Member
K Moses Origin Energy Limited and Group companies (appointed to Origin Energy Director/Employee/Shareholder Limited directorship March 2009)* Australian Energy Market Operator (Transitional) Limited* Director CSIRO, Energy and Transport Sector Advisory Council Committee Member UNSW, Australian School of Business Advisory Council* Energy and Water Ombudsman (Victoria) Limited Director Victorian Energy Networks Corporation (ceased operation in June 2009)* Director
S Sheldon CNZM Christchurch International Airport Limited* Deputy Chairman Electronic Transaction Services Limited* Director FibreTech New Zealand Limited* Chairman Freightways Limited* Director National Provident Fund Board of Trustees* Chairman Reserve Bank of New Zealand* Director Sue Sheldon Advisory Limited* Director Smiths City Group Limited and subsidiaries* Director Wool Industry Network Limited* Chairman Wool Grower Holdings Limited* Director
T Saunders Global Corporate Credit Limited (resigned as a director in February 2009)* Director L.E.K. Consulting Australasian Advisory Board Advisory Board Member Contact Energy Limited Annual Report 2009 39
Specific disclosures There were no specific disclosures made during the year of any interests in transactions entered into by Contact or any of its subsidiaries.
(c) Use of company information No director issued a notice requesting to use information received in his or her capacity as a director that would not otherwise be available to the director.
(d) Board-approved remuneration and other benefits The Board passed resolutions and signed accompanying certificates to confirm the distribution for the year ended 30 June 2009 amongst directors of a portion of the $1,500,000 remuneration pool (that pool having been approved by shareholders at the 2008 Annual Meeting). See page 40 for further details about the distribution approved by the Board.
(e) Directors’ and employees’ indemnity and insurance Contact has agreed to indemnify Contact’s employees and directors, including directors of subsidiary and associated companies, against any liability or costs incurred in any proceeding, excluding actions for gross negligence, criminal liability, breach of fiduciary duty or breach of directors’ duties. Contact has paid premiums and taken out comprehensive insurance cover, including insurance policies that indemnify employees and directors, including directors of subsidiaries and associates, against various potential legal liabilities. In March 2009, Contact’s Board authorised the renewal of the Directors and Officers and Statutory Liability Insurance covers as at 31 March 2009 until 31 December 2009 and certified, in terms of section 162 of the Companies Act 1993, that this cover is fair to the company. 40 Contact Energy Limited Annual Report 2009
Remuneration report
Directors’ remuneration Directors’ fees The current total directors’ fee pool is $1,500,000 per annum. A total of $852,651 was distributed in respect of the year ended 30 June 2009 as follows: • Base director fees: $679,445, distributed as follows: - Chairman (Grant King) – $200,000 per annum, paid with effect from 1 November 2008. - Deputy Chairman (Phillip Pryke) – $150,000 per annum. - Other non-executive directors – $100,000 per annum each (note that Karen Moses’s fees were paid with effect from 1 November 2008 and Sue Sheldon’s fees were paid with effect from 16 March 2009). - Managing Director (David Baldwin) – Nil. • Committee fees: $173,206, distributed as follows: - $22,500 and $17,500 was distributed to John Milne and Bruce Beeren respectively for their additional workload as members of the Due Diligence Committee for Contact’s March 2009 retail bond issue. - $50,000 was distributed to John Milne in his capacity as Chair of the Board Audit Committee. - $83,206 was distributed as committee fees.
Directors’ restricted share scheme Contact operates a directors’ restricted share scheme (Directors’ Share Scheme), approved by shareholders in 2004 to improve the alignment of directors’ and shareholders’ interests. Instead of receiving all of their pre-tax base directors fees in cash, those directors participating in the Directors’ Share Scheme receive one-third of that amount by way of Contact shares that are restricted for a period of three years or until a director ceases to hold office. Directors are not otherwise entitled to any payment in connection with their retirement or cessation of office. The directors participating in the Directors’ Share Scheme during the financial year were Grant King, Phillip Pryke, Bruce Beeren, John Milne, Karen Moses, Sue Sheldon and Tim Saunders. Grant King and Karen Moses joined the Directors’ Share Scheme effective from 1 November 2008 (the date they commenced receiving director fees), and Sue Sheldon joined effective from 16 March 2009. Tim Saunders’s participation in the Directors’ Share Scheme ceased following the final share purchase on 17 August 2009, using his director fees from the quarter ended 30 June 2009. Under the Directors’ Share Scheme, at the end of each quarter, Contact pays to a trustee on behalf of each participant one-third of the pre-tax base remuneration accrued by the participant during that quarter. The trustee uses the payment to purchase Contact shares on-market through a broker. This trading may only take place during a period that is not a specified blackout period to ensure compliance with the company’s Securities Trading Policy. The trustee is then required to hold the shares purchased until the earlier of three years from the commencement of the quarter immediately following the quarter in which the fees were accrued, and the date of the director ceasing to hold office. On transfer by the trustee to the participant at this time, the participant is entitled to sell the shares, subject to Securities Trading Policy requirements. Throughout the time that the shares are held by the trustee, the participant is entitled to receive distributions and participate in other rights attaching or accruing to the shares, subject to any particular restrictions set out in the Directors’ Share Scheme or elsewhere. During the financial year ended 30 June 2009, Contact provided financial assistance in connection with the ongoing operation of the scheme. A disclosure document relating to the financial assistance to be provided over the next 12 months was sent to shareholders in September 2009 and is available on the company’s website. Contact Energy Limited Annual Report 2009 41
The table below details the restricted shares of each of Contact’s directors that became unrestricted under the Directors’ Share Scheme during the financial year ended 30 June 2009.
Name Date of acquisition Date unrestricted Number unrestricted Original acquisition price
Phillip Pryke 16 November 2005 27 August 2008 1,694 $6.67 16 November 2005 3 October 2008 1,695 $6.67 21 February 2006 25 February 2009 1,547 $7.29 28 August 2006 1 April 2009 1,653 $6.84
John Milne 16 November 2005 27 August 2008 1,129 $6.67 16 November 2005 3 October 2008 1,130 $6.67 21 February 2006 25 February 2009 1,031 $7.29 28 August 2006 1 April 2009 1,102 $6.84
Tim Saunders 16 November 2005 27 August 2008 1,129 $6.67 16 November 2005 3 October 2008 1,130 $6.67 21 February 2006 25 February 2009 1,031 $7.29 28 August 2006 1 April 2009 1,102 $6.84
Bruce Beeren 21 February 2006 25 February 2009 1,032 $7.29 28 August 2006 1 April 2009 1,102 $6.84
Remuneration details of directors Details of the total remuneration and the value of other benefits received by each director of Contact in their capacity as a director during the financial year ended 30 June 2009 are as follows:
Director Position Board fees Committee fees Total remuneration5
Cash Restricted shares Cash
G King1 Chairman $88,889 $44,444 – $133,333 P Pryke Deputy Chairman $100,000 $50,000 – $150,000 D Baldwin2 Managing Director – – – – B Beeren Director $66,667 $33,333 $44,714 $144,714 J Milne Director $66,667 $33,333 $77,500 $177,500 K Moses1 Director $44,445 $22,222 $10,000 $76,667 S Sheldon3 Director $19,630 $9,815 $7,842 $37,287 T Saunders Director $66,667 $33,333 $33,150 $133,150
Total $452,965 $226,4804 $173,206 $852,651
1 Grant King and Karen Moses received director fees with effect from 1 November 2008. 2 As an executive, David Baldwin does not receive fees in his capacity as a director. See page 42 for details of David Baldwin’s remuneration. 3 Sue Sheldon became a director on 16 March 2009. 4 Due to trading period restrictions under Contact’s Securities Trading Policy, purchases of restricted shares valued at $72,314 of this total amount occurred on 17 August 2009. 5 Pursuant to Contact’s constitution, directors are not entitled to any payment in connection with their retirement or cessation of office. 42 Contact Energy Limited Annual Report 2009
Executive remuneration There are two components to executive remuneration – fixed remuneration and at-risk/variable remuneration. The determination of fixed remuneration is based on responsibilities, individual performance and experience, and market data. At-risk/variable remuneration comprises short term incentives and, for senior and key employees, long term incentives.
Managing Director remuneration David Baldwin, Managing Director of Contact, has been seconded to the role by his employer, Origin Energy Limited. During the term of the secondment, Contact will reimburse Origin Energy Limited for the cost of David Baldwin’s salary and other employment benefits, except for restricted shares and options, which are provided directly by Contact. David Baldwin does not receive any director fees. The following table details the nature and amount of the remuneration earned by David Baldwin for the year ended 30 June 2009.
Remuneration paid Equity rights (options and restricted shares)1
Value of Value of equity equity rights rights issued in Number of issued and past years Fixed Variable Number restricted amortising amortising David Baldwin remuneration remuneration2 Total of options shares during year4 during year4 Total Managing Director $ $ $ issued3 issued3 $ $ $
Year ended 30 June 2009 838,856 246,000 1,084,856 220,652 31,020 143,030 395,642 1,623,528
Year ended 30 June 2008 725,000 431,375 1,156,375 98,485 17,269 81,250 268,333 1,505,958
1 Although options and restricted shares are granted in October each year, they pertain to the at-risk component of the prior financial year’s remuneration. 2 Variable remuneration for the financial year is based on achieving personal goals and satisfying specific performance criteria. The short term incentive is for performance during the relevant financial year. The amount was determined following the end of the relevant financial year after performance reviews. 3 Contact Energy Limited equity securities. 4 Options and restricted shares are subject to performance hurdles as described on page 48. The fair value of the options is calculated at the date of grant using a combination of Monte-Carlo simulation and binomial option pricing model. Restricted shares are valued based on the market price at date of grant adjusted for distributions that are not received until the restricted share vests. The value disclosed is the portion of the fair value of the equity rights allocated to the relevant reporting period. Options and restricted shares will only be convertible into ordinary unrestricted shares to the extent that performance hurdles are met. No options or ordinary shares vested in the 2008 or 2009 financial year.
David Baldwin has participated in Contact’s long term incentive scheme for employees (LTI Scheme) since its inception. Contact relies on NZSX Listing Rule 7.3.9 to allow Mr Baldwin to continue to participate in the LTI Scheme following his appointment as Managing Director. On 23 July 2009, NZX Regulation granted a waiver in respect of NZSX Listing Rule 7.6.4(b)(iii) to allow Mr Baldwin to continue to receive financial assistance under the LTI Scheme. The full version of the waiver can be found on the company’s website. Contact Energy Limited Annual Report 2009 43
Movement during the reporting period in the number of options over ordinary shares and restricted shares held in Contact Energy Limited is set out in the following tables.
Restricted shares Held at 1 July 2008 Granted as compensation Vested during the year Held at 30 June 2009
David Baldwin Managing Director 57,322 31,020 – 88,342
Vested and Held at Granted as Held at Vested during excercisable at Options 1 July 2008 compensation Exercised 30 June 2009 the year 30 June 2009
David Baldwin Managing Director 304,895 220,652 – 525,547 – –
Short term incentives Contact’s variable remuneration recognises and rewards high-performing individuals whose contribution supports business goals and objectives, whilst meeting the goals set for the individual. Contact’s short term incentives (STIs) comprise cash payments based on performance measured against key performance indicators (KPIs). For the year ended 30 June 2009, different levels of incentives were determined reflecting the nature of roles in the company. KPIs generally comprise company, team and individual targets. These targets are designed to create goals that will support an achievement and performance-oriented culture. The STI programme is designed to differentiate and reward exceptional, outstanding and good performance. The Board reserves the right to adjust STI awards if health, safety and environment targets are not met.
Long term incentives The principal objective of long term incentives is to align executives’ performance with shareholder interests and provide equity-based incentives that help retain valuable employees.
Legacy Long Term Incentive Scheme Up until 30 June 2006, because a review was pending, only a limited number of senior executives participated in the then-existing long term incentive scheme (Legacy LTI Scheme). Upon completion of that review, a new employee long term incentive scheme was introduced for the year ended 30 June 2007 and beyond. Following the satisfaction of performance hurdle measurements, shares were purchased on-market for the benefit of participants in the Legacy LTI scheme in August 2007 and August 2008. Those share purchases were disclosed in the 2008 Annual Report. No further shares were purchased during the financial year. There will be six-monthly reassessments of performance in relation to hurdles not met until 30 June 2010. Therefore, within the next 12 months, Contact may provide financial assistance for both the purchase of the shares on-market and in connection with the ongoing operation of the scheme. A disclosure document relating to this financial assistance was sent to shareholders in September 2009 and is available on the company’s website. 44 Contact Energy Limited Annual Report 2009
Employee Long Term Incentive Scheme In formulating the new employee long term incentive scheme (LTI Scheme) in 2006, Contact determined that a combination of share options and restricted shares was desirable to ensure incentives align senior and key employees’ performance with shareholders’ interests, both in favourable and unfavourable sharemarket conditions. Therefore, for the year ended 30 June 2007 and beyond, Contact introduced a new employee long term incentive plan for participating employees – consisting of a Share Option Plan and a Restricted Share Plan (together, the ‘Plans’). Details of the Plans are set out below. The Board determined that long term incentives should be awarded to reflect individual participants’ performance in the preceding financial year and potential in future years. Under the Plans, for the year ended 30 June 2009, the Board allocated long term incentive awards that are, by value, 50 per cent share options and 50 per cent restricted shares. Under the Plans, the share options will only be exercisable, and the restricted shares will only become unrestricted, to the extent that the relevant performance hurdles are satisfied. The performance hurdles for the share options and restricted shares in relation to the year ended 30 June 2009 are set out on page 48. The number of share options and restricted shares awarded are calculated by dividing the value of the long term incentive award (being a percentage of the relevant participant’s salary) by the fair value of the share options and restricted shares. In the year ended 30 June 2009, there were 19 participants in the LTI Scheme. The Board intends to extend participation in the LTI Scheme to approximately 40 additional senior and key employees of the company in the October 2009 allocation of share options and restricted shares. The Board has decided to expand the current LTI Scheme to these additional individuals, in order to acknowledge not only their present worth to the business, but also their potential to add significant future value. This will bring the total number of participants under the LTI Scheme to approximately 60 employees.
Share Option Plan Under the Share Option Plan, the Board issues share options to participants to acquire ordinary shares in Contact at the market price determined at the effective grant date. For share options granted in the year ended 30 June 2009, the market price was the weighted average market price of Contact’s ordinary shares traded on the NZSX over the 20 business days prior to the effective grant date. As noted above, the options are exercisable subject to performance hurdles as determined by the Board. The performance hurdles for share options issued in the year ended 30 June 2009 are described on page 48. There is a vesting period of approximately three years from the effective grant date before share options may be exercised. Following the end of that period, the performance hurdles are measured on three annual test dates. There is a two-year, two-month exercise period following the first test date during which share options may be exercised, again, to the extent that the performance hurdles are met. The share options may also be exercised if, between the effective grant date and the exercise date, a change of control of Contact occurs. In addition, the Board may, at its discretion, permit share options to be exercised prior to the commencement of the relevant exercise period where Contact shares cease to be listed on the NZSX or other circumstances occur where such an early exercise is considered appropriate by the Board. Contact Energy Limited Annual Report 2009 45
The share options will lapse: • if the performance hurdles are not met by the final measurement date • if the share options are not exercised by the lapse date • on the date on which the participant ceases to be employed by the company (except in the case of redundancy), or • on the death of the participant (provided however, that the Board may, in its discretion, allow the participant’s successor to exercise the share options). In the event of redundancy, the Share Option Plan will continue, except that the number of share options will be recalculated on a proportionate basis. The share options are unlisted and are personal to the employee and therefore cannot be traded. In May 2007, NZX Regulation granted approval under NZSX Listing Rule 8.1.4 for the issue of share options under the Share Option Plan with effective grant dates of 1 July 2006 and 20 November 2006. NZX Regulation also granted a ruling that NZSX Listing Rule 7.10 (being additional requirements for rights issues) does not apply to the granting of share options under the Share Option Plan. The full version of the waiver and approval can be found on the company’s website. The number of options issued and their exercise status as at the date of this report are set out in the table below.
Exercise Number of Effective price per Number Number options issued grant date option First exercise date lapsed Final lapse date Vested exercisable
365,322 1 July 2006 $7.35 1 October 2009 81,2451 30 November 2011 No Nil
18,361 20 November 2006 $7.55 1 October 2009 18,3612 30 November 2011 No Nil
13,413 15 January 2007 $8.28 1 October 2009 Nil 30 November 2011 No Nil
490,326 1 October 2007 $9.15 1 October 2010 176,2953 30 November 2012 No Nil
22,706 1 February 2008 $7.63 1 October 2010 7,6984 30 November 2012 No Nil
881,769 1 October 2008 $8.60 1 October 2011 210,8505 30 November 2013 No Nil
1 Due to the cessation of employment of participants, options from this tranche lapsed pursuant to the Share Option Plan Rules on the following dates: 7 September 2007 (14,103 options), 30 June 2008 (20,513 options), 2 July 2008 (13,808 options) and 31 July 2009 (32,821 options). 2 Due to the cessation of employment of participants, all 18,361 options from this tranche lapsed pursuant to the Share Option Plan Rules on 31 December 2008. 3 Due to the cessation of employment of participants, options from this tranche lapsed pursuant to the Share Option Plan Rules on the following dates: 3 December 2007 (6,591 options), 2 April 2008 (18,136 options), 30 June 2008 (20,000 options), 2 July 2008 (33,656 options), 31 December 2008 (47,457 options) and 31 July 2009 (50,455 options). 4 Due to the cessation of employment of participants, 7,698 options from this tranche lapsed pursuant to the Share Option Plan Rules on 24 December 2008. 5 Due to the cessation of employment of participants, options from this tranche lapsed pursuant to the Share Option Plan Rules on the following dates: 24 December 2008 (19,871 options), 31 December 2008 (57,065 options) and 31 July 2009 (133,914 options). 46 Contact Energy Limited Annual Report 2009
Restricted Share Plan Under the Restricted Share Plan, the Board issues restricted shares to the participants at the market price determined at the effective grant date. Although the participant has beneficial title to the restricted shares, under the terms of the Restricted Share Plan: • the restricted shares are issued to a trustee to be held on trust for the participant, and • the trustee will not exercise any voting rights attaching to the restricted shares and has forgone the right to distributions. Legal title cannot be transferred to the participant, and therefore traded by the participant, unless and until the restricted shares become unrestricted. For restricted shares issued in the year ended 30 June 2009, the market price or allocation price of the restricted shares was the weighted average market price of Contact’s ordinary shares traded on the NZSX over the 20 business days prior to the effective grant date. Payment of the allocation price for the restricted shares was funded by an interest-free loan from the company in an amount equal to the allocation price for the shares. Financial assistance disclosures were sent to shareholders in September 2009 and are available on the company’s website. If the performance hurdles are met, the restricted shares will be released from the trust to the participant following the relevant test date. There is a vesting period of approximately three years from the effective grant date before restricted shares that vest may be released from the restrictions and transferred to the participant. Following the end of that period, the exercise hurdles are measured on three annual test dates. To the extent the hurdles are met on each of these test dates, restricted shares must be released from the restrictions and transferred from the trustee to the participant. For restricted shares that a participant becomes entitled to, the company pays a taxable bonus, out of which the participant must repay the loan. Upon repayment of the loan, the trustee transfers legal title to the restricted shares to the participant. The participants must transfer to the trustee their rights to any restricted shares that have not been released to the participant by the final test date. The allocation price for those restricted shares transferred to the trustee will be applied to the trustee to immediately repay the loan to the company. The restricted shares may be released from the restrictions and transferred to the participants if, between the grant date and a test date, a change of control of Contact occurs. The rights to the restricted shares will lapse: • if the performance hurdles are not met by the final test date • on the date on which the participant ceases to be employed by the company (except in the case of redundancy), or • on the death of the participant (provided, however, that the Board may, in its discretion, allow legal title to the restricted shares to be transferred to the participant’s successors). In the event of redundancy, the Restricted Share Plan will continue, except that the number of restricted shares will be recalculated on a proportionate basis. While restricted, the restricted shares are unlisted and are personal to the employee and therefore cannot be traded nor used for security. Contact Energy Limited Annual Report 2009 47
In May 2007, NZX Regulation granted approval under NZSX Listing Rule 8.1.4 for the issue of restricted shares under the Restricted Share Plan with effective grant dates of 1 July 2006 and 20 November 2006. NZX Regulation also granted an ongoing waiver from NZSX Listing Rule 8.1.3 for issues of reallocated shares under the Restricted Share Plan (being those restricted shares that are not released to a participant at the final transfer date, but are instead purchased by the trustee and then reallocated to a participant). The full version of the waiver and approval can be found on the company’s website. The number of restricted shares issued and their status as at the date of this report are set out in the table below.
Number of Number Number restricted reallocated from Allocation transferred to shares unallocated pool Effective price per unallocated pool Number issued (see following) grant date share First test date Final test date (see following) released
70,890 Nil 1 July 2006 $7.35 1 October 2009 1 October 2011 15,765 Nil 3,581 Nil 20 November 2006 $7.55 1 October 2009 1 October 2011 3,581 N/A 2,504 Nil 15 January 2007 $8.28 1 October 2009 1 October 2011 Nil Nil 83,242 2,737 1 October 2007 $9.15 1 October 2010 1 October 2012 30,913 Nil 3,091 1,156 1 February 2008 $7.63 1 October 2010 1 October 2012 1,440 Nil 104,712 19,247 1 October 2008 $8.60 1 October 2011 1 October 2013 29,641 Nil
Pursuant to the Restricted Share Plan rules, where a participant ceases employment, beneficial ownership of restricted shares is transferred to the trustee to hold on trust in an unallocated pool to be reallocated to a participant at a future date. As at the date of this report, there were 58,200 restricted shares held by the trustee in the unallocated pool. The following table sets out the movements of the unallocated pool to the date of this report.
Number of restricted Number of shares shares transferred to Date of transfer to reallocated to a Date of reallocation to Original issue date unallocated pool unallocated pool participant participant
21 June 2007 2,737 7 September 2007 2,737 31 October 2007 3,980 30 June 2008 3,980 11 November 2008 2,679 2 July 2008 2,679 11 November 2008 3,581 31 December 2008 Nil N/A 6,369 31 July 2009 Nil N/A
31 October 2007 1,156 3 December 2007 1,156 25 February 2008 3,180 2 April 2008 3,180 11 November 2008 3,507 30 June 2008 3,507 11 November 2008 5,901 2 July 2008 5,901 11 November 2008 8,322 31 December 2008 Nil N/A 8,847 31 July 2009 Nil N/A
25 February 2008 1,440 24 December 2008 Nil N/A
11 November 2008 2,794 24 December 2008 Nil N/A 8,022 31 December 2008 Nil N/A 18,825 31 July 2009 Nil N/A 48 Contact Energy Limited Annual Report 2009
Hurdles Broadly, the number of unrestricted ordinary shares to which a participant is entitled under the Plans is determined by achievement of a predetermined hurdle or hurdles. For the restricted shares and share options issued in the year ended 30 June 2009, the hurdle is a comparison of Contact’s total shareholder return (TSR) against the average TSR of a reference group comprising the NZX50 index over the relevant period, commencing on the effective grant date. For the restricted shares and share options issued in the year ended 30 June 2009, participants’ vesting entitlements will be calculated on three test dates, being 1 October 2011, 1 October 2012 and 1 October 2013. Contact’s TSR will be determined as follows: (i) The volume weighted average market price of Contact ordinary shares for the three months prior to the effective grant date is subtracted from the price of the shares as determined by measuring the volume weighted average market price of the shares over the three-month period prior to the relevant test date. (ii) Adjusting the calculation in (i) above to reflect the assumed reinvestment of distributions (excluding imputation credits) over the period from the effective grant date to the relevant test date. The participant’s vesting entitlements will be based on a predetermined formula relative to achievement of the predetermined hurdle or hurdles. For the restricted shares and share options issued in the year ended 30 June 2009, these are: (i) zero per cent vesting, if Contact’s TSR over the performance period does not exceed the 50th percentile of the TSR of those companies that are in the NZX50 at both grant date and the relevant test date (ii) 50–100 per cent vesting (on a sliding scale, i.e. the percentage of restricted shares released/share options exercisable increases proportionately on a straight-line sliding scale from the 50th up to the 75th percentile), if Contact’s TSR is between the 50th percentile and the 75th percentile TSR of those companies that are in the NZX50 at both grant date and the relevant test date (iii) 100 per cent vesting, if Contact’s TSR is at or above the 75th percentile TSR of those companies that are in the NZX50 at both grant date and the relevant test date. Contact Energy Limited Annual Report 2009 49
Employee remuneration The following table shows the number of employees Number of employees and former employees of Contact who, in their capacity Remuneration bands Parent Subsidiaries as employees, received remuneration and other benefit entitlements (including redundancy payments) during $100,000–$110,000 45 – the year ended 30 June 2009 of at least $100,000. As at $110,001–$120,000 49 – 30 June 2009, no Contact subsidiary held any employees. $120,001–$130,000 44 – $130,001–$140,000 18 – The remuneration figures analysed include all monetary $140,001–$150,000 17 – payments actually paid during the course of the year $150,001–$160,000 18 – ended 30 June 2009, including the short term variable $160,001–$170,000 11 – remuneration relating to the 30 June 2008 financial year. – The figures do not include amounts paid post 30 June 2009 $170,001–$180,000 6 – that related to the period ended 30 June 2009. $180,001–$190,000 5 $190,001–$200,000 7 – The value of remuneration benefits analysed includes $200,001–$210,000 6 – both fixed, short term and long term variable/risk $210,001–$220,000 3 – components of remuneration, and redundancy and other $220,001–$230,000 2 – payments made on termination of employment. The value $230,001–$240,000 4 – of the equity-based incentives included in the remuneration $240,001–$250,000 6 – band analysis represents the portion of the grant date fair $250,001–$260,000 2 – value of the equity instruments allocated to the reporting $260,001–$270,000 1 – period ended 30 June 2009. $270,001–$280,000 1 – The remuneration (and any other benefits) of the Managing $280,001–$290,000 1 – Director, David Baldwin, is disclosed in the Managing $310,001–$320,000 1 – Director remuneration section on page 42. $340,001–$350,000 1 – $360,001–$370,000 1 – $370,001–$380,000 2 – $440,001–$450,000 1 – $450,001–$460,000 1 – $490,001–$500,000 2 – $540,001–$550,000 1 – $550,001–$560,000 1 – $560,001–$570,000 1 – $580,001–$590,000 1 – $620,001–$630,000 1 – $730,001–$740,000 1 –
Total 261 – 50 Contact Energy Limited Annual Report 2009
Contact subsidiaries – directors and remuneration Other than Paul Smith, who received the Australian dollar equivalent of $57,489 in the year ended 30 June 2009 in his capacity as a consultant to Contact Australia Pty Limited and Contact Operations Australia Pty Limited, no other director of any of Contact’s subsidiaries received additional remuneration or benefits in respect of their directorships. The table below lists the directors of Contact subsidiary companies as at 30 June 2009.
Contact subsidiary Directors
Contact Aria Limited David Baldwin Elizabeth Kelly
Contact Australia Pty Limited David Baldwin Elizabeth Kelly Paul Smith
Contact Operations Australia Pty Limited David Baldwin Elizabeth Kelly Paul Smith
Contact Wind Limited David Baldwin Mark Trigg Alistair Yates
Empower Limited1 David Baldwin Jason Delamore
Rockgas Limited2 David Baldwin Mark Trigg
Rockgas Holdings Limited2 David Baldwin Mark Trigg
Stratford Power Limited3 Elizabeth Kelly Mark Trigg
1 Kim Josling was a director of Empower Limited until 13 March 2009, when she was replaced by David Baldwin. 2 John Cumming was a director of Rockgas Limited and Rockgas Holdings Limited until 22 December 2008. 3 Kim Josling was a director of Stratford Power Limited until 13 March 2009, when she was replaced by Elizabeth Kelly.
Effective from 31 July 2009, Mark Trigg resigned as a director of Contact Wind Limited, Rockgas Limited, Rockgas Holdings Limited and Stratford Power Limited. Graham Cockroft was appointed as a director of Contact Wind Limited on 31 July 2009. Contact Energy Limited Annual Report 2009 51
Security holder information
The following information is provided in accordance with the Listing Rules of New Zealand Exchange Limited.
20 largest registered holders of Quoted Equity Securities as at 3 August 2009 (including holdings within New Zealand Central Securities Depository Limited)
Origin Energy Pacific Holdings Limited 296,487,002 HSBC Nominees (New Zealand) Limited A/C State Street 23,451,830 National Nominees New Zealand Limited 23,024,228 New Zealand Superannuation Fund Nominees Limited 15,072,756 Accident Compensation Corporation 9,674,910 Citibank Nominees (New Zealand) Limited 7,999,557 Premier Nominees Limited – ING Wholesale Australasian Share Fund 6,769,380 Custodial Services Limited 5,827,956 NZGT Nominees Limited – AIF Equity Fund 5,793,463 Tea Custodians Limited 5,071,853 HSBC Nominees (New Zealand) Limited 4,669,907 FNZ Custodians Limited 3,724,884 Origin Energy Universal Holdings Limited 3,670,257 AMP Investments Strategic Equity Growth Fund 3,265,154 Asteron Life Limited 3,046,537 ANZ Nominees Limited 2,833,268 Investment Custodial Services Limited 2,783,064 Custody and Investment Nominees Limited 2,681,746 Masfen Securities Limited 2,544,863 Guardian Trust Investment Nominees (RWT) Limited 2,383,476
Total top 20 holders (excluding Treasury Stock) 430,776,091 Total other shares (excluding Treasury Stock) 154,538,533 Total issued shares1 (excluding Treasury Stock) 585,314,624 Total Treasury Stock (held by Contact Energy Limited) 2,571,104
Total issued shares1 587,885,728
1 Calculations exclude 268,020 restricted ordinary shares issued pursuant to Contact’s employee long term incentive scheme. 52 Contact Energy Limited Annual Report 2009
Distribution of Quoted Security Holders and security holdings as at 3 August 2009 Ordinary Shares
Size of holding Number of holders % of holders Number of shares1 % of shares
1 – 99 shares 847 1.02 22,446 0.00 100 – 199 shares 565 0.68 80,430 0.01 200 – 499 shares 14,061 16.90 5,368,663 0.92 500 – 999 shares 37,419 44.97 28,718,069 4.91 1,000 – 1,999 shares 17,703 21.27 21,037,904 3.59 2,000 – 4,999 shares 8,187 9.84 24,393,202 4.17 5,000 – 9,999 shares 2,874 3.45 18,353,359 3.14 10,000 – 49,999 shares 1,403 1.69 22,985,083 3.93 50,000 – 99,999 shares 70 0.08 4,621,363 0.79 100,000 – 499,999 shares 50 0.06 9,616,796 1.64 500,000 – 999,999 shares 7 0.01 5,228,028 0.89 1,000,000 shares and above 29 0.03 444,889,281 76.01
Total 83,215 100.00 585,314,624 100.00
1 Calculations are based on the number of ordinary shares quoted and listed on the New Zealand Stock Market as at 3 August 2009 and exclude 2,571,104 ordinary shares held as treasury stock and 268,020 restricted ordinary shares issued pursuant to Contact’s employee long term incentive scheme.
Bonds
Size of holding Number of holders % of holders Number of bonds % of bonds
5,000 – 10,000 bonds 2,974 31.44 25,096,000 4.56 10,001 – 25,000 bonds 2,977 31.47 58,987,000 10.72 25,001 – 50,000 bonds 2,321 24.53 96,001,000 17.46 50,001 – 100,000 bonds 766 8.10 67,988,000 12.36 100,001 – 500,000 bonds 360 3.80 85,353,000 15.52 500,001 – 1,000,000 bonds 32 0.34 28,658,000 5.21 1,000,001 bonds and above 30 0.32 187,917,000 34.17
Total 9,460 100.00 550,000,000 100.00 Contact Energy Limited Annual Report 2009 53
Substantial security holders As at 1 August 2009, the following persons had notified the company in accordance with the Securities Markets Act 1988 that they were currently substantial security holders in the company.
Nature of relevant Number of listed Substantial security holder interest voting securities Class
Origin Energy New Zealand Limited and its related bodies corporate (including Shareholder 300,956,306 Ordinary shares Origin Energy Limited and Origin Energy Vic Holdings Limited)
The total number of shares of Contact as at 1 August 2009 was 588,153,748, consisting of 585,314,624 listed ordinary shares, 2,571,104 ordinary shares held as treasury stock and 268,020 restricted ordinary shares issued pursuant to the Contact Energy employee long term incentive scheme (the treasury stock and restricted ordinary shares are not tradeable and are not listed or quoted on the NZSX). The ordinary shares and restricted ordinary shares are voting securities, except the trustee holding the restricted ordinary shares on behalf of the participants has waived all voting rights in relation to those shares. The shares held as treasury stock are not voting securities. Accordingly, the total number of listed voting securities of Contact as at 1 August 2009 was 585,314,624.
Securities of the company in which each director has a relevant interest as at 30 June 2009
Number of Number of restricted Number of Director ordinary shares Number of bonds ordinary shares options
G King 4,781 Nil N/A N/A P Pryke 89,282 Nil N/A N/A D Baldwin Nil Nil 88,342 525,547 B Beeren 14,881 Nil N/A N/A J Milne 89,379 150,000 N/A N/A K Moses 2,390 Nil N/A N/A S Sheldon 540 10,000 N/A N/A T Saunders 30,665 Nil N/A N/A
Directors’ statement This Annual Report is dated 4 September 2009 and is signed on behalf of the Board by
G King P Pryke Chairman Deputy Chairman 54 Contact Energy Limited Annual Report 2009 Contact Energy Limited Annual Report 2009 55
Financial Statements for the year ended 30 June 2009
Income Statement Statement of Changes in Equity Balance Sheet Statement of Cash Flows Notes to the financial statements 1 Statement of accounting policies 2 Underlying earnings after tax 3 Impairment of Gasbridge assets 4 New Plymouth power station 5 Sale of Mokai geothermal land and rights 6 Segment reporting 7 Operating expenses 8 Net interest expense 9 Income tax 10 Distributions and dividends 11 Earnings and net tangible assets per share 12 Share capital 13 Reserves 14 Share-based payments 15 Cash and cash equivalents 16 Receivables and prepayments 17 Inventories 18 Property, plant and equipment 19 Intangible assets 20 Gas storage – cushion gas 21 Investment in jointly controlled entity 22 Investment in subsidiaries 23 Investment in associates 24 Available-for-sale financial assets 25 Borrowings 26 Financial instruments 27 Payables and accruals 28 Provisions 29 Deferred tax 30 Commitments 31 Resource consents 32 Related party transactions 33 Key management personnel 34 Whirinaki generation plant 35 Contingent liabilities 36 Subsequent events Audit report 56 Contact Energy Limited Annual Report 2009
Contact Energy Limited and Subsidiaries
Income Statement for the year ended 30 June 2009
Group Group Parent Parent 30 June 2009 30 June 2008 30 June 2009 30 June 2008 Note $000 $000 $000 $000
Operating revenue Wholesale electricity revenue 594,267 1,147,988 594,267 1,147,988 Retail electricity revenue 1,286,265 1,244,326 1,086,197 1,010,846 Gas revenue 154,962 181,520 154,962 207,319 LPG revenue 153,779 145,233 – – Steam revenue 12,927 11,038 12,927 11,038 Other revenue 19,984 26,620 35,280 42,733
2,222,184 2,756,725 1,883,633 2,419,924 Operating expenses Electricity purchases (544,234) (954,923) (477,501) (792,581) Electricity transmission, distribution and levies (479,122) (486,843) (412,519) (407,903) Gas purchases and transmission (399,533) (412,430) (400,804) (439,152) LPG purchases (112,078) (105,207) – – Labour costs 7 (80,396) (82,191) (73,499) (70,531) Other operating expenses 3, 7 (161,562) (147,967) (151,411) (129,694)
(1,776,925) (2,189,561) (1,515,734) (1,839,861)
Earnings before net interest expense, income tax, depreciation, amortisation, financial instruments and other significant items (EBITDAF) 445,259 567,164 367,899 580,063
Depreciation and amortisation 18, 19 (161,954) (146,540) (156,811) (141,400) Impairment of Gasbridge assets 3 (2,830) – – – Equity accounted earnings of associates 23 3,624 2,793 – – Change in fair value of financial instruments 26 (57,511) (1,926) (57,511) (1,926) Removal of New Plymouth asbestos and related costs 4 – (33,747) – (33,747) Gain on sale of Mokai geothermal land and rights 5 – 21,319 – 21,319
(218,671) (158,101) (214,322) (155,754)
Earnings before net interest expense and income tax (EBIT) 226,588 409,063 153,577 424,309 Net interest expense 8 (62,601) (69,942) (62,492) (69,851)
Profit before income tax 163,987 339,121 91,085 354,458 Income tax expense 9 (46,451) (102,055) (27,497) (106,142)
Profit for the year 117,536 237,066 63,588 248,316
Basic and diluted earnings per share (cents) 11 20.02 40.33 10.83 42.24
Supplementary disclosure Underlying earnings after tax is presented to allow readers to make an assessment and comparison of underlying earnings after removing significant one-off items and the non-cash change in fair value of financial instruments.
Underlying earnings after tax 2 160,624 232,798 108,991 243,980
Underlying earnings per share (cents) 11 27.35 39.60 18.56 41.50
The accompanying notes form an integral part of these financial statements. Contact Energy Limited Annual Report 2009 57
Contact Energy Limited and Subsidiaries
Statement of Changes in Equity for the year ended 30 June 2009
Group Group Parent Parent 30 June 2009 30 June 2008 30 June 2009 30 June 2008 Note $000 $000 $000 $000
Profit for the year 117,536 237,066 63,588 248,316 Change in foreign currency translation reserve 13 (86) 346 – – Change in asset revaluation reserve 13 (2,307) (2,335) (2,307) (2,335) Change in cash flow hedge reserve 13 35,619 (74,572) 35,495 (75,008)
Total recognised revenues and expenses for the year 150,762 160,505 96,776 170,973 Distributions and dividends 10 (161,722) (161,458) (161,722) (161,458) Share-based payments 13 362 467 362 467 Share capital issued 12 48,795 285 48,795 285 Change in business combination of commonly controlled entities 13 – 93 – 93
Changes in equity for the year 38,197 (108) (15,789) 10,360 Equity at start of the year 2,904,071 2,904,179 2,878,112 2,867,752
Equity at end of the year 2,942,268 2,904,071 2,862,323 2,878,112
The accompanying notes form an integral part of these financial statements. 58 Contact Energy Limited Annual Report 2009
Contact Energy Limited and Subsidiaries
Balance Sheet as at 30 June 2009
Group Group Parent Parent 30 June 2009 30 June 2008 30 June 2009 30 June 2008 Note $000 $000 $000 $000
Shareholders’ equity 12, 13 2,942,268 2,904,071 2,862,323 2,878,112
Represented by: Current assets Cash and short term deposits 15 179,220 2,542 177,848 – Receivables and prepayments 16 253,836 517,365 224,786 488,987 Tax receivable – 162 – 662 Inventories 17 15,906 21,111 6,600 7,014 Derivative financial instruments 26 14,987 52,940 14,987 52,940
Total current assets 463,949 594,120 424,221 549,603
Non-current assets Property, plant and equipment 18 4,644,973 4,381,600 4,568,630 4,309,769 Intangible assets 19 252,159 214,552 193,525 155,918 Gas storage – cushion gas 20 46,252 23,622 46,252 23,622 Investment in subsidiaries 22 – – 132,788 132,788 Investment in associates 23 8,687 8,015 1,579 1,579 Available-for-sale financial assets 24 2,935 2,935 – – Derivative financial instruments 26 6,597 13,554 6,597 13,554 Other non-current assets 5,987 2,945 5,987 2,945
Total non-current assets 4,967,590 4,647,223 4,955,358 4,640,175
Total assets 5,431,539 5,241,343 5,379,579 5,189,778
Current liabilities Borrowings 25 4,311 132,811 2,982 130,384 Current portion of term borrowings 25 141,662 – 141,662 – Derivative financial instruments 26 72,368 139,282 72,317 139,024 Payables and accruals 27 304,235 540,619 338,246 522,949 Tax payable 2,218 – 2,968 – Provisions 28 8,195 20,954 7,953 20,746
Total current liabilities 532,989 833,666 566,128 813,103
Non-current liabilities Borrowings 25 1,091,106 554,725 1,091,066 554,695 Derivative financial instruments 26 85,905 194,925 85,905 194,925 Provisions 28 33,750 33,618 32,116 31,701 Deferred tax 29 744,092 718,462 741,238 717,242 Other non-current liabilities 1,429 1,876 803 –
Total non-current liabilities 1,956,282 1,503,606 1,951,128 1,498,563
Total liabilities 2,489,271 2,337,272 2,517,256 2,311,666
Net assets 2,942,268 2,904,071 2,862,323 2,878,112
The Directors of Contact Energy Limited authorised these financial statements for issue. On behalf of the Board
Grant King Phillip Pryke Chairman, 13 August 2009 Deputy Chairman, 13 August 2009
The accompanying notes form an integral part of these financial statements. Contact Energy Limited Annual Report 2009 59
Contact Energy Limited and Subsidiaries
Statement of Cash Flows for the year ended 30 June 2009
Group Group Parent Parent 30 June 2009 30 June 2008 30 June 2009 30 June 2008 Note $000 $000 $000 $000
Cash flows from operating activities Cash provided from: Receipts from customers 2,492,488 2,469,732 2,157,053 2,135,952 Dividends received 3,842 1,854 2,865 1,794
2,496,330 2,471,586 2,159,918 2,137,746
Cash applied to: Payments to suppliers and employees (2,035,904) (1,938,986) (1,712,259) (1,619,853) Supplementary dividends paid to shareholders 10 (10,776) (16,790) (10,776) (16,790) Tax paid (25,000) (81,900) (25,000) (81,900)
(2,071,680) (2,037,676) (1,748,035) (1,718,543)
Net cash inflow from operating activities 424,650 433,910 411,883 419,203
Cash flows from investing activities Cash provided from: Proceeds from sale of Mokai geothermal land and rights 5 – 27,252 – 27,252 Interest received 4,961 5,133 4,961 5,062 Repayment of loan to investee – 125 – 125 Loan from associate 80 1,051 – –
5,041 33,561 4,961 32,439
Cash applied to: Purchase of property, plant and equipment (385,715) (216,222) (372,982) (198,771) Purchase of intangibles (25,750) (1,357) (25,750) (1,357) New Plymouth asbestos removal and related costs 4 (17,280) (11,147) (17,280) (11,147) Purchase of gas storage rights – (28,457) – (28,457) Purchase of cushion gas (41,271) – (41,271) – Repayment of loan to associate (1,317) – – –
(471,333) (257,183) (457,283) (239,732)
Net cash (outflow) to investing activities (466,292) (223,622) (452,322) (207,293)
Cash flows from financing activities Cash provided from: Proceeds from other short term loans 11,024 6,846 11,024 6,846 Proceeds from borrowings 550,000 127,500 550,000 127,500
561,024 134,346 561,024 134,346
Cash applied to: Interest paid (79,019) (75,057) (78,909) (75,036) Distributions and dividends paid to shareholders (112,582) (161,458) (112,582) (161,458) Financing related costs (11,151) (150) (11,151) (150) Profit distribution related costs (432) – (432) – Repayment of borrowings – (277,778) – (277,778) Repayment of other short term loans and finance lease liabilities (139,443) (7,349) (139,438) (7,338)
(342,627) (521,792) (342,512) (521,760)
Net cash inflow/(outflow) from/to financing activities 218,397 (387,446) 218,512 (387,414)
Net increase/(decrease) in cash and cash equivalents 176,755 (177,158) 178,073 (175,504) Add: cash and cash equivalents at start of the year 790 177,948 (2,184) 173,320
Cash and cash equivalents at end of the year 177,545 790 175,889 (2,184)
Cash and cash equivalents is comprised of: Bank overdraft (1,675) (1,752) (1,959) (2,184) Cash and short term deposits 179,220 2,542 177,848 –
15 177,545 790 175,889 (2,184)
The accompanying notes form an integral part of these financial statements. 60 Contact Energy Limited Annual Report 2009
Contact Energy Limited and Subsidiaries
Statement of Cash Flows for the year ended 30 June 2009 (continued)
Group Group Parent Parent Reconciliation of profit for the year 30 June 2009 30 June 2008 30 June 2009 30 June 2008 to cash flows from operating activities Note $000 $000 $000 $000
Profit for the year 117,536 237,066 63,588 248,316
Items classified as investing/financing Removal of New Plymouth asbestos and related costs 4 – 33,747 – 33,747 Proceeds from sale of Mokai geothermal land and rights 5 – (21,319) – (21,319) Net interest expense 8 62,601 69,942 62,492 69,851
62,601 82,370 62,492 82,279
Non-cash items Bad and doubtful accounts receivable 11,531 5,954 9,431 4,584 Movement in provisions 28 165 917 165 917 Share-based payments 14 868 933 868 933 Write-off of advance to subsidiary 3, 7 – – 5,145 – Impairment of Gasbridge assets 3 2,830 – – – Depreciation and amortisation 18, 19 161,954 146,540 156,811 141,400 Equity accounted (earnings) of associates net of dividends received 23 (739) (939) – – Change in fair value of financial instruments 26 57,511 1,926 57,511 1,926 Increase in deferred tax 9, 29 8,849 5,126 8,590 3,767 Impact of change in corporate income tax rate 9 – (409) – (477) Other (2,872) (723) (1,601) 200
240,097 159,325 236,920 153,250
Movement in working capital Decrease/(increase) in receivables and prepayments 251,998 (288,044) 249,625 (283,734) Increase in tax payable 2,567 1,555 3,817 7,061 Decrease in inventories 5,205 227 414 9,332 (Decrease)/increase in payables and accruals (252,312) 244,356 (201,931) 205,644 (Increase) in other non-current assets (3,042) (2,945) (3,042) (2,945)
4,416 (44,851) 48,883 (64,642)
Net cash inflow from operating activities 424,650 433,910 411,883 419,203
The accompanying notes form an integral part of these financial statements. Contact Energy Limited Annual Report 2009 61
Contact Energy Limited and Subsidiaries
Notes to the financial statements for the year ended 30 June 2009
Group Group Parent Parent Reconciliation of profit for the year 30 June 2009 30 June 2008 30 June 2009 30 June 2008 to cash flows from operating activities Note $000 $000 $000 $000 1 Statement of accounting policies Profit for the year 117,536 237,066 63,588 248,316
Items classified as investing/financing Reporting entity Removal of New Plymouth asbestos and related costs 4 – 33,747 – 33,747 Contact Energy Limited (the Parent) is a profit-oriented company domiciled in New Zealand, registered under the Companies Proceeds from sale of Mokai geothermal land and rights 5 – (21,319) – (21,319) Act 1993 and listed on the New Zealand Stock Exchange (NZSX). It also has bonds listed on the New Zealand Debt Exchange Net interest expense 8 62,601 69,942 62,492 69,851 (NZDX). The Parent is an issuer in terms of the Financial Reporting Act 1993. The Group financial statements of Contact Energy Limited as at, and for the year ended, 30 June 2009 comprise the Parent and its subsidiaries, interests in associates and jointly 62,601 82,370 62,492 82,279 controlled entities (together referred to as Contact or the Group). Non-cash items Bad and doubtful accounts receivable 11,531 5,954 9,431 4,584 Contact is a diversified and integrated energy group, focusing on the wholesale generation of electricity and the retail sale of Movement in provisions 28 165 917 165 917 electricity, natural gas and liquefied petroleum gas (LPG), and related services in New Zealand. Share-based payments 14 868 933 868 933 Basis of preparation Write-off of advance to subsidiary 3, 7 – – 5,145 – The functional and reporting currency used in the preparation of the financial statements is New Zealand dollars, rounded to the Impairment of Gasbridge assets 3 2,830 – – – nearest thousand ($000). Depreciation and amortisation 18, 19 161,954 146,540 156,811 141,400 Equity accounted (earnings) of associates net of dividends received 23 (739) (939) – – The financial statements have been prepared in accordance with New Zealand Generally Accepted Accounting Practice (NZGAAP). Change in fair value of financial instruments 26 57,511 1,926 57,511 1,926 They comply with the New Zealand Equivalents to International Financial Reporting Standards (NZIFRS), and other applicable Increase in deferred tax 9, 29 8,849 5,126 8,590 3,767 Financial Reporting Standards, as appropriate for profit-oriented entities. The financial statements comply with International Impact of change in corporate income tax rate 9 – (409) – (477) Financial Reporting Standards (IFRS). Other (2,872) (723) (1,601) 200 The financial statements were approved by the Board of Directors (the Board) on 13 August 2009. 240,097 159,325 236,920 153,250 The measurement basis adopted in the preparation of these financial statements is historical cost modified by the valuation of Movement in working capital certain assets and liabilities. The following assets and liabilities are stated at their fair value: derivative financial instruments Decrease/(increase) in receivables and prepayments 251,998 (288,044) 249,625 (283,734) and property, plant and equipment, as identified in the specific accounting policies below. Recognised assets and liabilities that Increase in tax payable 2,567 1,555 3,817 7,061 are hedged in a fair value hedging relationship are stated at fair value in respect of the risk that is hedged. Decrease in inventories 5,205 227 414 9,332 (Decrease)/increase in payables and accruals (252,312) 244,356 (201,931) 205,644 The accounting policies set out below have been applied consistently to all periods presented in these financial statements. (Increase) in other non-current assets (3,042) (2,945) (3,042) (2,945) Presentational changes have been made to the Statement of Cash Flows to allow stakeholders to make an assessment of proceeds 4,416 (44,851) 48,883 (64,642) from and repayments of borrowings and to identify the cash outflow for purchase of intangible assets. These changes, which have
Net cash inflow from operating activities 424,650 433,910 411,883 419,203 been applied retrospectively, relate to: • reclassification of ‘proceeds from other short term loans’ from ‘proceeds from borrowings’, • reclassification of ‘repayment of other short term loans and finance lease liabilities’ from ‘repayment of borrowings’, • reclassification of ‘purchase of intangibles’ from ‘purchase of property, plant and equipment’. Certain presentational changes have been made to the Balance Sheet, Income Statement and related notes to ensure consistency with current year treatment. These changes, which have been applied retrospectively, are listed below: • presentation of derivative financial instruments – individual derivative financial assets and financial liabilities are offset where there is a legally enforceable right to set-off the recognised amounts and there is the intention to settle simultaneously. In addition the current and non-current split of derivative financial instruments has been amended to reflect the timing of the underlying cash flows rather than the contractual maturity dates of the instruments, • certain deferred financing costs have been reclassified from ‘other non-current assets’ to ‘borrowings’, • reclassification of certain fee income from ‘other operating expenses’ to ‘other income’.
Adoption status of relevant new financial reporting standards and interpretations Contact has chosen to early adopt the revised NZIAS 23 Borrowing Costs, NZIAS 27 Consolidated and Separate Financial Statements (amended), NZIFRS 3 Business Combinations and Amendments to NZIAS 39 Financial Instruments: Recognition and Measurement – Eligible Hedged Items. Contact has elected not to early adopt the following standards, considered relevant to the financial statements, which have been issued but are not yet effective: • NZIFRS 2 Share-Based Payment – revisions approved February 2008 and effective for annual reporting periods beginning on or after 1 January 2009. • NZIFRS 8 Operating Segments – approved December 2006 and effective for annual reporting periods beginning on or after 1 January 2009. 62 Contact Energy Limited Annual Report 2009
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
• NZIAS 1 Presentation of Financial Statements – revisions approved September 2007 and effective for annual reporting periods beginning on or after 1 January 2009. • NZIAS 27 Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate – amendment approved June 2008 and effective for annual reporting periods beginning on or after 1 January 2009. • NZIFRS 7 Amendment: Financial Instruments Disclosures – amendment issued March 2009 and effective for annual reporting periods beginning on or after 1 January 2009. • NZIAS 39 Amendment: Embedded Derivatives – amendment issued March 2009 and effective for annual reporting periods beginning on or after 1 January 2009. Contact does not currently intend to early adopt any of these standards before their effective date. The adoption of these standards is not expected to have a material impact on the recognition and measurement of Contact’s assets, liabilities, income and expenses.
Accounting estimates and judgements Contact’s significant areas of estimation and critical judgements in these financial statements are as follows:
Financial instruments Note 26 contains information about the assumptions and the risk factors relating to financial instruments and their valuation. The base future settlement price path for electricity derivatives is derived from the energy hedge market price path overlaid with Contact’s financial model for future electricity prices. Accounting judgements have been made in determining the hedge designation for the different types of derivatives employed by Contact to hedge its risk exposures.
Generation plant and equipment Contact’s generation plant and equipment (including land and buildings) and generation capital work in progress are stated at fair value as assessed by an independent valuer. The basis of the valuation is the net present value of the future earnings of the assets, excluding any reduction for costs associated with restoration and environmental rehabilitation. The major inputs and assumptions used in the valuation model that require judgement include the forecast of the future electricity price path, sales volume forecasts, projected operational and capital expenditure profiles, capacity and life assumptions for each generation plant and the relevant discount rates. The key inputs and assumptions are reassessed at each balance sheet date between valuations to ensure there has been no significant change that may impact on the valuation. Refer to note 18.
Intangible assets – gas storage rights Management has exercised judgement in determining the useful life of the gas storage rights. The useful life has been based on the current assumption of the period over which future economic benefits are expected. This life, however, is subject to the assumption that the contractual agreement under which the rights were acquired continues in existence and that any petroleum mining or other permit that may be required, can be successfully renewed. The useful life is reviewed annually. Refer to note 19.
Intangible assets – goodwill The carrying value of goodwill is subject to an annual impairment test to ensure the carrying value does not exceed the recoverable amount at balance sheet date. For the purpose of impairment testing, goodwill is allocated to the individual cash-generating units to which it relates. Any impairment losses are recognised in the Income Statement. In determining the recoverable amount of goodwill, Contact uses a valuation model to calculate the net present value of the expected future cash flows of the cash-generating units. The major inputs and assumptions that are used in the model that require management judgement include sales forecasts, cost to serve, customer numbers and customer churn, interest rates, discount rates and a forecast of the future electricity price path. Refer to note 19.
Provision – restoration and environmental rehabilitation Liabilities are estimated for the abandonment and site restoration of areas from which natural resources are extracted. Such estimates are valued at the net present value of the expenditures expected to settle the obligation. Key assumptions have been made as to the expected amount and timing of expenditures to remediate based on the expected life of the assets employed on the sites. Refer to note 28.
Retail revenue Management has exercised judgement in determining estimated retail sales for unread gas and electricity meters at balance sheet date. Specifically, this involves an estimate of consumption for each unread meter, based on the customer’s past consumption history. Contact Energy Limited Annual Report 2009 63
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
Useful life of property, plant and equipment and finite life intangible assets Management has exercised judgement in determining the useful life of the property, plant and equipment and finite life intangible assets. Useful lives are reviewed and, where appropriate, adjusted at each balance sheet date.
Basis of consolidation Subsidiaries Subsidiaries are those entities controlled, directly or indirectly, by the Parent. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Parent. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of an acquisition over the fair value of the Parent’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of an acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the Income Statement.
Business combinations of commonly controlled entities Business combinations involving entities or businesses under common control are those in which all of the combining entities or businesses are ultimately controlled by the same party or parties both before and after the business combination. Assets and liabilities assumed in business combinations of commonly controlled entities are measured initially at acquisition date at the book value of the acquired entities. Any difference between the cost of acquisition and the book values of the assets and liabilities acquired is recorded directly in equity against retained earnings.
Associates Associates are entities in which Contact has significant influence, but not control, over the operating and/or financial policies. Associates are reflected in the Group financial statements by applying the equity accounting method. The equity accounting method recognises Contact’s share of the current period retained surpluses or deficits in the Group Income Statement and its share of post acquisition increases or decreases in net assets in the Group Balance Sheet.
Jointly controlled assets and jointly controlled entities Jointly controlled assets and jointly controlled entities are joint arrangements with other parties in which Contact jointly controls or owns one or more asset or entity and is consequently entitled to a share of the future economic benefits through its share of the jointly controlled asset or entity. Contact’s share of the assets, liabilities, outputs (revenues) and expenses of jointly controlled assets or entities is incorporated into the Group financial statements on a proportionate line-by-line basis.
Acquisition or disposal during the period Where an entity becomes or ceases to be part of the Group during the period, the results of that entity are included in the Group results from the date of acquisition or up to the date of disposal.
Transactions and balances eliminated on consolidation The effects of intra-group transactions and balances are eliminated in preparing the Group financial statements.
Borrowings Borrowings are recognised initially at fair value less attributed transaction costs and are subsequently stated at amortised cost. Borrowings designated in a hedge relationship are carried at fair value and are subject to measurement under hedge accounting requirements. Refer to the accounting policy for derivative financial instruments and hedging. Discounts, premiums, prepaid interest and financing costs such as origination, commitment and transaction fees are amortised to interest expense on a yield-to-maturity basis over the period of the borrowing. Any difference between the cost and redemption value is recognised in the Income Statement over the period of the borrowings on an effective interest basis. All borrowing costs are recognised in the Income Statement using the effective interest method with the exception of borrowing costs directly associated with the acquisition or construction of qualifying assets, which are capitalised. Refer to the accounting policies on property, plant and equipment and intangible assets.
Cash and cash equivalents Cash and cash equivalents includes cash on hand, deposits held on call with banks and other short term highly liquid investments with original maturities of three months or less, net of outstanding bank overdrafts. Cash and short term deposits exclude bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the Balance Sheet. 64 Contact Energy Limited Annual Report 2009
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
Derivative financial instruments and hedging Derivative financial instruments are initially recognised at fair value on the date a derivative contract is entered into and are periodically re-measured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative financial instrument is designated as a hedging instrument and, if so, the nature of the item being hedged. Contact designates certain derivative financial instruments as either: • hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedge), or • hedges of highly probable forecast transactions (cash flow hedge), or • hedges of net investments in foreign operations (net investment hedge).
Fair value hedge Changes in the fair value of derivative financial instruments that are designated and qualify as fair value hedges are recorded in the Income Statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.
Cash flow hedge The effective portion of changes in the fair value of derivative financial instruments that are designated and qualify as cash flow hedges are recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the Income Statement. Amounts accumulated in equity are recycled to the Income Statement in the year when the hedged item will affect the Income Statement. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset (for example, inventory) or a liability, the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the asset or liability. When a hedging instrument expires or is sold, terminated or exercised, or the entity revokes designation of the hedge relationship such that the derivative financial instrument no longer qualifies for hedge accounting, but the hedged forecast transaction is still expected to occur, the cumulative gain or loss at that point remains in equity and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to take place, the cumulative unrealised gain or loss recognised in equity is recognised immediately in the Income Statement.
Net investment hedge Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in equity, and the gain or loss relating to the ineffective portion is recognised immediately in the Income Statement. Gains and losses accumulated in equity are included in the Income Statement when the foreign operation is disposed of.
Derivative financial instruments that do not qualify for hedge accounting Certain derivative financial instruments do not qualify for hedge accounting. Changes in the fair value of any derivative financial instruments that do not qualify for hedge accounting are recognised immediately in the Income Statement.
Employee benefits Annual, long service and retirement leave benefits estimated to be payable to employees are accounted for on the basis of statutory and contractual requirements.
Long term service benefits Contact’s net obligation in respect of long term service benefits, other than pension plans, is the amount of future benefit that employees have earned in return for their service in the current and prior periods. The obligation is calculated using an actuarial technique.
Share-based payments Share-based payments are provided to executives via a Share Option Plan and a Restricted Share Plan. The fair value of the employee services received in exchange for the grant of the options and restricted shares is recognised as an expense, with a corresponding increase in equity, over the vesting period during which the employees become unconditionally entitled to the options and restricted shares. The fair value is measured at grant date by reference to the fair value of the equity instruments granted, taking into account market performance conditions only. Non-market vesting conditions are included in the assumptions determining the number of options and restricted shares that are expected to become exercisable or vest. At each balance sheet date, Contact revises the amount to be recognised as an expense to reflect the number of options and restricted shares that are expected to become exercisable or vest. Contact Energy Limited Annual Report 2009 65
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
Exploration and evaluation expenditure Exploration and evaluation expenditure is accounted for in accordance with the area of interest method. The application of this method is based on the partial capitalisation model closely aligned to the successful efforts approach. All exploration and evaluation costs, including directly attributable overheads, general permit activity, geological and geophysical costs are expensed as incurred except the cost of drilling exploration wells and the cost of acquiring new interests. The costs of drilling exploration wells are initially capitalised as development capital work in progress pending the determination of the success of the area. Costs are expensed where the area of interest does not result in a successful discovery. Exploration and evaluation expenditure is partially or fully capitalised where either: • the expenditure is expected to be recouped through successful development and exploration of the area of interest (or alternatively, by its sale), or • the exploration and evaluation activities in the area of interest have not, at the balance sheet date, reached a stage that permits a reasonable assessment of the existence or otherwise of economically recoverable reserves, and active and significant operations in, or in relation to, the area of interest are continuing. Capitalised costs are reviewed at each balance sheet date to determine whether economic quantities of reserves have been found or whether further exploration and evaluation work is underway or planned to support the continued carry forward of the capitalised costs. Exploration and evaluation expenditure is impaired in the Income Statement under the successful efforts method of accounting in the period that exploration work demonstrates that an area of interest is no longer prospective for economically recoverable reserves or when the decision to abandon an area of interest is made.
Foreign currencies Foreign currency transactions are recorded at the exchange rates in effect at the date of the transaction. Monetary assets and monetary liabilities denominated in a foreign currency are translated at the rates of exchange ruling at balance sheet date. Non-monetary assets and non-monetary liabilities denominated in a foreign currency that are measured at fair value are translated to the functional currency at the exchange rate at the date that the fair value was determined. Hedged assets and liabilities are translated at the spot rate with the underlying hedge contract being separately recorded on the Balance Sheet at fair value.
Group entities The results and financial position of all Group entities (none of which have a currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • income and expenses are translated at average exchange rates, • assets and liabilities are translated at the closing exchange rate at the date of that Balance Sheet, • all resulting exchange differences are recognised as a separate component of equity. On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other foreign currency instruments designated as hedges of such investments, are taken to the foreign currency translation reserve account. When a foreign operation is sold, such exchange differences are recognised in the Income Statement as part of the gain or loss on sale.
Gas entitlements Where Contact has take-or-pay gas sale contracts, such receipts are recorded as current or non-current liabilities respectively, depending on the contracted terms applicable to such tranche quantities. These liabilities are credited to the Income Statement as customers uplift their prepaid gas. Where Contact has take-or-pay gas purchase contracts, such payments are expensed to the Income Statement in the month the payment obligation crystallises, or as Contact uplifts the gas, depending on the contracted terms.
Gas storage – cushion gas Cushion gas is necessary to develop and maintain operation of a gas storage facility and represents a long term investment in natural gas reserves. Cushion gas is recognised at cost and not depreciated on the basis that it is economically recoverable at the end of the life of the gas storage facility. The carrying amount is reviewed at each balance sheet date to determine whether there is any objective evidence of impairment. Refer to the impairment accounting policy. Gas reserves in excess of that required for cushion gas are treated as inventory. 66 Contact Energy Limited Annual Report 2009
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
Generation and other research and development expenditure Expenditure on research activities undertaken with the prospect of gaining new scientific or technical knowledge and understanding is recognised in the Income Statement as an expense as incurred. Expenditure on generation and other development activities is capitalised if the process is technically and commercially feasible, future economic benefits are probable and Contact intends to and has sufficient resources to complete development and to use or sell the asset. The expenditure capitalised includes the cost of materials, direct labour and an appropriate proportion of directly attributable overheads and capitalised interest. Capital work in progress is reviewed at each balance sheet date to determine whether further work is planned to support the continued carrying value of the capitalised costs. Upon the commencement of commercial operations, assets are transferred from capital work in progress and depreciated in accordance with the relevant accounting policy for each asset over the period of its expected economic benefit.
Goods and services tax (GST) The Income Statement and Statement of Cash Flows have been prepared so that all components are stated exclusive of GST. All items in the Balance Sheet are stated net of GST, with the exception of receivables and payables, which include GST.
Impairment The carrying amounts of Contact’s assets, other than inventories and deferred tax assets, are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s net recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the Income Statement unless the asset is recorded at a revalued amount. Impairment losses on revalued assets are first taken to the asset revaluation reserve if there is a revaluation surplus in respect of that asset. The recoverable amount of receivables is calculated as the present value of expected future cash flows. For retail receivables that are not significant on an individual basis, collective impairment is assessed on a portfolio basis, based on historic delinquency rates and historical losses. The recoverable amount of other assets is the greater of their net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their net present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash flows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.
Insurance Contact has property, plant and equipment, which is predominantly concentrated at power station locations that have the potential to sustain major physical losses through damage to plant with resultant consequential business interruption and other costs. To minimise the financial impact of such exposures, the major portion of these risks are insured by taking out appropriate insurance policies with appropriate creditworthy counterparties. Any uninsured loss is charged to the Income Statement in the year in which the loss is incurred.
Intangible assets Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of Contact’s share of the net identifiable assets of the acquired subsidiary/associate at the date of acquisition. Goodwill on the acquisition of subsidiaries is included in intangible assets. Goodwill on the acquisition of associates is included in investments in associates. Goodwill is tested annually for impairment and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. For the purpose of impairment testing, goodwill is allocated to the individual cash-generating unit to which it relates. Each cash-generating unit represents Contact’s lowest level of assets generating revenue independent of each other.
Other intangible assets Other intangible assets with finite lives are stated at cost less accumulated amortisation and accumulated impairment losses. Amortisation is charged to the Income Statement on a straight-line basis over the estimated useful lives of intangible assets from the date they are available for use. In the case of the gas storage rights, this will be when the gas storage facility is operational. Contact Energy Limited Annual Report 2009 67
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
The amortisation rates are as follows:
Type of asset Amortisation rate Computer software 10–33% Gas storage rights 4% Patents 10% Asset residual values and useful lives are reviewed annually and adjusted if appropriate. Borrowing costs incurred on the construction or acquisition of a qualifying asset project are capitalised during the period of time that is required to complete and prepare the intangible asset for its intended use. The amount of borrowing costs capitalised is determined using either the actual borrowing costs incurred, where qualifying assets have been specifically project funded, less any investment income from the temporary investment of those borrowings, or a capitalisation rate representing Contact’s weighted average borrowing cost applicable to the general borrowings (excluding any specific borrowings) that were outstanding during the period. Costs cease to be capitalised as soon as the intangible asset is ready for use or production is temporarily suspended, and do not include any inefficiency costs.
Inventories Inventories are stated at the lower of cost and net realisable value. The cost of materials, consumable supplies and maintenance spares is determined on a weighted average basis. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Gas reserves in excess of that required for cushion gas are treated as inventory. Refer to the gas storage – cushion gas accounting policy.
Investments – financial instruments Contact classifies its investments in the following categories: • financial assets at fair value through the Income Statement, • held-to-maturity financial assets, or • available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition and re-evaluates this designation at each balance sheet date. Purchases and sales of financial assets are recognised on the trade date. When financial assets are initially recognised, they are measured at fair value plus, in the case of financial assets not at fair value through the Income Statement, directly attributable transaction costs.
Financial assets at fair value through the Income Statement A financial asset is classified as a financial asset at fair value through the Income Statement if it is acquired principally for the purpose of selling in the short term or if so designated by management. Derivatives are also categorised as fair value through the Income Statement unless they are designated as hedges. Assets in this category are classified as current assets if they are either held for trading or are expected to be realised within 12 months of the balance sheet date. Subsequent to initial recognition, financial assets at fair value through the Income Statement are measured at fair value, with changes in fair value recognised immediately in the Income Statement.
Held-to-maturity financial assets Held-to-maturity financial assets are stated at amortised cost less impairment losses.
Available-for-sale financial assets Investments in unlisted shares are classified as being available-for-sale and are stated at fair value, with any resultant gain or loss being recognised directly in equity, except for impairment losses and foreign exchange gains and losses, which are recognised in the Income Statement. If the fair value of an unlisted equity instrument cannot be reliably determined, the investment is held at cost. When these investments are derecognised, the cumulative gain or loss previously recognised directly in equity is recognised in the Income Statement.
Operating leases Contact leases certain plant, equipment, land and buildings. Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Operating lease payments are representative of the pattern of benefits derived from the leased assets and, accordingly, are charged to the Income Statement on a straight-line basis. 68 Contact Energy Limited Annual Report 2009
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
Other revenue Dividend income Dividend income is recognised in the Income Statement on the date that the dividend is declared.
Interest income Interest income is recognised in the Income Statement as it accrues using the effective interest rate method.
Payables Payables are stated at cost.
Property, plant and equipment Contact’s generation plant and equipment and generation capital work in progress are stated at fair value less accumulated depreciation and accumulated impairment losses. All other property, plant and equipment are carried at historical cost less accumulated depreciation and accumulated impairment losses. The cost of purchased property, plant and equipment, including strategic spares, is the value of the consideration given to acquire the assets and the value of other directly attributable costs that have been incurred in bringing the assets to the location and condition necessary for their intended service. The cost of assets constructed by Contact, including capital work in progress, includes the cost of all materials used in construction, direct labour specifically associated with construction, resource management consent costs and an appropriate proportion of directly attributable variable and fixed overheads. Borrowing costs incurred on the construction of a qualifying asset project are capitalised during the period of time that is required to complete and prepare the asset for its intended use. The amount of borrowing costs capitalised is determined using either the actual borrowing costs incurred, where qualifying assets have been specifically project funded, less any investment income from the temporary investment of those borrowings, or a capitalisation rate representing Contact’s weighted average borrowing cost applicable to the general borrowings (excluding any specific borrowings) that were outstanding during the period. Costs cease to be capitalised as soon as the asset is ready for productive use, or the development is suspended, and do not include any inefficiency costs. Where an item of property, plant and equipment comprises major components having different useful lives, they are accounted for as separate items of property, plant and equipment. Subsequent expenditure is capitalised where it is incurred to replace a component of an item of property, plant and equipment that is accounted for separately, including major inspection and overhaul expenditure. Other subsequent expenditure is capitalised only when it is probable the future economic benefits embodied in the item of property, plant and equipment will flow to the entity and can be reliably measured. All other expenditure is recognised in the Income Statement as an expense as incurred.
Revaluations Contact’s generation plant and equipment (including land and buildings) and capital work in progress are stated at fair value as determined every three years by an independent valuer, with interim revaluations where there is deemed to be a significant change to the valuation of these assets. The basis of the valuation is the net present value of the future earnings of the assets, excluding any reduction for costs associated with restoration and environmental rehabilitation. Any accumulated depreciation at the date of revaluation is eliminated against the gross carrying amount and the net carrying amount is restated to the revalued amount of the asset. Any increase in value is recognised directly in equity. Any decrease in value that offsets a previous increase in value of the same asset is charged against reserves in equity and any other decrease in value is charged to the Income Statement.
Leased assets Leases in which Contact assumes substantially all the risks and rewards of ownership are classified as finance leases. Any asset acquired by the way of a finance lease is stated at an amount equal to the lower of its fair value or net present value of the future minimum lease payments at inception of the lease.
Depreciation Depreciation is charged to the Income Statement on a straight-line basis so as to allocate the cost of the assets, or the revalued amounts, less estimated residual value, over their expected remaining useful lives. The range of annual depreciation rates for each class of asset is as follows:
Type of asset Depreciation rate Land Not depreciated Generation plant and equipment (including buildings) 1–33% Other buildings 1–18% Other plant and equipment 1–33% Asset residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. Contact Energy Limited Annual Report 2009 69
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
Receivables Receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less impairment loss. An impairment loss is recognised when there is objective evidence that Contact will not be able to collect amounts due according to the original terms of the receivable. The amount of the impairment loss is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the impairment loss is recognised in the Income Statement.
Restoration and environmental rehabilitation Liabilities are estimated for the abandonment and site restoration of areas from which natural resources are extracted. Such estimates are valued at the present value of the expenditures expected to be required to settle the obligation. The cost primarily represents geothermal field restorations. Estimations are also made for the expected cost of environmental rehabilitation of commercial sites that require reinstatement of conditions resulting from present obligations. The liability is immediately recognised when exposure is identified and rehabilitation costs can be reasonably estimated.
Revenue Revenue comprises the amounts received and receivable at balance sheet date for electricity, gas, LPG, steam and related services supplied to customers in the ordinary course of business, including estimated amounts for unread meters. Sales revenue is recognised in accordance with contractual arrangements, where applicable, and only once the significant risks and rewards of ownership of the goods passes from Contact to the customer or when services have been rendered to the customer and collection is reasonably assured. Other revenue from meter leases is recognised in the Income Statement on a straight-line basis over the term of the lease.
Share capital Ordinary and restricted shares are classified as share capital. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction from the proceeds. Where the Parent purchases its own equity share capital (treasury stock), the consideration paid, including any directly attributable incremental costs, is deducted from equity attributable to equity holders until the shares are cancelled or re-issued. Where such shares are subsequently re-issued, any consideration received, net of any directly attributable incremental transaction costs are included in equity.
Statement of Cash Flows The following are the definitions used in the Statement of Cash Flows: • cash and cash equivalents includes cash on hand, deposits held on call with banks and other short term highly liquid investments with original maturities of three months or less, net of outstanding bank overdrafts, • operating activities include all transactions and other events that are not investing or financing activities, • investing activities are those activities relating to the acquisition, holding and disposal of property, plant and equipment, intangible assets and investments, • financing activities are those activities that result in changes in the size and composition of the capital structure of Contact. This includes both equity and debt not falling within the definition of cash. Dividends and interest paid in relation to the capital structure are included in financing activities. Cash flows arising from the following operating, investing or financing activities may be reported on a net basis: • cash receipts and payments on behalf of customers where the cash flows reflect the activities of the customer rather than those of Contact, or • cash receipts and payments for financing activities where the maturities are short.
Tax Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the Income Statement except to the extent that it relates to items recognised directly in equity, in which case the income tax is recognised in equity. Current tax is the expected tax payable on the taxable income for the period, using tax rates enacted or substantially enacted at the balance sheet date, together with any adjustment to tax payable in respect of previous years. 70 Contact Energy Limited Annual Report 2009
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
Deferred tax is calculated using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
Changes in accounting policies There have been no changes in accounting policies in the year other than the addition of a policy on share capital.
2 Underlying earnings after tax
Underlying earnings after tax for the year is presented to allow stakeholders to make an assessment and comparison of underlying earnings after removing significant one-off items and the non-cash change in fair value of financial instruments.
Group Group Parent Parent 30 June 2009 30 June 2008 30 June 2009 30 June 2008 Note $000 $000 $000 $000
Profit for the year 117,536 237,066 63,588 248,316
Change in fair value of financial instruments 26 57,511 1,926 57,511 1,926 Removal of New Plymouth asbestos and related costs 4 – 33,747 – 33,747 Impairment of Gasbridge assets 3 2,830 – – – Write-off of advance to subsidiaries* 3 – – 5,145 – Gain on sale of Mokai geothermal land and rights 5 – (21,319) – (21,319) Gain on disposal of fuel oil reserves** 4 – (9,613) – (9,613)
Adjustments before income tax 60,341 4,741 62,656 4,741
Income tax expense*** (17,253) (9,009) (17,253) (9,077)
Adjustments after income tax 43,088 (4,268) 45,403 (4,336)
Underlying earnings after tax 160,624 232,798 108,991 243,980
* Write-off of advance to subsidiaries is included in other operating expenses, a component of EBITDAF. ** Gain on disposal of fuel oil reserves is included in other revenue, a component of EBITDAF. *** Tax has been applied at 30 per cent (2008: 33 per cent) on relevant items.
3 Impairment of Gasbridge assets
During the year Contact and Genesis Power Limited decided to put on hold development of the land based liquefied natural gas (LNG) terminal. As a result of this decision, Contact has written off its share of the assets of the Gasbridge Joint Venture relating to the previously planned onshore LNG storage and land based regasification facility. An impairment loss of $2.8 million has been taken to the Income Statement relating to this write-off. As a result of this decision, the Parent has written off an amount of $5.1 million receivable from its subsidiary Contact Aria Limited in relation to its investment in the Gasbridge Joint Venture. Contact Energy Limited Annual Report 2009 71
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
4 New Plymouth power station
In December 2007, Contact announced the decommissioning of its 31-year-old New Plymouth power station following the discovery of asbestos in areas of the station where it was not previously recorded on the station’s asbestos register. In May 2008, Contact announced the temporary recommissioning of one 100 megawatt gas-fired generator unit in response to tight electricity supply conditions over the winter period. In January 2009, this unit was decommissioned. The financial impact of the decision to decommission the plant was recorded in the year ended 30 June 2008 and was an expense of $33.7 million. This expense principally represented an estimate of the cost to remove asbestos at the plant and other related costs, including a $1.5 million write-down in inventory. These costs were not impacted by the partial recommissioning and remain consistent with the estimated cost as at 30 June 2009. No impairment of the New Plymouth asset has been recorded on the basis that the recoverable amount of the asset, based on an assessed fair value less cost to sell, exceeds the carrying amount. Following the decommissioning, the New Plymouth asset has been transferred from generation plant and equipment to other land and buildings at 30 June 2009. Refer to note 18. Contact held reserves of fuel oil at New Plymouth. These reserves were sold for $20.3 million, and a gain on disposal of $9.6 million was recorded in other revenue during the year ended 30 June 2008. Contact has entered into derivative arrangements in the wholesale electricity market that are expected to provide a broadly equivalent degree of flexibility to that provided by the operation of the New Plymouth power station. These are accounted for as cash flow hedges.
5 Sale of Mokai geothermal land and rights
In November 2007, Contact sold geothermal land and rights relating to the Mokai geothermal field, north of Taupo, to Mighty River Power and the Tuaropaki Trust. Contact received $27.2 million for the sale of the Mokai land and rights, giving rise to a non-taxable gain of $21.3 million.
6 Segment reporting
A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services in a particular economic environment, where the risks and returns are different from those of segments operating in other economic environments. Contact’s primary reporting format is business segments. All business segments are fully integrated within New Zealand. Contact comprises the following main business segments:
Retail The retail segment encompasses any activity that is associated with Contact’s supply of energy and related services to end user customers.
Generation The generation segment encompasses any activity that is associated with Contact’s generation of electricity or steam and Contact’s sales to the wholesale electricity market. It includes all activities in relation to the gas storage facility at the Ahuroa reservoir, including the cushion gas required to enable the field to be used for storage. The segment result includes items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Items not directly attributable to, or those that cannot be allocated on a reasonable basis to, the retail or generation segments are included in the other segment. Wholesale electricity purchase costs for the retail segment are based on spot prices prevailing in the New Zealand wholesale electricity market at the relevant time and at the relevant grid exit purchase node. Similarly, the revenues received by the generation segment are determined by the spot prices received at the relevant grid injection points. The cost of gas purchases across the portfolio is allocated between these segments in proportion to consumption. Gas transmission and distribution charges are allocated to the segments within which they are incurred. 72 Contact Energy Limited Annual Report 2009
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
Group Retail Generation Other Total 2009 $000 $000 $000 $000
Segment revenue 1,610,926 611,258 – 2,222,184
EBITDAF 236,857 208,402 – 445,259 Depreciation and amortisation of segment assets (19,768) (142,186) – (161,954)
Segment result 217,089 66,216 – 283,305 Change in fair value of financial instruments (57,511) Equity accounted earnings of associates 3,624 Impairment of Gasbridge assets (2,830) Net interest expense (62,601) Income tax expense (46,451)
Profit for the year 117,536
Segment assets 515,649 4,713,575 202,315 5,431,539 Segment liabilities 148,806 195,117 2,145,348 2,489,271 Capital and investment expenditure 43,451 445,384 – 488,835
Group Retail Generation Other Total 2008 $000 $000 $000 $000
Segment revenue 1,582,975 1,173,750 – 2,756,725
EBITDAF (278,254) 845,418 – 567,164 Depreciation and amortisation of segment assets (20,264) (126,276) – (146,540)
Segment result (298,518) 719,142 – 420,624 Change in fair value of financial instruments (1,926) Equity accounted earnings of associates 2,793 Removal of New Plymouth asbestos and related costs (33,747) Gain on sale of Mokai geothermal land and rights 21,319 Net interest expense (69,942) Income tax expense (102,055)
Profit for the year 237,066
Segment assets 485,523 4,689,120 66,700 5,241,343 Segment liabilities 375,996 221,276 1,740,000 2,337,272 Capital and investment expenditure 27,609 254,343 – 281,952 Contact Energy Limited Annual Report 2009 73
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
7 Operating expenses
Group Group Parent Parent 30 June 2009 30 June 2008 30 June 2009 30 June 2008 Other operating expenses include: $000 $000 $000 $000
Auditors’ remuneration – Audit services: KPMG* 691 683 649 612 – Other assurance services: KPMG* 35 – 35 –
Auditors’ remuneration: KPMG 726 683 684 612 Donations 94 56 94 56 Write-off of advance to subsidiaries** – – 5,145 – Write-off of accounts receivable 7,568 3,985 5,969 3,005 Provision for impairment of accounts receivable 2,431 304 1,945 280 Rental expense on operating leases 5,969 5,506 4,358 3,903
Labour costs include:
Contributions to KiwiSaver 1,475 238 1,475 238
* In addition, KPMG charged $186,000 for additional audit services and $28,000 for other assurance services in relation to the debt prospectus for the retail bond issue. These amounts have been included in the transaction costs of the retail bond issue. ** During the year, Contact wrote off an advance to a subsidiary in relation to its investment in the Gasbridge Joint Venture, following the decision to put on hold the development of the liquefied natural gas terminal. Refer to note 3.
8 Net interest expense
Group Group Parent Parent 30 June 2009 30 June 2008 30 June 2009 30 June 2008 $000 $000 $000 $000
Interest expense 89,860 76,687 89,685 76,525 Interest expense capitalised (21,473) (1,617) (21,473) (1,617) Interest income (5,786) (5,128) (5,720) (5,057)
Net interest expense 62,601 69,942 62,492 69,851
Contact commenced capitalising interest from 1 July 2007. The weighted average capitalisation rate on funds borrowed is 7.1 per cent per annum (2008: 8.0 per cent). 74 Contact Energy Limited Annual Report 2009
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
9 Income tax
Income tax expense
Group Group Parent Parent 30 June 2009 30 June 2008 30 June 2009 30 June 2008 $000 $000 $000 $000
Profit before income tax 163,987 339,121 91,085 354,458
Tax thereon at 30% (2008: 33%) 49,196 111,910 27,326 116,971 Plus/(less) tax effect of adjustments: Effect of different tax rates of associate operating in other jurisdiction – (83) – – Gain on sale of Mokai geothermal land and rights – (7,035) – (7,035) Temporary differences no longer expected to reverse 21 47 – – Other differences 456 414 1,055 (535) Change in corporate income tax rate – (409) – (477) Income tax (over)/under provided in prior year (3,222) (2,789) (884) (2,782)
Income tax expense 46,451 102,055 27,497 106,142
Comprised of: Current tax 37,602 92,673 18,907 98,934 Deferred tax 8,849 9,382 8,590 7,208
46,451 102,055 27,497 106,142
Imputation credits
Group Group 30 June 2009 30 June 2008 $000 $000
Opening balance credit 206,535 190,269 Imputation credits attached to dividends paid (44,675) (62,734) Imputation credits attached to dividends received 1,172 – New Zealand income tax paid 23,187 79,000
Closing balance credit 186,219 206,535
The imputation credits are available to shareholders of the Parent through the consolidated imputation group. The imputation credit account balance representing tax paid at 30 per cent amounts to $23.2 million. The remaining imputation credit account balance of $163.0 million represents tax paid at 33 per cent. Contact Energy Limited Annual Report 2009 75
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
10 Distributions and dividends
The Parent declared the following distributions and dividends during the year:
Parent Parent Parent Parent Distribution/dividend 30 June 2009 30 June 2008 30 June 2009 30 June 2008 payment date $000 $000 cents per share cents per share
Dividends 2007 year final dividend 25 September 2007 – 98,028 – 17 2008 year interim dividend 26 March 2008 – 63,430 – 11 2008 year final dividend 23 September 2008 98,028 – 17 – Supplementary dividend 10,197 16,790 – – Foreign investor tax credit (10,197) (16,790) – – Distributions 2009 year interim distribution (PDP) 31 March 2009 63,694 – 11 – Supplementary dividend 579 – – – Foreign investor tax credit (579) – – –
Total distributions and dividends 161,722 161,458
On 23 February 2009 the Board approved the introduction of a Profit Distribution Plan (PDP). Under the PDP, all shareholders receive distributions in the form of non-taxable bonus shares with the option to have the shares, or a portion of them, bought back by the Parent for cash. Shareholders who elect to have their bonus shares bought back by the Parent at equivalent cost under the off-market buy back facility, are treated as having received a fully imputed cash dividend. On 31 March 2009, the Parent allotted 11,251,746 bonus shares under the PDP, at an issue price of $5.6608609 per share. This bonus issue represented a distribution equivalent to 11 cents per share, for shares on issue at 10 March 2009, the record date. Under the buy back facility the Parent completed an off-market buy back of 2,571,104 shares on 31 March 2009. These are Group Group 30 June 2009 30 June 2008 held as treasury stock at 30 June 2009. Refer to note 12. $000 $000 On 13 August 2009, the Board declared a distribution in the form of a non-taxable bonus issue under the PDP equivalent to Opening balance credit 206,535 190,269 17 cents per share, for shares on issue at 28 August 2009, the record date. Refer to note 36. Imputation credits attached to dividends paid (44,675) (62,734) Imputation credits attached to dividends received 1,172 – New Zealand income tax paid 23,187 79,000 11 Earnings and net tangible assets per share Closing balance credit 186,219 206,535
Group Group 30 June 2009 30 June 2008
Underlying earnings per share (cents) 27.35 39.60 Basic earnings per share (cents) 20.02 40.33 Diluted earnings per share (cents) 20.02 40.33 Net tangible assets per share (cents) 458.10 457.49
The calculation of underlying earnings per share is based on underlying earnings after tax after removing significant one-off items and the non-cash change in fair value of financial instruments attributable to ordinary shareholders. Refer to note 2. The calculation of basic earnings per share at 30 June 2009 is based on the profit attributable to ordinary shareholders of $117.5 million (2008: $237.1 million) and a weighted average number of ordinary shares outstanding during the year ended 30 June 2009 of 587,237,669 (2008: restated to 587,885,728). The weighted average number of shares outstanding during the prior year has been restated to reflect the effect of the issue of bonus shares under the PDP, as if the bonus issue had occurred at the beginning of the earliest period presented (2008 as previously reported: 576,633,982). For the purposes of the earnings per share calculations, the shares issued under the Restricted Share Plan are excluded until shares become unrestricted. Refer to note 14. The dilutive effect of share options and restricted shares has not been taken into account in the calculation of diluted earnings per share at 30 June 2009 and 30 June 2008 as the relevant performance conditions have not been fulfilled at the balance sheet dates presented. 76 Contact Energy Limited Annual Report 2009
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
The calculation of net tangible assets per share for the years ended 30 June 2009 and 30 June 2008 is based on the total net assets less intangible assets. Net tangible assets per share would increase if total net assets were adjusted for the deferred tax on the revaluation of generation plant and equipment and generation capital work in progress, which is unlikely to crystallise under existing income tax legislation. Contact holds its property, plant and equipment on capital account for income tax purposes. Where the generation plant and equipment and generation capital work in progress is revalued, but there is no similar adjustment to the tax base, a taxable temporary difference is created that is recognised in deferred tax. The deferred tax liability ($535.7 million, 2008: $563.5 million) on these revaluations is unlikely to crystallise under existing income tax legislation.
12 Share capital
Parent and Group 30 June 2009 30 June 2008
Number $000 Number $000
Ordinary shares – unrestricted Balance at start of the year 576,633,982 780,037 576,633,982 780,037 Issued 11,251,746 63,694 – – Transaction costs – (563) – –
Balance at end of the year 587,885,728 843,168 576,633,982 780,037
Ordinary shares – restricted Balance at start of the year 163,308 444 76,975 159 Issued 104,712 219 86,333 285
Balance at end of the year 268,020 663 163,308 444
Shares issued and authorised 588,153,748 843,831 576,797,290 780,481
Treasury stock from PDP (2,571,104) (14,555) – –
Total share capital 585,582,644 829,276 576,797,290 780,481
The holders of unrestricted ordinary shares are entitled to receive dividends or distributions as declared from time to time and are entitled to one vote per share at meetings of the Parent. Ordinary shares have no par value and are fully paid. On 31 March 2009, the Parent issued 11,251,746 new ordinary shares at the per share price of $5.6608609, pursuant to the Parent’s PDP. The PDP allowed shareholders to elect to have the Parent buy back the shares issued to them at the issue price. As a result of shareholder elections, the Parent completed an off-market buy back of 2,571,104 shares at an equivalent cost on 31 March 2009, which remain held as treasury stock at 30 June 2009. Restricted ordinary shares are issued pursuant to Contact’s Employee Long Term Incentive Scheme and are held in trust. While restricted ordinary shares confer the same rights on the holder as unrestricted shares, restricted shares are subject to the terms of the Restricted Share Plan that restrict the right to vote and to receive dividends or distributions. Refer to note 14. At 30 June 2009, Contact had 585,314,624 (2008: 576,633,982) ordinary shares (excluding shares held as treasury stock and restricted shares) quoted on the NZSX. Contact Energy Limited Annual Report 2009 77
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
13 Reserves
Group Foreign currency Asset Cash flow Share-based translation revaluation hedge payment Retained reserve reserve reserve reserve earnings Total Note $000 $000 $000 $000 $000 $000
Balance as at 1 July 2007 50 1,900,718 293 260 222,662 2,123,983 Profit for the year – – – – 237,066 237,066 Cash flow hedges: Profit/(Loss) taken to equity – – (106,450) – – (106,450) Translation of foreign operations 606 – – – – 606 Asset revaluation: Re-estimate of restoration provision 28 – (3,272) – – – (3,272) Movement in deferred tax liability attributable to equity 29 (260) 1,080 35,129 – – 35,949 Re-measurement of deferred tax on change in corporate income tax rate 29 – (143) (3,251) – – (3,394)
Total recognised revenues and expenses 346 (2,335) (74,572) – 237,066 160,505
Dividends paid to shareholders 10 – – – – (161,458) (161,458) Business combination of commonly controlled entities – – – – 93 93 Share-based payments 14 – – – 467 – 467
Balance as at 30 June 2008 396 1,898,383 (74,279) 727 298,363 2,123,590
Balance as at 1 July 2008 396 1,898,383 (74,279) 727 298,363 2,123,590 Profit for the year – – – – 117,536 117,536 Cash flow hedges: Profit/(Loss) taken to equity – – 52,091 – – 52,091 Translation of foreign operations (106) – – – – (106) Asset revaluation: Re-estimate of restoration provision 28 – (3,295) – – – (3,295) Movement in deferred tax liability attributable to equity 29 20 988 (16,472) – – (15,464)
Total recognised revenues and expenses (86) (2,307) 35,619 – 117,536 150,762
Distributions and dividends 10 – – – – (161,722) (161,722) Share-based payments 14 – – – 362 – 362
Balance as at 30 June 2009 310 1,896,076 (38,660) 1,089 254,177 2,112,992 78 Contact Energy Limited Annual Report 2009
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
Parent Foreign currency Asset Cash flow Share-based translation revaluation hedge payment Retained reserve reserve reserve reserve earnings Total Note $000 $000 $000 $000 $000 $000
Balance as at 1 July 2007 – 1,707,304 905 260 379,087 2,087,556 Profit for the year – – – – 248,316 248,316 Cash flow hedges: Profit/(Loss) taken to equity – – (107,110) – – (107,110) Asset revaluation: Re-estimate of restoration provision 28 – (3,272) – – – (3,272) Movement in deferred tax liability attributable to equity 29 – 1,080 35,345 – – 36,425 Re-measurement of deferred tax on change in corporate income tax rate 29 – (143) (3,243) – – (3,386)
Total recognised revenues and expenses – (2,335) (75,008) – 248,316 170,973
Dividends paid to shareholders 10 – – – – (161,458) (161,458) Business combination of commonly – – – – 93 93 controlled entities Share-based payments – – – 467 – 467
Balance as at 30 June 2008 – 1,704,969 (74,103) 727 466,038 2,097,631
Balance as at 1 July 2008 – 1,704,969 (74,103) 727 466,038 2,097,631 Profit for the year – – – – 63,588 63,588 Cash flow hedges: Profit/(Loss) taken to equity – – 51,889 – – 51,889 Asset revaluation: Re-estimate of restoration provision 28 – (3,295) – – – (3,295) Movement in deferred tax liability attributable to equity 29 – 988 (16,394) – – (15,406)
Total recognised revenues and expenses – (2,307) 35,495 – 63,588 96,776
Distributions and dividends 10 – – – – (161,722) (161,722) Share-based payments – – – 362 – 362
Balance as at 30 June 2009 – 1,702,662 (38,608) 1,089 367,904 2,033,047
14 Share-based payments
Contact has a Long Term Incentive Scheme for executives whereby the value of the long term incentive award is allocated, by value, 50 per cent in share options under a Share Option Plan and 50 per cent in restricted shares under a Restricted Share Plan (together the Plans). Under the Plans, the share options will only be exercisable, and the restricted shares will only become unrestricted, to the extent that the relevant performance hurdles are satisfied. For the restricted shares and share options issued under the Plans, the hurdle is a comparison of Contact’s total shareholder return (TSR) against the average TSR of a reference group comprising the NZX50 index over the relevant period, commencing on the effective grant date. The share options and unrestricted shares are unlisted and are personal to the employee and therefore cannot be traded. The total expense recognised for share-based payments under the Plans during the year ended 30 June 2009 was $0.9 million (2008: $0.9 million). Contact Energy Limited Annual Report 2009 79
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
(a) Share Option Plan Under the Share Option Plan, the Board issues share options to executives to acquire ordinary shares in the Parent at the market price determined at the effective grant date. For share options granted in the years ended 30 June 2009 and 30 June 2008, the market price was the weighted average market price of the Parent’s ordinary shares traded on the NZSX over the 20 business days prior to the effective grant date. The share options do not entitle the executives to receive dividends or other distributions from, nor vote in respect of, the shares subject to the options. There is a vesting period of approximately three years from the effective grant date before share options may be exercised. Following the end of that period, the performance hurdles are measured on three annual test dates. There is a two-year, two-month exercise period following the first test date during which share options may be exercised, again, to the extent that the performance hurdles are obtained. The share options may also be exercised if, between the effective grant date and the exercise date, a change of control of the Parent occurs. In addition, the Board may, at its discretion, permit share options to be exercised prior to the commencement of the relevant exercise period where the shares cease to be listed on the NZSX or other circumstances occur where such an early exercise is considered appropriate by the Board. The share options will lapse: • if the performance hurdles are not met by the last measurement date, or • if the share options are not exercised by the lapse date, or • on the date on which the participant ceases to be employed by the Parent (except in the case of redundancy), or • on the death of the participant (provided, however, that the Board may, in its discretion, allow the participant’s successor to exercise the share options). In the event of redundancy, the Share Option Plan will continue, except that the number of share options will be recalculated on a proportionate basis.
Group and Parent 2009 First Exercise Balance at Exercisable Effective exercise price per Balance at 30 June at 30 June grant date date Expiry date option 1 July 2008 Granted Lapsed 2009 2009
1 Jul 2006 1 Oct 2009 30 Nov 2011 $7.35 330,706 – (13,808) 316,898 – 20 Nov 2006 1 Oct 2009 30 Nov 2011 $7.55 18,361 – (18,361) – – 15 Jan 2007 1 Oct 2009 30 Nov 2011 $8.28 13,413 – – 13,413 – 1 Oct 2007 1 Oct 2010 30 Nov 2012 $9.15 445,599 – (81,113) 364,486 – 1 Feb 2008 1 Oct 2010 30 Nov 2012 $7.63 22,706 – (7,698) 15,008 – 1 Oct 2008 1 Oct 2011 30 Nov 2013 $8.60 – 881,769 (76,936) 804,833 –
830,785 881,769 (197,916) 1,514,638 –
Group and Parent 2008 First Exercise Balance at Exercisable Effective exercise price per Balance at 30 June at 30 June grant date date Expiry date option 1 July 2007 Granted Lapsed 2008 2008
1 Jul 2006 1 Oct 2009 30 Nov 2011 $7.35 365,322 – (34,616) 330,706 – 20 Nov 2006 1 Oct 2009 30 Nov 2011 $7.55 18,361 – – 18,361 – 15 Jan 2007 1 Oct 2009 30 Nov 2011 $8.28 13,413 – – 13,413 – 1 Oct 2007 1 Oct 2010 30 Nov 2012 $9.15 – 490,326 (44,727) 445,599 – 1 Feb 2008 1 Oct 2010 30 Nov 2012 $7.63 – 22,706 – 22,706 –
397,096 513,032 (79,343) 830,785 –
A further 217,190 share options lapsed on 31 July 2009. 80 Contact Energy Limited Annual Report 2009
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
(b) Restricted Share Plan Under the Restricted Share Plan the Board issues restricted shares to the participants at the market price determined at the effective grant date. Although the participant has beneficial title to the restricted shares, under the terms of the Restricted Share Plan: (i) the restricted shares are issued to an independent trustee to be held on trust for the participant; and (ii) the trustee will not exercise any voting rights attaching to the restricted shares and has forgone the right to distributions. Legal title cannot be transferred to the participant, and therefore traded by the participant, unless, and until, the restricted shares become unrestricted. A participant may not transfer, assign, or otherwise dispose of, or create any interest (including any security, or legal or equitable interest) in, a restricted share until it becomes unrestricted. For restricted shares issued in the years ended 30 June 2009 and 30 June 2008, the market price or allocation price of the restricted shares was the weighted average market price of the Parent’s ordinary shares traded on the NZSX over the 20 business days prior to the effective grant date. Payment of the allocation price for the restricted shares is funded by an interest-free loan from the Parent in an amount equal to the allocation price for the shares. If the performance hurdles are met, the restricted shares will be released from the trust to the participant following the relevant test date. There is a vesting period of approximately three years from the effective grant date before restricted shares that vest may be released from the restrictions and transferred to the participant. Following the end of that period, the exercise hurdles are measured on three annual test dates. To the extent the hurdles are met on each of these test dates, restricted shares must be released from the restrictions and transferred from the trustee to the participant. For restricted shares that a participant becomes entitled to, the Parent pays a bonus, which the participant must use to repay the loan. Upon repayment of the loan, the trustee transfers legal title to the restricted shares to the participant and the shares become unrestricted. The restricted shares may be released from the restrictions and transferred to the participants if, between the grant date and a test date, a change of control of the Parent occurs. The rights to the restricted shares will lapse: • if the performance hurdles are not met by the last test date, or • on the date on which the participant ceases to be employed by the Parent (except in the case of redundancy), or • on the death of the participant (provided, however, that the Board may, in its discretion, allow legal title to the restricted shares to be transferred to the participant’s successors). In the event of redundancy, the Restricted Share Plan will continue, except that the number of restricted shares will be recalculated on a proportionate basis.
Group and Parent 2009 Unvested Unvested Allocation balance at balance at Effective price per 1 July 2008 Granted Vested 30 June 2009 grant date First test date Final test date share number number number number
1 Jul 2006 1 Oct 2009 1 Oct 2011 $7.35 70,890 – – 70,890 20 Nov 2006 1 Oct 2009 1 Oct 2011 $7.55 3,581 – – 3,581 15 Jan 2007 1 Oct 2009 1 Oct 2011 $8.28 2,504 – – 2,504 1 Oct 2007 1 Oct 2010 1 Oct 2012 $9.15 83,242 – – 83,242 1 Feb 2008 1 Oct 2010 1 Oct 2012 $7.63 3,091 – – 3,091 1 Oct 2008 1 Oct 2011 1 Oct 2013 $8.60 – 104,712 – 104,712
163,308 104,712 – 268,020 Contact Energy Limited Annual Report 2009 81
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
Group and Parent 2008 Unvested Unvested Allocation balance at balance at Effective price per 1 July 2007 Granted Vested 30 June 2008 grant date First test date Final test date share number number number number
1 Jul 2006 1 Oct 2009 1 Oct 2011 $7.35 70,890 – – 70,890 20 Nov 2006 1 Oct 2009 1 Oct 2011 $7.55 3,581 – – 3,581 15 Jan 2007 1 Oct 2009 1 Oct 2011 $8.28 2,504 – – 2,504 1 Oct 2007 1 Oct 2010 1 Oct 2012 $9.15 – 83,242 – 83,242 1 Feb 2008 1 Oct 2010 1 Oct 2012 $7.63 – 3,091 – 3,091
76,975 86,333 – 163,308
Pursuant to the Restricted Share Plan’s rules, where the rights to the restricted shares lapse, beneficial ownership of the restricted shares is transferred to the trustee to hold in trust in an unallocated pool, to be reallocated by the Board to a participant at a future date. As at 30 June 2009, 24,159 (2008: 10,667) restricted shares were held by the trustee in the unallocated pool. A further 34,041 restricted shares were transferred to the unallocated pool on 31 July 2009.
(c) Fair value of share-based payments The fair value of services received in return for share options granted is based on the fair value of share options granted, measured using a combination of Monte-Carlo simulation and a binomial option pricing model. The valuation of the options granted in the year ended 30 June 2009 was based on the following weighted average assumptions:
30 June 2009 30 June 2008
Risk free interest rate 5.6% 6.7% Expected dividend yield 3.9% 3.7% Expected option life (in years) 5.1 5.1 Expected share price volatility 21.0% 18.5% Weighted average remaining contractual life (in years) 3.7 4.0
Restricted shares are valued based on the market price at the effective grant date, adjusted for dividends and distributions that are not received until the restricted shares vest. Volatility is based on historic volatility in Contact’s share price. The performance hurdles noted above are included in the valuation model used in determining the fair value of share options and restricted shares issued during the year.
15 Cash and cash equivalents
Group Group Parent Parent 30 June 2009 30 June 2008 30 June 2009 30 June 2008 $000 $000 $000 $000
Unrestricted cash 179,220 2,542 177,848 –
Cash and short term deposits 179,220 2,542 177,848 – Bank overdrafts (refer to note 25) (1,675) (1,752) (1,959) (2,184)
Cash and cash equivalents in the Statement of Cash Flows 177,545 790 175,889 (2,184) 82 Contact Energy Limited Annual Report 2009
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
16 Receivables and prepayments
Group Group Parent Parent 30 June 2009 30 June 2008 30 June 2009 30 June 2008 $000 $000 $000 $000
Retail electricity, other receivables and accruals 170,184 188,694 128,031 144,464 Wholesale electricity receivables 70,080 332,024 70,080 332,024 Provision for impairment (7,192) (4,761) (5,321) (3,376)
Net receivables 233,072 515,957 192,790 473,112 Prepayments 1,340 1,408 1,333 1,276 Interest receivable 637 – 637 – Advances to subsidiaries – – 11,239 14,599 Other receivables 18,787 – 18,787 –
Total receivables and prepayments 253,836 517,365 224,786 488,987
Included in retail electricity, other receivables and accruals are $29.9 million of receivables (2008: $26.3 million) that are past due but not impaired. These relate to a number of customers who are currently outside normal commercial payment terms and for whom there is no recent history of default.
Included in other operating expenses for the Group are receivables written off during the year totalling $7.6 million (2008: $4.0 million). Average wholesale electricity sales prices per megawatt hour that the Parent received for its generation in June 2009 were considerably lower than June 2008 prices due to the national hydro shortage conditions during winter 2008. Consequently, wholesale electricity receivables were higher at June 2008.
Provision for impairment
Group Group Parent Parent 30 June 2009 30 June 2008 30 June 2009 30 June 2008 $000 $000 $000 $000
Provision for impairment at start of year (4,761) (4,457) (3,376) (3,096) Charge to Income Statement (2,431) (304) (1,945) (280)
Provision for impairment at end of year (7,192) (4,761) (5,321) (3,376)
17 Inventories
Group Group Parent Parent 30 June 2009 30 June 2008 30 June 2009 30 June 2008 $000 $000 $000 $000
LPG 9,004 13,876 – – Consumables and spare parts 6,902 7,235 6,600 7,014
Total inventories 15,906 21,111 6,600 7,014 Contact Energy Limited Annual Report 2009 83
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
18 Property, plant and equipment
Group Group Parent Parent Group Generation 30 June 2009 30 June 2008 30 June 2009 30 June 2008 plant and $000 $000 $000 $000 equipment (including Other Other Generation Development Other Retail electricity, other receivables and accruals 170,184 188,694 128,031 144,464 land and land and plant and capital work capital work capital work Wholesale electricity receivables 70,080 332,024 70,080 332,024 buildings) at buildings equipment in progress at in progress in progress Provision for impairment (7,192) (4,761) (5,321) (3,376) fair value at cost at cost fair value at cost at cost Total $000 $000 $000 $000 $000 $000 $000 Net receivables 233,072 515,957 192,790 473,112 Prepayments 1,340 1,408 1,333 1,276 Cost or fair value Interest receivable 637 – 637 – Balance as at 1 July 2007 4,027,138 25,209 272,009 94,286 32,795 21,874 4,473,311 Advances to subsidiaries – – 11,239 14,599 Additions 70,394 13,139 10,718 50,055 60,761 23,343 228,410 Other receivables 18,787 – 18,787 – Transfers to/(from) capital work in progress 77,731 888 14,914 (64,889) (11,165) (17,479) – Total receivables and prepayments 253,836 517,365 224,786 488,987 Disposals – (2,992) – – (3,038) – (6,030)
Balance as at 30 June 2008 4,175,263 36,244 297,641 79,452 79,353 27,738 4,695,691
Balance as at 1 July 2008 4,175,263 36,244 297,641 79,452 79,353 27,738 4,695,691 Transfer to intangibles – – (6,467) – – (5,132) (11,599) Reclassification of New Plymouth land and buildings (14,259) 14,259 – – – – – Additions 100,876 6,517 9,709 55,307 243,871 16,723 433,003 Transfers to/(from) capital work in progress 64,538 117 15,608 (62,627) (1,723) (15,913) – Disposals – (874) (52,731) – – – (53,605)
Balance as at 30 June 2009 4,326,418 56,263 263,760 72,132 321,501 23,416 5,063,490
Depreciation and impairment losses
Balance as at 1 July 2007 – (2,624) (168,156) – – (123) (170,903) Depreciation charge (122,461) (446) (20,404) – – 123 (143,188)
Balance as at 30 June 2008 (122,461) (3,070) (188,560) – – – (314,091)
Balance as at 1 July 2008 (122,461) (3,070) (188,560) – – – (314,091) Transfer to intangibles – – 6,085 – – – 6,085 Reclassification of New Plymouth land and buildings 1,185 (1,185) – – – – – Depreciation charge (138,716) (1,086) (21,043) – – – (160,845) Disposals – 874 52,290 – – – 53,164 Impairment losses recognised in Income Statement* – – – – (2,830) – (2,830)
Balance as at 30 June 2009 (259,992) (4,467) (151,228 ) – (2,830) – (418,517)
Carrying value
As at 30 June 2008 4,052,802 33,174 109,081 79,452 79,353 27,738 4,381,600
As at 30 June 2009 4,066,426 51,796 112,532 72,132 318,671 23,416 4,644,973
* Refer to note 3. 84 Contact Energy Limited Annual Report 2009
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
Parent Generation plant and equipment (including Other Other Generation Development Other land and land and plant and capital work capital work capital work buildings) at buildings equipment in progress at in progress in progress fair value at cost at cost fair value at cost at cost Total $000 $000 $000 $000 $000 $000 $000
Cost or fair value
Balance as at 1 July 2007 4,027,138 22,538 163,750 94,286 30,665 13,075 4,351,452 Additions 70,394 13,139 10,712 50,055 54,411 12,690 211,401 Transfers to/(from) capital work in progress 77,731 – 9,522 (64,889) (11,165) (11,199) – Disposals – (2,992) – – (3,038) – (6,030)
Balance as at 30 June 2008 4,175,263 32,685 183,984 79,452 70,873 14,566 4,556,823
Balance as at 1 July 2008 4,175,263 32,685 183,984 79,452 70,873 14,566 4,556,823 Transfer to intangibles – – (6,467) – – (5,132) (11,599) Reclassification of New Plymouth land and buildings (14,259) 14,259 – – – – – Additions 100,876 5,954 2,803 55,307 238,414 16,723 420,077 Transfers to/(from) capital work in progress 64,538 – 7,966 (62,627) (1,723) (8,154) – Disposals – (874) (52,159) – – – (53,033)
Balance as at 30 June 2009 4,326,418 52,024 136,127 72,132 307,564 18,003 4,912,268
Depreciation and impairment losses
Balance as at 1 July 2007 – (2,094) (106,664) – – – (108,758) Depreciation charge (122,461) (327) (15,508) – – – (138,296)
Balance as at 30 June 2008 (122,461) (2,421) (122,172) – – – (247,054)
Balance as at 1 July 2008 (122,461) (2,421) (122,172) – – – (247,054) Transfer to intangibles – – 6,085 – – – 6,085 Reclassification of New Plymouth land and buildings 1,185 (1,185) – – – – – Depreciation charge (138,716) (945) (16,041) – – – (155,702) Disposals – 874 52,159 – – – 53,033
Balance as at 30 June 2009 (259,992) (3,677) (79,969) – – – (343,638)
Carrying value
As at 30 June 2008 4,052,802 30,264 61,812 79,452 70,873 14,566 4,309,769
As at 30 June 2009 4,066,426 48,347 56,158 72,132 307,564 18,003 4,568,630
Generation plant and equipment and capital work in progress carried at fair value Deloitte revalued Contact’s generation plant and equipment and generation capital work in progress at 30 June 2007. Deloitte is an independent valuer. The key assumptions used in the valuation model include a forecast electricity price path, sales volume forecasts, projected operational and capital expenditure profiles, capacity and life assumptions for each generation plant and a discount rate assumption. Under the Treaty of Waitangi Act 1975, the Waitangi Tribunal has the power to recommend, in appropriate circumstances, that some of the land and interest in land purchased from the Electricity Corporation of New Zealand (ECNZ) and now owned by Contact be resumed by the Crown in order that it be returned to the Maori claimants. In the event that the Tribunal’s initial recommendation is confirmed and the land is to be returned, compensation will be paid to Contact under the provisions of the Public Works Act 1981. Contact Energy Limited Annual Report 2009 85
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
The carrying amount of generation plant and equipment and generation capital work in progress, had they been recognised under the cost model, are as follows:
Depreciated cost Group Group Parent Parent 30 June 2009 30 June 2008 30 June 2009 30 June 2008 $000 $000 $000 $000
Generation plant and equipment 1,612,992 1,562,172 1,612,992 1,562,172 Generation capital work in progress 72,132 79,452 72,132 79,452
1,685,124 1,641,624 1,685,124 1,641,624
19 Intangible assets
Group Gas storage Computer Goodwill Patents rights software Total $000 $000 $000 $000 $000
Cost
Balance as at 1 July 2007 181,941 1,222 – 8,777 191,940 Additions – – 28,563 1,357 29,920
Balance as at 30 June 2008 181,941 1,222 28,563 10,134 221,860
Balance as at 1 July 2008 181,941 1,222 28,563 10,134 221,860 Transfer from property, plant and equipment – – – 11,599 11,599 Additions – – 2,305 30,897 33,202 Disposals – – – (733) (733)
Balance as at 30 June 2009 181,941 1,222 30,868 51,897 265,928
Amortisation and impairment losses
Balance as at 1 July 2007 – (974) – (2,982) (3,956) Amortisation charge – (248) – (3,104) (3,352)
Balance as at 30 June 2008 – (1,222) – (6,086) (7,308)
Balance as at 1 July 2008 – (1,222) – (6,086) (7,308) Transfer from property, plant and equipment – – – (6,085) (6,085) Amortisation charge – – – (1,109) (1,109) Disposals – – – 733 733
Balance as at 30 June 2009 – (1,222) – (12,547) (13,769)
Carrying value
As at 30 June 2008 181,941 – 28,563 4,048 214,552
As at 30 June 2009 181,941 – 30,868 39,350 252,159 86 Contact Energy Limited Annual Report 2009
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
Parent Gas storage Computer Goodwill Patents rights software Total $000 $000 $000 $000 $000
Cost
Balance as at 1 July 2007 123,307 – – 8,777 132,084 Additions – – 28,563 1,357 29,920
Balance as at 30 June 2008 123,307 – 28,563 10,134 162,004
Balance as at 1 July 2008 123,307 – 28,563 10,134 162,004 Transfer from property, plant and equipment – – – 11,599 11,599 Additions – – 2,305 30,897 33,202 Disposals – – – (733) (733)
Balance as at 30 June 2009 123,307 – 30,868 51,897 206,072
Amortisation and impairment losses
Balance as at 1 July 2007 – – – (2,982) (2,982) Amortisation charge – – – (3,104) (3,104)
Balance as at 30 June 2008 – – – (6,086) (6,086)
Balance as at 1 July 2008 – – – (6,086) (6,086) Transfer from property, plant and equipment – – – (6,085) (6,085) Amortisation charge – – – (1,109) (1,109) Disposals – – – 733 733
Balance as at 30 June 2009 – – – (12,547) (12,547)
Carrying value
As at 30 June 2008 123,307 – 28,563 4,048 155,918
As at 30 June 2009 123,307 – 30,868 39,350 193,525
Goodwill For the purpose of impairment testing, all goodwill is allocated to the retail cash-generating unit. The unit’s impairment test is based on a value in use discounted cash flow valuation. Cash flow projections are based on a 10 year financial forecast for the underlying retail business and are extrapolated using an average annual growth rate of approximately 1.0 – 3.0 per cent. The cash flow projections are discounted using post tax discount rates of 8.0 – 10.0 per cent. Key assumptions in the value in use calculation for the retail cash-generating unit are:
Assumptions Method of determination Customer numbers and customer churn Review of actual customer numbers and historical data regarding movements in customer numbers. The historical analysis is considered against expected market trends and competition for customers. Gross margin per customer Review of actual gross margin per customer and consideration of expected market movements and impacts. Cost to serve per customer Review of actual cost to serve per customer and consideration of expected market movements and impacts.
Gas storage rights On 12 June 2008, Contact acquired the exclusive right to use the Ahuroa reservoir in order to develop an underground gas storage facility field. This acquisition was completed in conjunction with Contact’s ultimate parent company, Origin Energy Limited (Origin), which acquired certain New Zealand oil and gas assets from Swift Energy New Zealand Limited (Swift). These assets included a petroleum mining licence (PML 38139, the PML) to an area that includes the Ahuroa reservoir. Contact paid $52.0 million of the total purchase price to Origin, subject to the final measurement of gas for reserves in situ at purchase date, in exchange for a beneficial interest in the PML as it relates to the Ahuroa reservoir, the right to develop and undertake gas storage in the Ahuroa reservoir, and the gas and LPG reserves contained therein. Contact’s beneficial right in the PML shall continue until such time as the term of the PML expires and is not renewed or is no longer required in order to undertake gas storage. Contact Energy Limited Annual Report 2009 87
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
As part of the acquisition of the rights, Contact has secured beneficial access to the remaining natural gas and LPG reserves (excluding condensate) in the Ahuroa reservoir. The natural gas reserves, together with additional natural gas injections, represent the investment necessary to enable the field to be used for gas storage and are referred to as cushion gas. Refer to note 20. Additions to gas storage rights for the year relate to capitalised financing costs on the original acquisition of the rights.
Impairment No impairment exists for any intangible asset at 30 June 2009 (2008: nil).
20 Gas storage – cushion gas
As part of the acquisition of the gas storage rights (refer to note 19), Contact has secured beneficial access to the remaining natural gas and LPG reserves (excluding condensate) in the Ahuroa reservoir. The natural gas reserves at the date of acquisition, together with additional natural gas injections during the year, are referred to as cushion gas and represent the investment necessary to enable the field to be used for storage of future ‘operational’ gas. Gas injected in excess of the cushion gas requirements will be treated as inventory. Cushion gas is recognised at cost, which includes capitalised interest, and is presented on the Balance Sheet as a separate non-current, non-depreciable asset, referred to as gas storage – cushion gas.
21 Investment in jointly controlled entity
Interest held by Group
Name of entity 30 June 2009 30 June 2008 Principal activity
Gasbridge Joint Venture 50% 50% LNG importation development
The Gasbridge Joint Venture is operated through Gasbridge Limited, an entity jointly controlled by Contact Aria Limited (a 100 per cent subsidiary of Contact Energy Limited) and GP No. 1 Limited (a 100 per cent subsidiary of Genesis Power Limited). The joint venture was set up to preserve the option of importing natural gas, if required in the future. The following amounts represent Contact’s 50 per cent share of the assets and liabilities, and income and results of the joint venture. These are included in the Balance Sheet and the Income Statement:
Group Group Assumptions Method of determination 30 June 2009 30 June 2008 Customer numbers and customer churn Review of actual customer numbers and historical data regarding movements $000 $000 in customer numbers. The historical analysis is considered against expected Assets market trends and competition for customers. Current assets 42 572 Gross margin per customer Review of actual gross margin per customer and consideration of expected Non–current assets* – 2,281 market movements and impacts. Total assets 42 2,853 Cost to serve per customer Review of actual cost to serve per customer and consideration of expected Liabilities market movements and impacts. Current liabilities 59 75 Total liabilities 59 75
Net (liabilities)/assets (17) 2,778
Income 4 11 Expenses (344) (432)
Loss after income tax (340) (421)
Proportionate interest in joint venture’s commitments – –
* During the year, Contact wrote off its 50 per cent share of the Gasbridge Joint Venture’s non-current assets following the decision to put on hold the development of the liquefied natural gas terminal. These assets have been excluded from the balances above. Refer to note 3. There are no contingent liabilities relating to Contact’s interest in the joint venture and no contingent liabilities in the joint venture itself. 88 Contact Energy Limited Annual Report 2009
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
22 Investment in subsidiaries
Interest held by Parent
Country of Name of entity 30 June 2009 30 June 2008 Principal activity incorporation
Empower Limited 100% 100% Electricity retailer New Zealand Stratford Power Limited 100% 100% Gas wholesaler New Zealand Contact Aria Limited 100% 100% Investment holding company New Zealand Contact Wind Limited 100% 100% Wind generation development New Zealand Rockgas Holdings Limited 100% 100% Holding and management company New Zealand Rockgas Limited 100% 100% LPG retailer New Zealand Contact Australia Pty Limited 100% 100% Investment holding company Australia Contact Operations Australia Pty Limited 100% 100% Manages Australian interests relating to operation Australia and maintenance
All subsidiaries have a balance sheet date of 30 June.
23 Investment in associates
Interest held by Group
Country of Name of entity 30 June 2009 30 June 2008 Principal activity incorporation
Oakey Power Holdings Pty Limited 25% 25% Electricity generation Australia Rockgas Timaru Limited 50% 50% LPG distribution New Zealand
Group Group Parent Parent 30 June 2009 30 June 2008 30 June 2009 30 June 2008 $000 $000 $000 $000
Carrying value of associates Carrying value at start of the year 8,015 6,210 1,579 1,579 Share of recognised revenue and expenses 3,624 2,793 – – Movements taken to foreign currency translation reserve (67) 866 – – Dividends received (2,885) (1,854) – –
Carrying value at end of the year 8,687 8,015 1,579 1,579
Rockgas Timaru Limited has a balance sheet date of 31 March.
Group Group 30 June 2009 30 June 2008 Aggregate summary financial information of associates, not adjusted for the percentage held by Contact $000 $000
Total assets 161,644 173,901 Total liabilities 127,416 141,547 Total revenues 42,138 42,889 Profit for the year 13,244 10,934 Contact Energy Limited Annual Report 2009 89
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
24 Available-for-sale financial assets
Available-for-sale financial assets are financial assets that do not fall into any other financial instrument category. Contact does not currently intend to sell these assets.
Group Group Parent Parent 30 June 2009 30 June 2008 30 June 2009 30 June 2008 $000 $000 $000 $000
At cost* Unlisted shares in Liquigas Limited 2,935 2,935 – –
2,935 2,935 – –
* As the fair value of the investment in the unlisted shares of Liquigas Limited cannot be reliably determined, the investment is held at cost.
25 Borrowings
This note provides information about the contractual terms of Contact’s borrowings. For more information about Contact’s exposure to interest rate and foreign currency risk, refer to note 26.
Carrying value of borrowings
Borrowing Group Group Parent Parent currency 30 June 2009 30 June 2008 30 June 2009 30 June 2008 denomination $000 $000 $000 $000
Current borrowings Bank overdraft NZD 1,675 1,752 1,959 2,184 Committed credit facilities NZD – 100,000 – 100,000 Other credit facilities NZD – 27,500 – 27,500 Loan from associate AUD 1,580 2,839 – – Finance lease liabilities NZD 1,056 720 1,023 700
Total current borrowings 4,311 132,811 2,982 130,384
Current portion of term borrowings 4.5% March 2010 USD 141,662 – 141,662 –
Total current portion of term borrowings 141,662 – 141,662 –
Non-current borrowings Non-current portion of term borrowings 4.5% March 2010 USD – 117,878 – 117,878 6.9% February 2013 USD 130,593 105,716 130,593 105,716 5.3% March 2014 USD 140,867 111,403 140,867 111,403 5.3% March 2015 USD 166,886 131,636 166,886 131,636 5.6% March 2018 USD 65,411 51,276 65,411 51,276 7.1% April 2018 USD 45,595 36,212 45,595 36,212
Fixed rate senior notes 549,352 554,121 549,352 554,121 Fixed rate bonds 8.0% coupon NZD 540,219 – 540,219 –
Total non-current portion of term borrowings 1,089,571 554,121 1,089,571 554,121 Finance lease liabilities NZD 1,535 604 1,495 574
Total non-current borrowings 1,091,106 554,725 1,091,066 554,695 90 Contact Energy Limited Annual Report 2009
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
Foreign currency denominated term borrowings are hedged by cross currency interest rate swaps and are measured at fair value less deferred financing costs in the Balance Sheet. All other borrowings are held at amortised cost less deferred financing costs. The reconciliation of the New Zealand dollar equivalent of notional borrowings to the Balance Sheet carrying value is detailed below:
Group and Parent Fixed rate Fixed rate Total term 2009 senior notes bonds borrowings $000 $000 $000
New Zealand dollar equivalent of notional borrowings 747,527 550,000 1,297,527 Deferred financing costs (1,678) (9,781) (11,459) Net fair value adjustment (54,835) – (54,835)
Carrying value of term borrowings 691,014 540,219 1,231,233
Current 141,662 – 141,662 Non-current 549,352 540,219 1,089,571
Carrying value of term borrowings 691,014 540,219 1,231,233
Group and Parent Fixed rate Fixed rate Total term 2008 senior notes bonds borrowings $000 $000 $000
New Zealand dollar equivalent of notional borrowings 747,527 – 747,527 Deferred financing costs (2,126) – (2,126) Net fair value adjustment (191,280) – (191,280)
Carrying value of term borrowings 554,121 – 554,121
Current – – – Non-current 554,121 – 554,121
Carrying value of term borrowings 554,121 – 554,121
Fixed rate bonds On 31 March 2009, the Parent issued $550.0 million of fixed rate bonds at a coupon rate of 8.0 per cent. Transaction costs directly attributable to the bond issue were $10.1 million. Interest is payable quarterly in arrears until the bond matures on 15 May 2014, at which point the Parent will pay the bondholders the face value of the fixed rate bonds. The Parent accounts for these bonds at amortised cost using the effective interest rate.
Security Except for finance leases, Contact’s borrowings are unsecured. Contact borrows under a negative pledge arrangement, which does not permit Contact to grant any security interest over its assets, unless it is an exception permitted within the negative pledge arrangements. All borrowing covenants requirements were met during the year.
Credit facilities Contact has total committed but undrawn facilities at 30 June 2009 of $685.0 million (2008: $585.0 million, of which $100.0 million was drawn). As at 30 June 2009 $165.0 million of the facilities mature in May 2010, $270.0 million mature in May 2011, $100.0 million mature in February 2012 and $150.0 million mature in December 2012. These committed credit facilities also support a $250.0 million commercial paper programme. The commercial paper programme was not utilised at 30 June 2009 and 30 June 2008. Contact Energy Limited Annual Report 2009 91
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
Finance lease liabilities Future minimum lease payments are as follows:
Group Group Parent Parent 30 June 2009 30 June 2008 30 June 2009 30 June 2008 $000 $000 $000 $000
Not later than one year 1,205 762 1,173 742 Later than one year and not later than five years 1,758 670 1,717 640
Minimum lease payments 2,963 1,432 2,890 1,382 Future finance charges on finance leases (372) (108) (372) (108)
Present value of finance lease liabilities 2,591 1,324 2,518 1,274
The finance leases relate to computer equipment. The present value of finance lease liabilities are as follows:
Group Group Parent Parent 30 June 2009 30 June 2008 30 June 2009 30 June 2008 $000 $000 $000 $000
Not later than one year 1,056 720 1,023 700 Later than one year and not later than five years 1,535 604 1,495 574
2,591 1,324 2,518 1,274
26 Financial instruments
Financial risk management objectives In the normal course of business, Contact is exposed to a variety of financial risks: market risk (including foreign currency risk, interest rate risk and price risk), credit risk and liquidity risk. Contact’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on Contact’s financial performance. Contact uses derivative financial instruments to hedge these risk exposures.
Fair value of derivative financial instruments The fair values of the significant types of derivative financial instruments outstanding are summarised below:
Group Fair value Fair value Fair value Fair value assets liabilities assets liabilities 30 June 2009 30 June 2009 30 June 2008 30 June 2008 $000 $000 $000 $000
Cross currency interest rate swaps 4,103 (58,922) – (191,255) Interest rate derivatives 1,809 (38,544) 14,257 (800) Cross currency interest rate swaps – margin 117 (2,454) – (6,591) Forward foreign exchange derivatives 3,713 (5,940) 4,114 (340) Electricity price hedges 11,842 (52,413) 48,123 (135,221)
Total derivative financial instruments 21,584 (158,273) 66,494 (334,207)
Disclosed as: Current 14,987 (72,368) 52,940 (139,282) Non-current 6,597 (85,905) 13,554 (194,925)
21,584 (158,273) 66,494 (334,207) 92 Contact Energy Limited Annual Report 2009
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
Parent Fair value Fair value Fair value Fair value assets liabilities assets liabilities 30 June 2009 30 June 2009 30 June 2008 30 June 2008 $000 $000 $000 $000
Cross currency interest rate swaps 4,103 (58,922) – (191,255) Interest rate derivatives 1,809 (38,544) 14,257 (800) Cross currency interest rate swaps – margin 117 (2,454) – (6,591) Forward foreign exchange derivatives 3,713 (5,889) 4,114 (82) Electricity price hedges 11,842 (52,413) 48,123 (135,221)
Total derivative financial instruments 21,584 (158,222) 66,494 (333,949)
Disclosed as: Current 14,987 (72,317) 52,940 (139,024) Non-current 6,597 (85,905) 13,554 (194,925)
21,584 (158,222) 66,494 (333,949)
Changes in fair value of financial instruments The changes in the fair values of financial instruments recognised in the Income Statement and cash flow hedge reserve are summarised below:
Group Income Cash flow Income Cash flow Hedge Statement hedge reserve Statement hedge reserve accounting 30 June 2009 30 June 2009 30 June 2008 30 June 2008 Favourable/(unfavourable) designation $000 $000 $000 $000
Cross currency interest rate swaps Fair value hedge 136,436 – 124,317 – Borrowings (136,444) – (124,448) –
(8) – (131) –
Interest rate derivatives No hedge (51,096) 904 (15,767) 802 Cross currency interest rate swaps – margin Cash flow hedge 2,444 1,810 349 1,778 Forward foreign exchange derivatives Cash flow hedge – (6,058) – 8,336 Forward foreign exchange derivatives No hedge 56 – (56) – Electricity price hedges Cash flow hedge 1,814 55,435 4,807 (117,366) Electricity price hedges No hedge (10,721) – 8,872 – Income tax on changes in fair value of financial instruments taken to equity – (16,472) – 31,878
Total change in fair value of financial instruments (57,511) 35,619 (1,926) (74,572)
Parent Income Cash flow Income Cash flow Hedge Statement hedge reserve Statement hedge reserve accounting 30 June 2009 30 June 2009 30 June 2008 30 June 2008 Favourable/(unfavourable) designation $000 $000 $000 $000
Cross currency interest rate swaps Fair value hedge 136,436 – 124,317 – Borrowings (136,444) – (124,448) –
(8) – (131) –
Interest rate derivatives No hedge (51,096) 904 (15,767) 802 Cross currency interest rate swaps – margin Cash flow hedge 2,444 1,810 349 1,778 Forward foreign exchange derivatives Cash flow hedge – (6,260) – 7,676 Forward foreign exchange derivatives No hedge 56 – (56) – Electricity price hedges Cash flow hedge 1,814 55,435 4,807 (117,366) Electricity price hedges No hedge (10,721) – 8,872 – Income tax on changes in fair value of financial instruments taken to equity – (16,394) – 32,102
Total change in fair value of financial instruments (57,511) 35,495 (1,926) (75,008) Contact Energy Limited Annual Report 2009 93
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
The non-cash total change in fair value of financial instruments recorded in the Income Statement of $(57.5) million (2008: $(1.9) million) is principally due to a movement in interest rate derivatives and electricity price hedges that have not been designated in a hedge relationship. The interest rate derivatives are revalued applying market interest rates. As a result, the change in fair value of interest rate derivatives is a non-cash item that fluctuates over time in accordance with changes in market interest rates. The movement in the electricity price hedge is due to the volatility in the forecast market price path.
Movement in cash flow hedge reserve
Group Parent $000 $000
Balance as at 1 July 2007 293 905 Effective portion of cash flow hedges recognised in the cash flow hedge reserve (88,878) (88,711) Amount transferred from the cash flow hedge reserve to operating revenue 21,218 21,218 Amount transferred from the cash flow hedge reserve to operating expenses 1,257 345 Amount transferred from the cash flow hedge reserve to change in fair value of financial instruments 802 802 Amount transferred from the cash flow hedge reserve to property, plant and equipment 2,930 2,930 Amount transferred from the cash flow hedge reserve in relation to deferred tax (11,901) (11,592)
Balance as at 30 June 2008 (74,279) (74,103)
Balance as at 1 July 2008 (74,279) (74,103) Effective portion of cash flow hedges recognised in the cash flow hedge reserve 46,003 46,045 Amount transferred from the cash flow hedge reserve to operating revenue (10,853) (10,853) Amount transferred from the cash flow hedge reserve to operating expenses (717) (975) Amount transferred from the cash flow hedge reserve to change in fair value of financial instruments 904 904 Amount transferred from the cash flow hedge reserve to property, plant and equipment (2,961) (2,961) Amount transferred from the cash flow hedge reserve in relation to deferred tax 3,243 3,335
Balance as at 30 June 2009 (38,660) (38,608)
The gain from ineffectiveness recognised in the Income Statement of both the Parent and Group from cash flow hedges is $2.1 million (2008: $0.8 million).
Risk management Risk management is carried out by a central treasury department (Treasury) for interest rate and foreign exchange exposures. Risk management activities in respect of the electricity exposures are undertaken by the wholesale group (Wholesale). Both Treasury and Wholesale operate under policies approved by the Board. Treasury and Wholesale identify, evaluate and hedge the financial risks in close co-operation with Contact’s operating units. The Board’s policies provide written principles for overall risk management, as well as written policies covering specific areas, such as foreign currency risk, price risk, credit risk, interest rate risk, use of derivative financial instruments and non-derivative financial instruments, and the investment of excess liquidity.
(a) Market risk (i) Foreign currency risk Contact is exposed to foreign currency risk as a result of transactions denominated in a currency other than Contact’s functional currency, New Zealand dollars. The currencies giving rise to this risk are primarily Australian dollar, US dollar, Swiss franc and the Euro. Foreign currency risk arises from future commercial transactions (including interest payments on long term borrowings and the purchase of capital equipment and maintenance), recognised assets and liabilities (including borrowings) and net investments in foreign operations. Contact uses forward foreign exchange contracts to manage foreign exchange risk arising from future commercial transactions and recognised assets and liabilities. To manage the foreign currency risk arising from the future interest payments required on foreign currency denominated long term borrowings, Contact uses cross currency interest rate swaps (fixed to floating), which convert the foreign currency denominated future interest payments into the functional currency for the full term of the underlying borrowings. Treasury is responsible for managing the net position in each foreign currency within the parameters of Board policy. Contact has certain investments in foreign operations whose net assets are exposed to foreign currency translation risk. Currency exposure arising from the net assets of Contact’s foreign operations is managed primarily through borrowings denominated in the relevant foreign currencies. 94 Contact Energy Limited Annual Report 2009
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
Forward foreign exchange contracts The aggregate notional principal amount of the outstanding forward foreign exchange contracts at 30 June 2009 was $120.3 million (2008: $226.4 million). As at 30 June 2009, all foward foreign exchange contracts were designated in a cash flow hedge (2008: $206.3 million). The hedged anticipated transactions denominated in foreign currency are expected to occur at various dates between one month to one year and three months (2008: two years and three months) from the balance sheet date. Gains and losses recognised in the cash flow hedge reserve in equity on forward foreign exchange contracts as at 30 June 2009 will be released at dates when the cash flow from the underlying anticipated transactions will occur and will be recognised in the Income Statement or included in the cost of any asset or liability acquired. During the year to 30 June 2009, no hedges were de-designated, and all underlying forecast transactions remain highly probable to occur as originally forecast.
Sensitivity analysis At 30 June 2009, if the New Zealand dollar had weakened/strengthened by 10 per cent against the currencies with which Contact had foreign currency risk with all other variables held constant: • post-tax profit for the year would not have been materially different, • the cash flow hedge reserve component of equity would have been $8.7 million higher/lower (2008: $15.5 million), arising from foreign exchange gains/losses on revaluation of forward foreign exchange contracts in a cash flow hedge relationship. (ii) Price risk Contact is exposed to commodity price risk, primarily from electricity prices. To manage its commodity price risks in respect of electricity, Contact utilises electricity price hedges including options, where Contact sells and buys electricity forward at a fixed price.
Electricity price hedges The aggregate notional volume of the outstanding fixed volume electricity derivatives at 30 June 2009 was 1,522 GWh (2008: 2,387 GWh). The aggregate notional volume of the outstanding variable volume electricity derivatives at 30 June 2009 was 7,634 GWh (2008: 10,408 GWh). Electricity derivatives are hedging underlying exposures over various trade periods out to December 2012. As at 30 June 2009 the fair value of the electricity price hedges was $(40.6) million (2008: $(87.1) million), $(38.8) million of which was designated in a cash flow hedge (2008: $(96.1) million). Gains and losses on hedged electricity derivatives recognised in the cash flow hedge reserve in equity will be continuously released to the Income Statement in the period in which the underlying sale/purchase transactions are recognised in the Income Statement. Sensitivity analysis The following table summarises the impact of increases/decreases of the relevant electricity forward prices on Contact’s post-tax profit for the year and on other components of equity. The sensitivity analysis is based on the assumption that the relevant market prices have increased/decreased by 10 per cent.
Group and Parent 30 June 2009 30 June 2009 30 June 2008 30 June 2008 +10% -10% +10% -10% Favourable/(unfavourable) $000 $000 $000 $000
Impact on post-tax profit 251 (786) 8,776 (3,774) Impact on equity 13,013 (12,335) 1,393 4,676 Contact Energy Limited Annual Report 2009 95
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
(iii) Interest rate risk (cash flow and fair value) Contact’s income and operating cash flows are substantially independent of changes in market interest rates. Contact is primarily exposed to interest rate risk as a result of issuing term borrowings at fixed interest rates. Contact manages the combined interest and foreign currency risk on borrowings issued in foreign currency, by entering into cross currency interest rate swaps to convert the proceeds into a floating rate New Zealand dollar exposure. New Zealand dollar interest rate swaps are used to convert floating rate exposure into fixed rate exposure.
Cross currency interest rate swaps The aggregate notional principal amount of the outstanding cross currency interest rate swap contracts at 30 June 2009 was $747.5 million (2008: $747.5 million). The cross currency interest rate swaps have been split into two components for the purposes of hedge designation. The hedge of the benchmark interest rate is designated as a fair value hedge, and the hedge of the issuance margin is designated as a cash flow hedge. The hedged anticipated interest payments are expected to occur at various dates between one month to nine years (2008: one month to ten years) from the balance sheet date as a result of the maturities of the underlying borrowings. Interest rate swaps The aggregate notional principal amount of the outstanding interest rate swap contracts at 30 June 2009 was $1,016.4 million (2008: $1,041.0 million) including $355.0 million of forward starting swaps (2008: $360.0 million). The anticipated interest payment transactions are expected to occur at various dates between one month to 10 years (2008: one month to 10 years) from the balance sheet date. Sensitivity analysis At 30 June 2009, if interest rates at that date had been 100 basis points higher/lower, with all other variables held constant, post-tax profit for the year would have been $17.0 million higher/lower (2008: $13.6 million). This is mainly as a result of the fair value change in interest rate swaps, which are valid economic hedges but which do not qualify for hedge accounting under NZIAS 39. There would be no effect on other components of equity.
(b) Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to Contact. Contact is exposed to credit risk in the normal course of business arising from receivables, the purchase of commercial paper and transactions with financial institutions. The Board has approved a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral, where appropriate, as a means of mitigating the risk of financial loss from defaults. Contact minimises its exposure to credit risk of receivables through the adoption of counterparty credit limits. Derivative counterparties and cash transactions are limited to high-credit-quality financial institutions and other organisations in the relevant industry. Contact’s exposure and the credit ratings of its counterparties are continuously monitored, and the aggregate value of transactions concluded are spread amongst approved counterparties. The carrying amounts of financial assets recognised in the Balance Sheet best represent Contact’s maximum exposure to credit risk at the balance sheet date without taking account of the value of any collateral obtained. Contact does not have any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. Concentration of credit risk with respect to receivables is limited due to Contact’s large customer base in a diverse range of industries throughout New Zealand. Contact has no significant concentration of credit risk with any one financial institution.
(c) Liquidity risk Contact’s ability to attract cost-effective funding is largely driven by its credit standing. Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the spreading of debt maturities. Liquidity risk is monitored by continuously forecasting actual cash flows and matching the maturity profiles of financial assets and liabilities. 96 Contact Energy Limited Annual Report 2009
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
Contractual maturities of financial liabilities and derivative financial instruments The amounts disclosed are the contracted undiscounted cash flows, except for the derivative financial instruments that are the undiscounted settlements expected under the contracts. Balances due within 12 months equal their carrying value as the impact of discounting is not significant. As the amounts presented are contracted undiscounted cash flows, the totals will not reconcile with the Balance Sheet.
Group Total 2009 contractual Less than More than cash flows 1 year 1–2 years 2–5 years 5 years Outflow/(inflow) Note $000 $000 $000 $000 $000
Payables and accruals 27 304,235 304,235 – – – Borrowings 25 1,604,451 222,784 73,817 1,014,402 293,448 Finance lease liabilities 25 2,963 1,205 783 975 – Net settled derivative financial instruments: 26 Electricity price hedges 44,487 8,789 16,123 19,575 – Interest rate derivatives 40,623 24,934 11,841 4,288 (440) Gross settled derivative financial instruments: 26 Forward foreign exchange derivatives – Inflow (111,637) (109,654) (1,983) – – – Outflow 114,684 112,851 1,833 – – Cross currency interest rate swaps – Inflow (831,010) (175,462) (29,809) (332,236) (293,503) – Outflow 972,957 189,594 32,254 407,596 343,513
Total 2,141,753 579,276 104,859 1,114,600 343,018
Group Total 2008 contractual Less than More than cash flows 1 year 1–2 years 2–5 years 5 years Outflow/(inflow) Note $000 $000 $000 $000 $000
Payables and accruals 27 540,619 540,619 – – – Borrowings 25 868,756 164,708 148,700 174,179 381,169 Finance lease liabilities 25 1,432 762 565 105 – Net settled derivative financial instruments: 26 Electricity price hedges 94,794 47,509 16,981 30,304 – Interest rate derivatives (16,554) (9,899) (3,401) (2,733) (521) Gross settled derivative financial instruments: 26 Forward foreign exchange derivatives – Inflow (213,879) (175,778) (36,421) (1,680) – – Outflow 215,861 175,289 38,739 1,833 – Cross currency interest rate swaps – Inflow (734,736) (30,743) (148,643) (174,134) (381,216) – Outflow 1,104,101 69,864 222,323 277,900 534,014
Total 1,860,394 782,331 238,843 305,774 533,446 Contact Energy Limited Annual Report 2009 97
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
Parent Total 2009 contractual Less than More than cash flows 1 year 1–2 years 2–5 years 5 years Outflow/(inflow) Note $000 $000 $000 $000 $000
Payables and accruals 27 338,246 338,246 – – – Borrowings 25 1,603,154 221,487 73,817 1,014,402 293,448 Finance lease liabilities 25 2,890 1,173 742 975 – Net settled derivative financial instruments: 26 Electricity price hedges 44,487 8,789 16,123 19,575 – Interest rate derivatives 40,623 24,934 11,841 4,288 (440) Gross settled derivative financial instruments: 26 Forward foreign exchange derivatives – Inflow (106,071) (104,088) (1,983) – – – Outflow 109,052 107,219 1,833 – – Cross currency interest rate swaps – Inflow (831,010) (175,462) (29,809) (332,236) (293,503) – Outflow 972,957 189,594 32,254 407,596 343,513
Total 2,174,328 611,892 104,818 1,114,600 343,018
Parent Total 2008 contractual Less than More than cash flows 1 year 1–2 years 2–5 years 5 years Outflow/(inflow) Note $000 $000 $000 $000 $000
Payables and accruals 27 522,949 522,949 – – – Borrowings 25 866,349 162,301 148,700 174,179 381,169 Finance lease liabilities 25 1,382 742 535 105 – Net settled derivative financial instruments: 26 Electricity price hedges 94,794 47,509 16,981 30,304 – Interest rate derivatives (16,554) (9,899) (3,401) (2,733) (521) Gross settled derivative financial instruments: 26 Forward foreign exchange derivatives – Inflow (203,646) (165,545) (36,421) (1,680) – – Outflow 205,290 164,718 38,739 1,833 – Cross currency interest rate swaps – Inflow (734,736) (30,743) (148,643) (174,134) (381,216) – Outflow 1,104,101 69,864 222,323 277,900 534,014
Total 1,839,929 761,896 238,813 305,774 533,446
Fair values The carrying amount of financial assets and financial liabilities recorded in the financial statements approximates their fair values, with the exception of the fixed rate bonds, which have a fair value of $563.4 million, compared with a carrying value of $540.2 million.
Estimation of fair values The fair values and net fair values of financial assets and financial liabilities are determined as follows: • the fair values of financial assets and liabilities with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market prices, • the fair values of other financial assets and financial liabilities are calculated using market-quoted rates based on discounted cash flow analysis, • the fair values of derivative financial instruments are calculated using quoted prices. Where such prices are not available, use is made of discounted cash flow analysis using the applicable yield curve or available forward price data for the duration of the instruments, • the fair value of fixed rate bonds is determined with reference to quoted market prices. 98 Contact Energy Limited Annual Report 2009
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
Where the fair value of a derivative financial instrument is calculated as the present value of the estimated future cash flows of the instrument, the two key types of variables used by the valuation technique are: • forward price curves (for the relevant underlying interest rates, foreign exchange rates or electricity prices), or • discount rates. The selection of variables requires significant judgement and, therefore, there is a range of reasonably possible assumptions in respect of these variables that could be used in estimating the fair value of these derivatives. Maximum use is made of observable market data when selecting variables and developing assumptions for the valuation techniques.
Financial instruments by category The following tables provide an analysis of financial assets and financial liabilities by category.
Group Derivatives Derivatives 2009 Available- designated designated for-sale Other as fair value as cash flow Held for Loans and financial financial hedging hedging trading receivables assets* liabilities instruments instruments Total Note $000 $000 $000 $000 $000 $000 $000
Assets Cash and short term deposits 15 – 179,220 – – – – 179,220 Receivables and prepayments 16 – 253,836 – – – – 253,836 Derivative financial instruments 26 1,539 – – – 4,103 15,942 21,584 Available-for-sale financial assets 24 – – 2,935 – – – 2,935
Total financial assets 1,539 433,056 2,935 – 4,103 15,942 457,575 Total non-financial assets 4,973,964
Total assets 5,431,539
Liabilities Borrowings 25 – – – 1,237,079 – – 1,237,079 Derivative financial instruments 26 40,013 – – – 58,922 59,338 158,273 Payables and accruals 27 – – – 304,235 – – 304,235
Total financial liabilities 40,013 – – 1,541,314 58,922 59,338 1,699,587 Total non-financial liabilities 789,684
Total liabilities 2,489,271
* Refer to note 24. Contact Energy Limited Annual Report 2009 99
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
Group Derivatives Derivatives 2008 Available- designated designated for-sale Other as fair value as cash flow Held for Loans and financial financial hedging hedging trading receivables assets* liabilities instruments instruments Total Note $000 $000 $000 $000 $000 $000 $000
Assets Cash and short term deposits 15 – 2,542 – – – – 2,542 Receivables and prepayments 16 – 517,365 – – – – 517,365 Derivative financial instruments 26 21,862 – – – – 44,632 66,494 Available-for-sale financial assets 24 – – 2,935 – – – 2,935
Total financial assets 21,862 519,907 2,935 – – 44,632 589,336 Total non-financial assets 4,652,007
Total assets 5,241,343
Liabilities Borrowings 25 – – – 687,536 – – 687,536 Derivative financial instruments 26 (577) – – – 191,255 143,529 334,207 Payables and accruals 27 – – – 540,619 – – 540,619
Total financial liabilities (577) – – 1,228,155 191,255 143,529 1,562,362 Total non-financial liabilities 774,910
Total liabilities 2,337,272
* Refer to note 24.
Parent Derivatives Derivatives 2009 Available- designated designated for-sale Other as fair value as cash flow Held for Loans and financial financial hedging hedging trading receivables assets* liabilities instruments instruments Total Note $000 $000 $000 $000 $000 $000 $000
Assets Cash and short term deposits 15 – 177,848 – – – – 177,848 Receivables and prepayments 16 – 224,786 – – – – 224,786 Derivative financial instruments 26 1,539 – – – 4,103 15,942 21,584 Available-for-sale financial assets 24 – – – – – – –
Total financial assets 1,539 402,634 – – 4,103 15,942 424,218 Total non-financial assets 4,955,361
Total assets 5,379,579
Liabilities Borrowings 25 – – – 1,235,710 – – 1,235,710 Derivative financial instruments 26 40,013 – – – 58,922 59,287 158,222 Payables and accruals 27 – – – 338,246 – – 338,246
Total financial liabilities 40,013 – – 1,573,956 58,922 59,287 1,732,178 Total non-financial liabilities 785,078
Total liabilities 2,517,256
* Refer to note 24. 100 Contact Energy Limited Annual Report 2009
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
Parent Derivatives Derivatives 2008 Available- designated designated for-sale Other as fair value as cash flow Held for Loans and financial financial hedging hedging trading receivables assets* liabilities instruments instruments Total Note $000 $000 $000 $000 $000 $000 $000
Assets Cash and short term deposits 15 – – – – – – – Receivables and prepayments 16 – 488,987 – – – – 488,987 Derivative financial instruments 26 21,862 – – – – 44,632 66,494 Available-for-sale financial assets 24 – – – – – – –
Total financial assets 21,862 488,987 – – – 44,632 555,481 Total non-financial assets 4,634,297
Total assets 5,189,778
Liabilities Borrowings 25 – – – 685,079 – – 685,079 Derivative financial instruments 26 (577) – – – 191,255 143,271 333,949 Payables and accruals 27 – – – 522,949 – – 522,949
Total financial liabilities (577) – – 1,208,028 191,255 143,271 1,541,977 Total non-financial liabilities 769,689
Total liabilities 2,311,666
* Refer to note 24.
Capital risk management objectives Contact’s capital includes share capital, reserves and retained earnings. Contact’s objectives when managing capital are to safeguard Contact’s ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Board may adjust the amount and nature of distributions to shareholders, return capital to shareholders, issue new shares or sell assets. Contact monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital funding. Net debt is calculated as total borrowings less short term deposits. Total borrowings are calculated using the New Zealand dollar equivalent value of unsecured loans after the effect of foreign exchange hedging of the borrowings and before deduction of deferred financing costs. Total capital funding is calculated as shareholders’ equity, adjusted for the net effect of the fair value of financial instruments, plus net debt. The gearing ratios at 30 June 2009 and 30 June 2008 were as follows:
Group Group 30 June 2009 30 June 2008 Note $000 $000
Net debt Current borrowings 25 (4,311) (132,811) New Zealand dollar equivalent of term borrowings – after foreign exchange hedging and before deferred financing costs 25 (747,527) (747,527) Fixed rate bond before deferred financing costs 25 (550,000) – Other non-current borrowings 25 (1,535) (604) Cash and short term deposits 15 179,220 2,542
Total net debt (1,124,153) (878,400)
Equity Shareholders’ equity 12, 13 (2,942,268) (2,904,071) Remove net effect of fair value of financial instruments after tax (57,298) (51,210)
Adjusted equity (2,999,566) (2,955,281)
Total capital funding (4,123,719) (3,833,681) Gearing ratio 27% 23% Contact Energy Limited Annual Report 2009 101
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
27 Payables and accruals
Group Group Parent Parent 30 June 2009 30 June 2008 30 June 2009 30 June 2008 $000 $000 $000 $000
Electricity purchases accrual 46,012 250,163 39,943 205,756 Other trade payables and accruals 230,999 263,828 193,467 235,608 Advances from subsidiaries – – 78,250 55,741 Employee benefits 14,723 18,681 14,085 17,897 Interest payable 12,501 7,947 12,501 7,947
Total payables and accruals 304,235 540,619 338,246 522,949
The purchase price that Contact paid for electricity to supply its customers was considerably lower in June 2009 than in June 2008 as a result of lower prices in the wholesale market. Consequently, the electricity purchases accrual is lower than at 30 June 2008.
28 Provisions
Group Restoration/ environmental New Plymouth rehabilitation Other Total $000 $000 $000 $000
Balance at 1 July 2007 – 29,110 295 29,405 Provisions made during the year 31,457 3,272 2,958 37,687 Provisions used during the year (12,620) (1,388) (652) (14,660) Provisions reversed during the year – (481) (125) (606) Unwind of discount rate – 2,746 – 2,746
Balance at 30 June 2008 18,837 33,259 2,476 54,572
Balance at 1 July 2008 18,837 33,259 2,476 54,572 Provisions made during the year – 3,295 165 3,460 Provisions used during the year (15,352) (3,129) (390) (18,871) Provisions reversed during the year – (1,215) – (1,215) Unwind of discount rate – 3,999 – 3,999
Balance at 30 June 2009 3,485 36,209 2,251 41,945
Current 3,485 4,137 573 8,195 Non-current – 32,072 1,678 33,750
3,485 36,209 2,251 41,945 102 Contact Energy Limited Annual Report 2009
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
Parent Restoration/ environmental New Plymouth rehabilitation Other Total $000 $000 $000 $000
Balance at 1 July 2007 – 26,621 295 26,916 Provisions made during the year 31,457 3,272 2,958 37,687 Provisions used during the year (12,620) (1,365) (652) (14,637) Provisions reversed during the year – – (125) (125) Unwind of discount rate – 2,606 – 2,606
Balance at 30 June 2008 18,837 31,134 2,476 52,447
Balance at 1 July 2008 18,837 31,134 2,476 52,447 Provisions made during the year – 3,295 165 3,460 Provisions used during the year (15,352) (3,068) (390) (18,810) Unwind of discount rate – 2,972 – 2,972
Balance at 30 June 2009 3,485 34,333 2,251 40,069
Current 3,485 3,895 573 7,953 Non-current – 30,438 1,678 32,116
3,485 34,333 2,251 40,069
Refer to note 4 for discussion on the provision for removal of asbestos at New Plymouth power station. Cash outflows in relation to this are expected to occur within the next year. The restoration and environmental rehabilitation provisions include estimates of future expenditures for the abandonment and restoration of areas from which natural resources are extracted and the expected cost of environmental rehabilitation of commercial sites that require remediation of conditions resulting from present operations. Cash outflows are typically expected to coincide with the end of the useful life of the sites. Other provisions cover a range of commercial matters that are the subject of legal privilege and/or confidentiality arrangements. Contact Energy Limited Annual Report 2009 103
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
29 Deferred tax
Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are offset on the face of the Balance Sheet where they relate to entities within a Consolidated Income Tax Group.
Group Assets Assets Liabilities Liabilities 30 June 2009 30 June 2008 30 June 2009 30 June 2008 $000 $000 $000 $000
Property, plant and equipment – – (783,827) (763,392) Investment in associate – – (2,235) (2,071) Inventories 2,179 1,759 – – Employee benefits 4,241 5,166 – – Provisions 15,173 18,007 – – Financial instruments 23,889 22,930 – – Other – – (3,512) (861)
Total 45,482 47,862 (789,574) (766,324)
Parent Assets Assets Liabilities Liabilities 30 June 2009 30 June 2008 30 June 2009 30 June 2008 $000 $000 $000 $000
Property, plant and equipment – – (780,996) (761,677) Investment in associate – – (174) (174) Inventories 2,179 1,759 – – Employee benefits 4,053 4,930 – – Provisions 14,048 16,930 – – Financial instruments 23,889 22,853 – – Other – – (4,237) (1,863)
Total 44,169 46,472 (785,407) (763,714)
Movement in deferred tax
Group Balance Recognised in Recognised in Change in Balance 1 July 2008 income equity tax rate* 30 June 2009 $000 $000 $000 $000 $000
Property, plant and equipment** (763,392) (20,435) – – (783,827) Investment in associate (2,071) 1,133 (1,297) – (2,235) Inventories 1,759 420 – – 2,179 Employee benefits 5,166 (925) – – 4,241 Provisions 18,007 (3,822) 988 – 15,173 Financial instruments 22,930 17,431 (16,472) – 23,889 Other (861) (2,651) – – (3,512)
Total (718,462) (8,849) (16,781) – (744,092) 104 Contact Energy Limited Annual Report 2009
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
Group Balance Recognised in Recognised in Change in Balance 1 July 2007 income equity tax rate* 30 June 2008 $000 $000 $000 $000 $000
Property, plant and equipment** (749,850) (15,400) – 1,858 (763,392) Investment in associate (1,516) (833) 278 – (2,071) Inventories 1,614 321 – (176) 1,759 Employee benefits 4,813 840 – (487) 5,166 Provisions 10,783 7,168 1,080 (1,024) 18,007 Financial instruments (9,504) 636 35,129 (3,331) 22,930 Other 1,487 (2,523) – 175 (861)
Total (742,173) (9,791) 36,487 (2,985) (718,462)
Parent Balance Recognised in Recognised in Change in Balance 1 July 2008 income equity tax rate* 30 June 2009 $000 $000 $000 $000 $000
Property, plant and equipment** (761,677) (19,319) – – (780,996) Investment in associate (174) – – – (174) Inventories 1,759 420 – – 2,179 Employee benefits 4,930 (877) – – 4,053 Provisions 16,930 (3,870) 988 – 14,048 Financial instruments 22,853 17,430 (16,394) – 23,889 Other (1,863) (2,374) – – (4,237)
Total (717,242) (8,590) (15,406) – (741,238)
Parent Balance Recognised in Recognised in Change in Balance 1 July 2007 income equity tax rate* 30 June 2008 $000 $000 $000 $000 $000
Property, plant and equipment** (748,815) (14,715) – 1,853 (761,677) Investment in associate (174) – – – (174) Inventories 1,614 321 – (176) 1,759 Employee benefits 4,472 921 – (463) 4,930 Provisions 9,458 7,378 1,080 (986) 16,930 Financial instruments (9,803) 634 35,345 (3,323) 22,853 Other 175 (2,224) – 186 (1,863)
Total (743,073) (7,685) 36,425 (2,909) (717,242)
* The change in tax rate column reflects the net change in deferred tax as a result of the reduction in the corporate income tax rate to 30 per cent enacted in May 2007 and effective for Contact’s income tax year ending 30 June 2009. The effect of the change was recognised in the Income Statement in 2008 (Group $0.4 million and Parent $0.5 million) and in equity (Group and Parent $3.4 million) consistent with the underlying items that gave rise to the deferred tax. ** Deferred tax on the revaluation increment of generation property, plant and equipment as at 30 June 2007 is recorded against the asset revaluation reserve in equity. Refer to note 13. Contact holds its property, plant and equipment on capital account for income tax purposes. Where the generation plant and equipment and generation capital work in progress is revalued, and there is no similar adjustment to the tax base, a taxable temporary difference is created that is recognised in deferred tax. The deferred tax liability on these revaluations would not crystallise under existing income tax legislation if the assets were to be sold at the balance sheet date. At 30 June 2009, the amount of deferred tax relating to the revaluation of generation plant and equipment and generation capital work in progress was $535.7 million (2008: $563.5 million).
Unrecognised deferred tax assets and liabilities There are no unrecognised deferred tax assets and liabilities. Contact Energy Limited Annual Report 2009 105
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
30 Commitments
Capital and investment commitments
Group Group Parent Parent 30 June 2009 30 June 2008 30 June 2009 30 June 2008 $000 $000 $000 $000
Not later than one year 173,612 151,429 173,426 151,429 Later than one year and not later than five years 75,658 108,481 75,658 108,481 Later than five years 551 3,814 551 3,814
Total capital and investment commitments 249,821 263,724 249,635 263,724
Operating lease commitments The operating leases are of a rental nature and are on normal commercial terms and conditions. The majority of the lease commitments are for building accommodation. The remainder relate to vehicles, plant and equipment.
Group Group Parent Parent 30 June 2009 30 June 2008 30 June 2009 30 June 2008 $000 $000 $000 $000
Not later than one year 6,592 5,780 4,796 4,134 Later than one year and not later than five years 13,395 14,319 10,816 11,381 Later than five years 9,728 11,959 5,114 7,608
Total operating lease commitments 29,715 32,058 20,726 23,123
Lease commitments are stated exclusive of GST.
Other operating commitments Other operating commitments comprise a portion of long term maintenance agreements entered into for generation assets, with the remainder of commitments under these agreements included in capital and investment commitments.
Group Group Parent Parent 30 June 2009 30 June 2008 30 June 2009 30 June 2008 $000 $000 $000 $000
Not later than one year 6,661 5,172 6,661 5,172 Later than one year and not later than five years 5,703 9,962 5,703 9,962
Total other operating commitments 12,364 15,134 12,364 15,134 106 Contact Energy Limited Annual Report 2009
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
Gas commitments Maui contracts with Maui Development Limited Contact has entered into four contracts to secure Maui gas with Maui Development Limited, each with a 1 April 2007 first delivery date and a 31 December 2014 expiry date. Delivery of gas from early 2014 is subject to confirmation of sufficient Maui reserves. Under the four contracts and while the contracts remain in effect, Contact has agreed to make fixed annual payments for the right to take gas. The contracts require Contact to have arrangements in place in order to transport the gas in the Maui pipeline.
Shell New Zealand Limited Contact has a contract with Energy Finance NZ Limited (a Shell New Zealand Limited subsidiary), whereby Contact has agreed to make fixed monthly payments over the period 1 October 2007 to 31 December 2010 for the right to take gas.
OMV New Zealand Limited Contact has contracts with OMV New Zealand Limited giving Contact rights to gas from the Pohokura gas field until 31 December 2013. Under the current contract that expires on 31 March 2012, Contact is committed to pay fixed fees and may have to pay additional fees if the amount of gas actually uplifted is less than a contractually specified amount on each day. Under the second contract that has a first delivery date of 1 April 2012 and expiry date of 31 December 2013, Contact has agreed to make fixed annual payments for the right to take gas. Both contracts require Contact to have arrangements in place to transport the gas in the Maui pipeline.
Gas transmission contracts Contact has contracts with Vector Gas Limited relating to the transport of natural gas. Under these contracts, Contact is committed to pay minimum fees for reserved pipeline capacity.
31 Resource consents
Contact requires resource consents (authorisations to use land, water and air obtained under the Resource Management Act 1991) to enable it to operate its geothermal, thermal and hydro power stations. The duration of resource consents may vary up to a maximum of 35 years except for land use consents, which run for the duration of the activity they authorise. The current resource consents within which Contact’s power stations operate are due for renewal at varying times. In addition to consents for its existing operational power stations, Contact holds resource consents to construct and operate a new 400 megawatt (MW) combined-cycle power station (Otahuhu C) and has the ability to construct and operate a 120 MW open-cycle power station under its existing consents (Otahuhu A), both at its Otahuhu site. Contact also has consents to construct and operate an up to 500 MW combined-cycle power station at its Stratford site (TCC 2). Lapse dates on the consents for the combined-cycle plants have been extended to 2011 (Otahuhu C) and 2017 (TCC 2). Contact also has consents to construct and operate a net 220 MW geothermal power station at Te Mihi (near Taupo), a 200 MW gas-fired peaking power station at Stratford and a 20 MW geothermal binary plant at Taupo. Construction of the Stratford gas-fired peaking power station and the geothermal binary plant has started. Contact is applying for a variation of consents to allow the geothermal binary plant at Taupo to operate at 23 MW. Contact has obtained consents to construct and operate a 17.2 MW hydro power station on the Hawea dam. In addition, Contact has applied to vary one of its Clutha hydro consents which would provide a greater operating range in Lake Roxburgh. Contact has filed applications for a 177 MW wind farm at Waitahora, near Dannevirke in the Manawatu. Initial consents have been declined, and Contact has appealed to the Environment Court and is currently awaiting formal court mediation. Contact has also filed applications for an up to 540 MW wind farm on the west Waikato coast called Haua–uru ma– raki. The applications were called in by the Minister for the Environment to be heard by a board of inquiry. The hearing commenced in April 2009 and has been adjourned for 12 months until May 2010.
32 Related party transactions
Parent company As at 30 June 2009, Origin Energy Pacific Holdings Limited was the major shareholder in the Parent, owning 50.6 per cent (2008: 50.6 per cent) of the ordinary shares of the Parent. Further shares amounting to 0.8 per cent (2008: 0.8 per cent) of the Parent’s ordinary shares are held by Origin Energy Universal Holdings Limited and Origin Energy New Zealand Limited. All three companies are 100 per cent ultimately owned by Origin Energy Limited, an Australian incorporated company. Contact Energy Limited Annual Report 2009 107
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
Identity of related parties with whom material transactions have occurred Notes 21, 22, and 23 identify group entities, associates and joint ventures in which Contact has an interest. All of these entities are related parties of the Parent. Related parties also include other Origin Energy Group entities, the Directors and members of the Senior Management Team.
Material related party transactions Transactions with ultimate parent entity • David Baldwin, Managing Director of Contact, is seconded to Contact from his employer Origin. Fees incurred or accrued during the year ended 30 June 2009 in relation to David’s role as Managing Director totalled $1.0 million (2008: $1.1 million), which includes the cost of his salary and other employment benefits including the 2008/09 short term performance incentive. At 30 June 2009 $0.2 million (2008: $0.5 million) of this amount remained outstanding. In addition, he received share-based payments under the Parent’s long term incentive scheme amounting to $0.5 million (2008: $0.3 million), being the fair value of the share-based payments allocated to this reporting period. Refer to note 14. • In the period ending 30 June 2009, Origin was employed for consulting work on the Stratford Peaker project. Transactions totalled $0.1 million, all of which is outstanding at 30 June 2009. • During the year Contact and Origin undertook a joint marketing project for renewal of both parties’ insurance cover. Contact and Origin are covered under separate policies. • On 12 June 2008, Contact’s ultimate parent company Origin acquired certain New Zealand oil and gas assets from Swift for approximately $110.0 million. Among these assets was a PML to an area that includes the Ahuroa reservoir. Contact paid $52.0 million of the total purchase price to Origin effectively in exchange for a beneficial interest in the PML as it relates to the Ahuroa reservoir and the gas and LPG reserves contained therein. Contact is developing the Ahuroa field as an underground gas storage facility. Refer to notes 19 and 20. • A further payment relating to the initial gas and LPG reserves acquired as part of the acquisition of the gas storage rights of $2.6 million was made to Origin in April 2009 following an independent reservoir measurement as at the date of acquisition. • Contact and Origin have entered into a Master Services Agreement for the provision of professional, consulting and/or administrative services between the parties. During the year, Contact had one member of the Senior Management Team on secondment at Origin under this agreement. The reimbursement for the secondment is at arm’s length and is outstanding at balance sheet date. There were no other payments for services entered into under this agreement for the year ended 30 June 2009 or 30 June 2008. - Contact and Origin are party to a Statement of Work dated 27 April 2007 relating to the provision of transitional services in connection with the sale of the Rockgas Limited business. - Contact and Origin are party to a Statement of Work dated 28 August 2007 relating to the acquisition of the New Zealand assets of Swift.
Transactions with other Origin related parties • During the year ended 30 June 2009, Contact had transactions with Origin Energy Resources NZ Limited, a subsidiary of Origin, in respect to the development and operation of the Ahuroa gas storage facility. During the year, the transactions totalled $3.8 million. At 30 June 2009, there are outstanding fees of $0.6 million relating to management costs. • Contact and Origin Energy Resources have entered into a LPG Gas Sales Agreement for the supply of LPG from the Rimu Production Station and any LPG produced from the Waihapa Production Station. Transactions for the year totalled $2.9 million (2008: nil), of which $0.2 million (2008: nil) remained outstanding at 30 June 2009.
Transactions with subsidiaries • Advances to/from subsidiaries and loan from associate are included in notes 16, 25 and 27 respectively. Advances are repayable on demand and are interest free. • The Parent had transactions with Empower Limited, a 100 per cent owned subsidiary, in respect of electricity charges, network charges and management fees, which are calculated at arm’s length. These charges totalled $16.0 million (2008: $16.7 million). All balances are settled through the intercompany account. • The Parent had transactions with Stratford Power Limited, a 100 per cent owned subsidiary, in respect of gas purchases, which are calculated at arm’s length. Purchases from Stratford Power Limited totalled $115.2 million (2008: $104.2 million) of which $11.0 million (2008: $10.1 million) was outstanding at 30 June 2009. • Contact pays various operating expenses on behalf of its wholly owned subsidiaries, which are passed directly on to those subsidiaries. 108 Contact Energy Limited Annual Report 2009
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
Transactions with Directors and key management personnel • Fees paid or accrued to Directors and Officers of Origin for director services totalled $0.4 million for the year (2008: $0.1 million). Outstanding amounts at 30 June 2009 totalled $0.1 million (2008: $0.1 million). • New Zealand based Directors and members of the Senior Management Team purchase gas and electricity from the Group for domestic purposes.
Transactions with other related parties • Rockgas Limited had transactions with Origin Energy LPG Limited, Origin Energy Contracting Limited and Origin Energy Resources Limited, all entities within the Origin Energy Group, in respect of the purchase and shipping of LPG. The transactions are calculated at arm’s length. During the year ended 30 June 2009, transactions totalled $45.0 million (2008: $49.5 million). At 30 June 2009, $4.6 million (2008: $6.0 million) remained outstanding. • Rockgas Limited had transactions with Rockgas Timaru Limited (Rockgas Timaru), an associate, in respect of the supply of LPG to Rockgas Timaru (30 June 2009: $1.1 million (2008: $1.0 million)) and the provision of deliveries by Rockgas Timaru (30 June 2009: $0.3 million (2008: $0.1 million)), which are calculated at arm’s length. At 30 June 2009, a receivable of $0.2 million (2008: $0.3 million) remained outstanding.
33 Key management personnel
The table below includes the aggregate remuneration for the Directors, the Managing Director and members of the Senior Management Team.
Group Group Parent Parent 30 June 2009 30 June 2008 30 June 2009 30 June 2008 Note $000 $000 $000 $000
Directors’ fees 853 770 853 770
Managing Director and Senior Management Team
Salary and other short term benefits 4,911 5,566 4,911 5,566 Share-based payments 14 1,050 933 1,050 933
Total Managing Director and Senior Management Team 5,961 6,499 5,961 6,499
Total key management personnel 6,814 7,269 6,814 7,269
Details of the total remuneration and the value of other benefits paid to (or accrued for) each Director of Contact are as follows:
Group and Parent Committee Total For the year ended 30 June 2009 Board fees fees remuneration* Director** Position $ $ $
G King Chairman 133,333 – 133,333 P Pryke Deputy Chairman 150,000 – 150,000 B Beeren Director 100,000 44,714 144,714 J Milne Director 100,000 77,500 177,500 K Moses Director 66,667 10,000 76,667 T Saunders Director 100,000 33,150 133,150 S Sheldon (appointed 16 March 2009) Director 29,445 7,842 37,287 D Baldwin (appointed 16 March 2009)*** Managing Director – – –
Total 679,445 173,206 852,651 Contact Energy Limited Annual Report 2009 109
Contact Energy Limited and Subsidiaries Notes to the financial statements for the year ended 30 June 2009
Group and Parent Committee Total For the year ended 30 June 2008 Board fees fees remuneration* Director Position $ $ $
G King Chairman – – – P Pryke Deputy Chairman 150,000 214,815 364,815 B Beeren Director 100,000 27,000 127,000 J Milne Director 100,000 50,000 150,000 K Moses Director – – – T Saunders Director 100,000 28,150 128,150
Total 450,000 319,965 769,965
* Pursuant to Contact’s constitution, Directors are not entitled to any payment in connection with their retirement or cessation of office. ** Remuneration paid and payable to Origin associated Directors Grant King, Bruce Beeren and Karen Moses is paid to them in their individual capacities and complies with the NZX waiver dated 12 May 2008. *** David Baldwin, as Managing Director, does not receive any fees in his capacity as an Executive Director.
34 Whirinaki generation plant
Contact is contracted to operate the Crown-owned reserve generation plant at Whirinaki in Hawke’s Bay. Contact owns the Whirinaki site and has agreed to lease it to the Crown until June 2015. The Crown owns the plant and has engaged Contact to operate and maintain it until June 2015. Under the Project Development agreement entered into in 2003, the Crown agreed to pay Contact compensation for loss of use of the site. Contact also received a fee for project managing construction of the plant, and receives an annual fee under the Operating and Maintenance Management Services Agreement.
35 Contingent liabilities
There are no known material contingent liabilities (2008: Nil).
36 Subsequent events
On 13 August 2009, the Board declared a distribution in the form of a non-taxable bonus issue for the year ended 30 June 2009 equivalent to 17 cents per share, for shares on issue at 28 August 2009, the record date, with bonus shares allotted and/or cash distributed if elected on 22 September 2009. Refer to note 10. 110 Contact Energy Limited Annual Report 2009
Audit Report To the shareholders of Contact Energy Limited
We have audited the financial statements on pages 56 to 109. The financial statements provide information about the past financial performance and financial position of the company and the group as at 30 June 2009. This information is stated in accordance with the accounting policies set out on pages 61 to 70.
Directors’ responsibilities The Directors are responsible for the preparation of financial statements which give a true and fair view of the financial position of the company and group as at 30 June 2009 and the results of their operations and cash flows for the year ended on that date.
Auditors’ responsibilities It is our responsibility to express an independent opinion on the financial statements presented by the Directors and report our opinion to you.
Basis of opinion An audit includes examining, on a test basis, evidence relevant to the amounts and disclosures in the financial statements. It also includes assessing: • the significant estimates and judgements made by the Directors in the preparation of the financial statements; • whether the accounting policies are appropriate to the company’s and group’s circumstances, consistently applied and adequately disclosed. We conducted our audit in accordance with New Zealand Auditing Standards. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to obtain reasonable assurance that the financial statements are free from material misstatements, whether caused by fraud or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Our firm has also provided other assurance services to the company. Partners and employees of our firm may deal with the company and group on normal terms within the ordinary course of trading activities of the business of the company and group. These matters have not impaired our independence as auditors of the company and group. The firm has no other relationship with or interest in the company or any of its subsidiaries.
Unqualified opinion We have obtained all the information and explanations we have required. In our opinion: • proper accounting records have been kept by the company as far as appears from our examination of those records; • the financial statements on pages 56 to 109: – comply with New Zealand generally accepted accounting practice; – give a true and fair view of the financial position of the company and group as at 30 June 2009 and the results of their operations and cash flows for the year ended on that date. Our audit was completed on 13 August 2009 and our unqualified opinion is expressed as at that date.
Wellington Contact Energy Limited Annual Report 2009 111
Corporate directory Board of Directors Grant King, Chairman Phillip Pryke, Deputy Chairman David Baldwin, Managing Director Bruce Beeren John Milne Karen Moses Sue Sheldon
Senior management David Baldwin, Managing Director Steve Bielby, General Counsel and Company Secretary Graham Cockroft, Chief Operating Officer Jason Delamore, General Manager, Retail Luc Hennekens, Chief Information Officer and General Manager, ICT Liz Kelly, General Manager, Development and Acquisitions Nigel Thomson, Acting Chief Financial Officer
Head office Level 1, Harbour City Tower 29 Brandon Street, Wellington, New Zealand
Postal address PO Box 10742, The Terrace, Wellington 6143, New Zealand Telephone 64 4 499 4001 Facsimile 64 4 499 4003 Email: [email protected] Website: www.contactenergy.co.nz
NZX trading code: CEN Company number: 660760 112 Contact Energy Limited Annual Report 2009
Share registrar Computershare Investor Services Limited Private Bag 92119 Auckland 1142 159 Hurstmere Road Takapuna, North Shore City 0622
Shareholder enquiries To change your address, add or change your bank account and to view your registered details including transactions, please visit: www.computershare.co.nz/investorcentre General enquiries can be directed to: [email protected] Private Bag 92119, Auckland 1142 Telephone +64 9 488 8777 Facsimile +64 9 488 8787 Please assist our registrar by quoting your CSN or shareholder number. General enquiries on the company’s operating and financial performance should be made to the company at: General Manager, Development and Acquisitions Contact Energy Limited PO Box 10742, The Terrace, Wellington 6143 Email: [email protected]
Financial calendar
Final distribution announced 14 August 2009 Record date for final distribution 28 August 2009 Cut-off date for receipt of election notices for buy back of bonus shares under Profit Distribution Plan Noon, 17 September 2009 Final distribution date 22 September 2009 End of first quarter 30 September 2009 Annual meeting 22 October 2009 Half year end 31 December 2009 Results announcement for the half year ended 31 December 2009 February 2010 End of third quarter 31 March 2010 Financial year end 30 June 2010
The paper this report is printed on is from sustainable forests, with 90 per cent of the raw materials sourced locally. Waste byproducts generated during production are used for power generation for the mill, with excess power sold to the local grid. The manufacturer is ISO accredited and an environmental award-winner. The ink used to print this report is vegetable-based, mineral-free and from 100 per cent renewable resources.
SustainContact Energy’s Sustainability Report for 2009 ability Contact and the environment Contact’s financial performance
Contact and the community Defining sustainability
To reflect the significance of the concept of sustainability across our entire business, the following definition is most relevant and applicable to Contact:
“Operating our business with a focus on the future. We will protect our environment for future generations and build a strong, profitable and safe business through relationships based on trust with all people we interact with.”
definition
environment page 7 community page 33 financial performancepage 69 About Contact
Contact generates electricity from hydro, natural gas and geothermal power stations and sells electricity, natural gas and LPG to customers across New Zealand.
We employ around 1,000 We are currently staffacross We supply LPG to constructing two power the country approximately 54,000 stations and the country’s customers across the first underground natural gas country, with 48 per cent storage facility, representing market share combined investment of $600 million We generate 25 per cent of New Zealand’s total electricity and sell electricity to around 480,000 customers across the country – a 25 per cent retail market share We raised We are owned $550 million in by around 83,000 an oversubscribed shareholders, with Australian- retail bond issue based energy company Origin Energy holding 51.4 per cent We supply of Contact shares reticulated natural gas to about 67,000 North Island customers
We are advancing plans for 1,400 megawatts of new electricity generation projects
More information Contact’s Annual Report for the 12 months ended 30 June 2009 and the previous Half Year Report for the six months ended 31 December 2008 are available at www.contactenergy.co.nz/annualreports about National overview overview Contact is one of New Zealand’s largest publicly listed companies, with the ability to supply electricity and gas products across the country. We have reticulated natural gas customers across much of the North Island, reticulated LPG customers in Christchurch, Queenstown and Wanaka, and we can supply bottled and automotive LPG nationwide.
Contents
About this report Summary 2 About this report Managing Director’s review 4 Transparency in reporting Contact and the environment 7 Welcome to Contact’s third Sustainability Report; a report that measures Towards a lower-carbon electricity sector 9 our performance across three areas: environmental, social and financial. Drought, deluge and the HVDC impact on the year 12 This is a report that is focused on transparency; on enabling readers to Our projects gain an accurate understanding of the company and its challenges Thermal generation and gas storage 14 and achievements. Geothermal generation 16 This report continues to evolve; we’re reporting in much more depth than in our previous report, released in September 2008, and we’re Wind generation 18 taking a closer look at the business and its performance. This year, we Hydro generation 20 are adhering closely to the Global Reporting Initiative, the international Our power stations and their performance standard for benchmarking and measuring an organisation’s social, Thermal generation 22 environmental and economic performance. Geothermal generation 23 Decisions on what to include in the report have been informed by these guidelines and our own assessment of the most material issues we face. Hydro generation 26 Biodiversity 27 We are also moving to a higher assurance standard for this report. This enables the independent auditors of this report, ERM New Zealand Limited, Contact’s Green Office programme 28 to visit the company’s key sites, interview staff and monitor on-the-ground Making a difference with LPG 32 processes and systems. ERM New Zealand Limited has also conducted Contact and the community 33 interviews with some of our key stakeholders to gain a deeper understanding of some of the issues the company faces and how they are managed. The neighbour you want 34 Celebrating milestones 36 This report covers the financial year ended 30 June 2009. All periods used for comparisons cover the 12 months to 30 June, unless otherwise Our sponsorship initiatives 37 stated. This report has been prepared and released in conjunction with the The heart of our business – our customers 41 company’s Annual Report, covering the same period. The company’s financial Protecting local communities 44 statements contained in the Annual Report are independently audited. For a complete picture, these two reports should be read in parallel. Health, safety and the environment 46 Contact and the Clutha: hosting a conversation 54 This report has been independently verified by ERM New Zealand Limited, Contact – the employer of the future 56 and their verification is published on page 78. Engaging with our stakeholders 65 Contact us Contact’s financial performance 69 For more detail on the information contained in this report, please contact: Our financial performance 71 GRI index 74 Contact Energy PO Box 10742 Verification report 78 Wellington Feedback form 79 Email: [email protected] Corporate directory and financial calendar 81 environment
community
financial performance
Contact’s Sustainability Report for 2009 Page 1 generated 25 per cent Summary of New Zealand’s total electricity At a glance…
In the financial year to 30 June 2009, we madegood progress on the company’s generation and gas storage development programme. We...
took delivery of generators and turbines for the $250 million, 200 megawatt gas-fired peaking power station under construction at Stratford
commenced natural gas injection into the Ahuroa natural gas storage facility near Stratford – the project is a $250 million investment, which is currently under construction
began construction of the $100 million, 23 megawatt Tauhara phase one geothermal power station at Taupo
Page 2 Contact’s Sustainability Report for 2009 sold electricity, gas and LPG to around 600,000 customers started a conversation around new hydro development on the Clutha River
answered 1.2 million phone invested $1.3 million in calls from customers in an a range of national and average of 44.5 seconds each community sponsorships made land available at Taupo for a new SPCA base at a $1 lease held the Contact Big Give, involving Contact staff celebrated 50 years of donating their time renewable geothermal to a range of local generation at the community projects Wairakei power station achieved underlying and causes with a community open earnings after tax for the day and celebration year of $162.6 million, down from $232.8 million in 2008
raised $550 million in Contact’s first retail bond issue – the most successful bond issue in the history of the New Zealand market for a non A rated corporate
environment community financial performance
Started resource consent hearings for Installed more than 42,000 smart meters Introduced a Profit Distribution the 540 megawatt Hauauru- ma- raki wind in customers’ houses. Plan, allowing the company to farm on the Waikato coast. The hearings retain cash within the business Continued to invest in communities have been adjourned for 12 months to through distribution of where we have a major presence. enable the presentation of more detailed non-taxable bonus shares. evidence and will resume in June 2010. Held a community open day at our Declared total distributions for Taranaki combined-cycle gas-fired Continued to develop options in renewable shareholders equivalent to 28 cents power station. geothermal electricity generation. per share; the same as for the 2008 Continued consultation on a range of new financial year. Continued to support the introduction of renewable generation projects, including an emissions trading scheme. starting a conversation with Clutha communities around possible new hydro developments.
summaryContact’s Sustainability Report for 2009 Page 3 Managing Director’s review
Sustainability reporting is about transparency. It’s about disclosure of a company’s social, environmental and economic performance. A commitment to sustainability reporting represents a commitment to being open and honest with stakeholders, regardless of the story we have to tell. In this respect, it’s much easier to produce a Sustainability Report when you’ve had a good year – when our health and safety performance is good, when we’ve delivered a pleasing financial result and when our social and environmental performance is heading in the right direction.
The flipside is that it’s a much more difficult exercise when there has not been such a good year, and the year to the end of June 2009 has been one of the toughest in Contact’s history.
Despite the fact that Contact has achieved some remarkable and significant achievements over the year – achievements that position us very well for the future – we have also been negatively impacted by a number of events. Some of these events were outside our control, and some were mistakes that should not have occurred. Regardless, we have learned or are learning from all of them. Publicly disclosing and discussing what we have done well and what we have not done well is a key part of Contact’s commitment to continual improvement.
Page 4 Contact’s Sustainability Report for 2009 review
Health and safety Financial performance
Perhaps the biggest disappointment has been the company’s poor health Contact’s financial performance was negatively impacted by a convergence of and safety performance. This is an area where we simply must do better, unique conditions that reduced the company’s ability to generate electricity and Contact’s health and safety performance remains my number one and to transmit electricity from power stations to customers. operational priority. Page 12 of this report provides a description of the factors that came together Over the 2007 and 2008 financial years, our health and safety performance to impact on the company’s financial performance. However, the single showed pleasing trends, with marked reductions in lost time injuries and the most significant underlying issue that directly contributed to a 31 per cent company’s injury frequency rates. However, the 2009 year saw both of these reduction in underlying earnings after tax for the 2009 financial year was measures increase, with accidents leaving two people, both contractors of a constrained electricity transmission network. Contact, seriously injured. During drought conditions in the South Island, Contact was unable to transmit Our disappointing health and safety performance over the year highlights the surplus, low-cost electricity from the North to the South Island, forcing the need for vigilance and a commitment from every one of our staff and senior company to purchase expensive wholesale electricity to sell to South Island management, our Board and our contractors to our own personal safety and customers at a loss. that of our colleagues. When the situation reversed and the southern hydro lakes were very full, Pages 52 and 53 of this report include a case study on the most serious transmission limitations could not accommodate full generation from accident that occurred over the year and a case study demonstrating how we Contact’s hydro power stations, forcing us to spill and effectively waste can proactively manage health and safety through incorporating best practice huge volumes of water. into all of our decisions and actions. Various transmission constraints over the course of the year have distorted Improving our health and safety performance will be a critical area of focus wholesale electricity market prices, compromised security of supply, seen for the company over the coming year and beyond. a significant amount of potential hydro generation wasted and negatively impacted on Contact’s financial performance.
The year in review serves as a graphic illustration of how critical a strong, modern transmission network is to the efficient operation of the electricity market.
While the impact of this situation on our financial result was disappointing, Contact also undertook a number of measures that significantly strengthened the company’s financial position over the course of the year.
Contact’s first ever retail bond issue closed well oversubscribed, raising $550 million from investors to support the company’s capital investment programme and the introduction of a new profit distribution plan for Contact’s interim distribution resulted in around $50 million being retained within the company rather than being paid out as cash dividends.
While the 2009 year was very challenging and the financial result disappointing, Contact’s financial position remains strong, with the success of the company’s retail bond issue and Profit Distribution Plan indicating strong investor support for the company and its strategy.
As a result of the strength of the company’s financial position and the introduction of the Profit Distribution Plan, Contact was able to hold distributions to shareholders at the equivalent of 28 cents per share, the same level as for the previous year. The decision to maintain the distribution level was based on the expectation that the company’s financial performance will return to normal trends. Any reoccurrence of extreme hydrology, transmission constraints, adverse government policy changes, or a prolonging of the recession, could impact Contact’s financial performance in the near-to-medium term. To the extent such impacts do occur, the company would be unlikely to maintain distributions at this year’s level.
review Contact’s Sustainability Report for 2009 Page 5
Managing Director’s review
Our environmental performance Our social performance
Contact continued to make good progress on key projects that will make an As a company with approximately 83,000 New Zealand shareholders, around important contribution to a cleaner, more renewable electricity supply for 600,000 electricity, gas and LPG customers, and power stations from Northland New Zealand. to Southland, Contact is a part of New Zealand’s social fabric.
Contact’s new gas-fired peaking power station at Stratford, the neighbouring Through our products and services, our projects and power stations, we touch Ahuroa natural gas storage facility and the first power station fuelled with hundreds of thousands of New Zealanders every day. With this presence and geothermal steam from the Tauhara steamfield at Taupo are all on track for reach, we have an obligation to deliver our customers the respect, quality of commissioning during 2010. service and value they deserve; a rate of return that rewards investment for our shareholders; and a safe, rewarding workplace for our 1,000 staff. These projects represent approximately $600 million of investment in some of the country’s most important energy infrastructure. In communities where we have a presence or are looking to develop projects in the future, we aim to be ‘the neighbour you want’. We seek to earn the respect Additionally, Contact is making pleasing progress in developing a number and trust of each of our stakeholders, and for the most part, we perform well of renewable geothermal, wind and hydro generation projects. All of these in communicating clearly and respectfully and listening to our full range projects are described in the environment section of this report. of stakeholders. Contact has a unique mix of current projects and new generation options – From time to time, however, we don’t get it right, and sometimes, people particularly in geothermal – to lower the greenhouse gas intensity of the disagree with what we are trying to achieve. New Zealand generation sector and to contribute to security of supply. Last year, our customers made it quite clear they perceived a link between price increases and a proposed increase to the fee pool from which directors are paid, which was not acceptable to them. The result was a loss of customers, a drop in our favourability ratings and a bruise to our brand.
The message was loud and clear, and we’ve been intensely focused on rebuilding the trust and confidence of our customers and other stakeholders by providing a range of new offers, in addition to the usual outstanding customer service from our dedicated team across New Zealand.
We’ve also run into local opposition in trying to secure resource consents for two significant wind farms. While there will often be individuals and groups who will want something else to be built somewhere else, Contact remains committed to continuing to work constructively and respectfully with groups or individuals that might be affected by our renewable electricity generation projects.
We continue to invest in and support projects that are important to those communities where we have a strong presence and to ensure we have the systems and processes in place to protect those of our most vulnerable customers.
Conclusion
I hope this report will inform you about our company, what we are doing and how we think about key energy-related issues.
David Baldwin Managing Director
Page 6 Contact’s Sustainability Report for 2009 Contact and the environment environment
Contact’s Sustainability Report for 2009 Page 7 Contact and the environment
Corporate Policy Number CP04 The sustainability of our
Contact Energy Policy business depends on strong Environmental and sustainable relationships
We are committed to understanding, managing and reducing the across all stakeholders, environmental risks and impacts of our activities. We recognise that environmental risks can relate to: including investors, Flora, fauna, earth, air, water resource and climate E Committee Human health and wellbeing, including human social and cultural welfare ve these and to set policies and improve practices Environmental legislation and regulations. the company’s environmental objectives, including preventing pollution communities, customers
To achieve this we will: p in reflecting Contact’s commitment to responsible stewardship Adopt a high standard of environmental governance, monitored by the Board HS
Set clear objectives and targets and use the results of performance audits to impro and employees. ironmental impact of our activities at each of our sites Train our staff in the efficient and safe use of all plant and equipment so as to meet ernally and with our customers so as to reduce the company’s environmental effects, ants Engage with Contact’s stakeholders, listening and responding to their views to hel cords of the environment
Quantify and seek through continuous improvement to reduce the env e
Strive for sustainable and efficient use of natural resources both int ition projects as a core element in our decision-making including the greenhouse gas intensity of each of Contact’s generating pl icable the impact of environmental incidents Report annually the company’s independently validated environmental performance re te requirements. A sustainability strategy Take all practicable steps to reduce, reuse or recycle all operational wast Undertake environmental assessment of all major generation and acquis We are now progressing to the development of a five-year Incorporate active environmental risk management to reduce as far as pract sustainability strategy that will pull together the company’s As a minimum, comply with all relevant environmental legislation and subordina
social, economic and environmental objectives and set out how we plan to achieve them.
David A. Baldwin Chief Executive Officer This sustainability strategy will help set the targets August 2008 that Contact will measure and report against on an ongoing basis. While this strategy is being developed, this report sets a number of targets across the most important areas of the business against which we will continue to report.
Contact’s environmental policy
Contact’s environmental policy is available at www.contactenergy.co.nz/environmentpolicy.
Page 8 Contact’s Sustainability Report for 2009 Gigawatt hours Contact’s generation developmentacross projects allofthefour mainfueltypes. hydro –haveroletoplay. animportant includesprogress This updateson report country’s generation options and that all of the major fuel types – including new Contact’s view is that we must be able to develop the most cost-effective of the supply ofelectricity. toasecure meeting NewZealand’s andcontributing demandgrowth electricity our generation optionspositions Contact well torespondthechallenge of hydro, –wind, major fueltypes geothermal andnaturalgas.The diversity of Contact generation iscurrentlyoptionsacross allofthe developing electricity generation tomarket. projects of a decline in gas-fired generation would heighten the need to bring even more plant, is a key challenge for the New Zealand electricity sector. The possibility Meeting this future growth in demand, while managing the retirement of existing 2014, theneedforgeneration. steadily increasingofnewelectricity amounts generation at Huntly, growth in geothermal and wind generation and, from around The graph assumes the phasing out of the 1,000 megawatts of coal-fired three different electricity growth assumptions. the last 10years andhow itmightcontinue tochange over thenext 15years under The graph below illustrates how New Zealand’s generation mix has changed over is following). underinvestigationprojects andthecommunityengagement process thatContact of renewable electricity generation (see page 54 for a summary of onthe the Clutha Clutha River, which could, in time, further increase theIn company’s addition, Contactlevels is also investigating further large-scale hydro developments renewable and one-third using natural gas. change from roughly half renewable and half using natural gas towere two-thirds to proceed to construction, this would see the company’s generationIf alloftheconsented andplannedgeneration thatContact projects isdeveloping mix geothermal power stations. all but 200 megawatts is likely to come from renewable wind, hydroOf theand new generation capacity that Contact has in various stages of development, New Zealand. a cleaner, more secure and lower-emission electricity generationContact sector continues for to advance a range of initiatives that will contribute to electricity sector Towards alower-carbon 10,000 20,000 30,000 40,000 50,000 60,000 70,000 0
New Zealand electricity supplyNew Zealandanddemand electricity
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2015 $/Megawatt hour and/or hydro –areseen asthemost cost-effective options for New Zealand. Accordingly, renewable options – geothermal in the short-term, followed by wind associated baseload with thermalinvestment. risk price the continuing uncertainty as to the availability of domestic gas, there is too much emissions tradingscheme, which,althoughdelayed, seemsandwith inevitable, is well placed regardless of market conditions. With the introduction of an Contact’s strategy iscentred ondeveloping optionsthatensurethecompany ofnewgeneration.fundamental change tothedrivers While the global recession has resulted in a slowing of demand growth, there is no The economicsofrenewables 2016 100 120 140 160 180 20 40 60 80
0 2017 limitprice Entry
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cycle gas
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Contact’s Sustainability for Report 2009 Page 9 2023 2024 range Wind Wind Geothermal Hydro Gas New generation Coal High demand3.5%growth $25/t Carbon Potential gasdecline to 2011,2.5%2012+ Base demand1.5%growth Low demand1.5%growth Hydro range Geothermal $50/t Carbon range
Contact and the environment
Gas supply and price
While Contact continues to hold resource consents for a large combined-cycle gas-fired power station at Otahuhu in Auckland and another at Stratford, there is currently insufficient certainty around New Zealand’s domestic gas supplies or future prices to warrant making what would be at least a $500 million plus investment per plant.
Contact remains concerned at both the lack of medium to long-term natural gas supplies in New Zealand and the rate at which existing supplies are dwindling and increasing in price.
In 2008, Contact issued a tender for a long-term supply of domestic natural gas, which the company would need to underpin any investment in a large baseload gas plant.
The result of the tender was that no party was able to contract sufficient volumes or give sufficient price certainty to enable such an investment. This was not unexpected and was consistent with official projections around domestic gas supply and demand.
As a result of this uncertainty and the high likelihood of a price on carbon, Contact continues to focus on renewable options and on securing incremental gas supplies to fuel the company’s existing power stations and the Stratford gas-fired peaking power station that is currently under construction.
New Zealand gas supply/demand potential – public data July 2009 250
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Karewa – estimate Turangi – estimate Maui – LT ROFR P50 Maui – LT ROFR P85 Maui legacy Kupe – estimate Pohokura Mangahewa Kapuni McKee TAW Rimu/Kauri Minor fields Base demand excl. petrochemicals (methanol) Demand incl. conservative petrochemicals (methanol) Demand incl. strong petrochemicals (methanol)
Contact remains concerned at both the lack of medium to long-term natural gas supplies in New Zealand and the rate at which existing supplies are dwindling and increasing in price.
Page 10 Contact’s Sustainability Report for 2009 Gas import options
As the natural gas supply and demand graph on page 10 shows, New Zealand will reach a point at which domestic gas supply will be unable to meet demand – according to the latest official data, this will be sometime in the second half of the next decade.
With natural gas supply critical to New Zealand’s energy sector – both as a fuel for electricity generation and as a direct heating fuel for homes and industry – it is likely that, at some time in the future, New Zealand will need to import some natural gas.
Liquefied natural gas (LNG) is natural gas that has been cooled to the point at which it becomes a liquid. This allows the liquefied gas to be carried in specially- built LNG ships and then stored in land-based tanks, before being converted back to a gas and piped into the gas network.
Contact and Genesis Energy, jointly developed the option of a LNG import terminal at Port Taranaki in New Plymouth, known as Gasbridge.
The Gasbridge project would enable New Zealand to import around half of its annual natural gas requirements from international gasfields as LNG, using land- based storage and regasification.
The Gasbridge project has been well advanced, to a point at which resource consent applications can be filed. It is Contact’s view that while gas imports are likely to feature in some form in New Zealand’s energy future, this should be delayed for as long as possible.
However, there are now opportunities to look at other import options that do not involve land-based LNG regasification plants, including using ship-based regasification, with natural gas then piped from an offshore vessel into the gas distribution pipeline. This kind of technology has a number of advantages, including avoiding the fixed cost and infrastructure of a large land-based facility.
To this end and in light of the development of other ship-based import
ment opportunities, the decision has been made not to apply for consents for the Gasbridge LNG terminal at this stage. While the land-based Gasbridge option still exists and a consent application could be filed quickly, Contact is focusing on a number of generation alternatives, including renewable electricity generation projects as well as the development of the country’s first natural gas storage facility at Ahuroa.
There are now opportunities to look at other import options that do not involve land-based LNG regasification plants, including using ship-based regasification.
Production platform at the Maui gas field, offshore Taranaki environ
Contact’s Sustainability Report for 2009 Page 11 Contact and the environment
Drought, deluge and HVDC impact on the year In Contact’s last two Sustainability Reports, we highlighted concerns about the poor state of the country’s electricity transmission system and how a failure to invest in transmission could lead to inefficient market outcomes.
Over the year in review, the state of the country’s transmission system came to the fore, with major negative impacts on the operation of the electricity market and on Contact’s full year financial performance.
The role of the transmission system is to deliver electricity from power stations to load centres around the country. In New Zealand, with its high proportion of hydro generation in the South Island, the transmission system needs to be able to transmit hydro electricity to the North Island when water is available for generation, and thermal generation from the North to the South Island when the hydro lakes are low (such as during the winter of 2008).
In November 2007, one of two cables comprising the High Voltage Direct Current (HVDC) transmission link connecting the North and the South Islands was unexpectedly shut down and removed from service, effectively halving the amount of energy that can be transmitted between the two islands. The impacts of this and other transmission constraints have been profound to Contact and the wholesale market.
From drought…
In 2008, the South Island experienced a dry winter, with the southern hydro lakes at extremely low levels. At the same time, the transmission network in the lower half of the North Island was constrained, preventing thermal electricity reaching the Wellington region, with the reduced HVDC cable further limiting the flow of thermal electricity to the South Island.
The shortage of electricity capacity in the South Island as a result of low lakes and transmission limitations led to South Island wholesale electricity prices averaging $148 per megawatt hour for the three months of July through September.
Due to the drought and transmission limitations, Contact was unable to generate enough to cover its South Island customer demand, forcing Contact to purchase expensive electricity to sell to its southern customers.
Over the same three months, the average price Contact received for its North Island generation was $96 per megawatt hour, just 65 per cent of the per unit cost of South Island electricity purchases.
Major transmission constraints had effectively turned the North and South Islands into separate markets. The transmission network was unable to transmit electricity to where it was needed, with the end result being markedly different wholesale prices in each island.
The reduced transmission capacity increases the risks of supplying electricity to the South Island, particularly at a time in which electricity flow from the North to the South Island has been steadily increasing over the last 10 years and is expected to continue.
Wholesale monthly average electricity price 180
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This graph shows average wholesale prices in the North and South Islands over the year in review, from high prices over the winter months of 2008 to much lower prices over the summer. The gap between the lines shows price separation, as a result of an inability to transmit
electricity between the islands. Page 12 Contact’s Sustainability Report for 2009 National hydro storage So what does it all mean? 4,500 The 2009 financial year has demonstrated how the efficient operation of the 4,000 electricity market depends on a strong, modern electricity transmission system. A transmission system that can deliver electricity from power stations to centres 3,500 of demand anywhere in the country is critical to maximising competition in the
3,000 market and developing the cheapest renewable electricity generation options. The HVDC link is expected to be restored to full capacity by April 2012. This 2,500 means there is an ongoing risk of the North and South Islands operating as 2,000 separate markets until the HVDC Pole one replacement project is complete. Stored Gigawatt hours 1,500 Contact has been drawing attention to historic underinvestment in the country’s transmission network for a number of years now and has consistently supported 1,000 measures to remove potential barriers to rapid transmission investment.
500 It’s encouraging to see the urgency with which these issues are now being addressed by both Transpower and the Government. 0 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun In May 2009, the Government introduced a Government Policy Statement that 2009 financial year streamlines the process for transmission investments up to a value of $20 Mean 2009 2008 million. Streamlining transmission investment is also a theme highlighted in the Ministerial Taskforce review of the electricity market. This graph shows how hydro storage in the 2009 financial year (the red line) started from an extremely low base before rapidly reaching very high levels, compared to the 2008 year (the yellow line), which In addition, national grid operator Transpower has a comprehensive transmission was consistently below mean. investment programme underway that Contact strongly supports and that will address the main deficiencies in the current transmission network. …to deluge Transmission losses The 2008 financial year was a year of extremes, and following a very dry winter, the situation changed dramatically, with high inflows into the southern hydro lakes. The further electricity travels through the transmission network to reach end-consumers, the greater the proportion of electricity that is lost. During the The spring deluge into the southern lakes resulted in significant spill by South 12 months to 30 June 2009, Transpower reported that 3.7 per cent of grid- Island generators to manage high lake levels (see page 26). The surplus of connected electricity generated in New Zealand was lost via the transmission water coincided with the Tiwai Point aluminium smelter in Southland closing a network. A further 3.8 per cent is lost through local electricity distribution production line, reducing its electricity demand by 180 megawatts. networks, meaning around 7.5 per cent of generated electricity is lost through the transmission and distribution system, quite apart from losses of potential The surplus of water combined with a sudden loss of demand exacerbated generation through transmission-related hydro spill. transmission limitations in the bottom of the South Island, with Contact prevented from generating to capacity from its hydro stations. This forced Contact to spill more water from its Clyde and Roxburgh dams.
In addition, cheaper southern hydro electricity was unable to reach North Island consumers due to reduced interisland HVDC transmission capacity, the result being higher prices in the north than the south – reversing the winter situation.
environmentContact’s Sustainability Report for 2009 Page 13 Contact and the environment Thermal generation
In May 2009, this vessel, the Tampa, arrived from Europe carrying critical equipment for Contact’s $250 million Stratford peaking power station.
Page 14 Contact’s Sustainability Report for 2009 Our projects – an update environment Making the most of our gas Ahuroa – the country’s first underground The Stratford peaking project gas storage facility Most renewable electricity generation options, with the exception of geothermal and tidal energy, depend on the weather – wind for the wind farms and rain for It may seem counterintuitive to be taking natural gas out of the country’s gas the country’s hydro dams. fields only to put it back into another, but that’s exactly what Contact is doing – and it couldn’t be more logical. As the country builds its renewable generation base, it follows that our electricity system becomes increasingly dependent on the weather. As a country, we In December 2007, Contact announced that it had reached agreement to purchase need to develop solutions that enable the country to maximise its renewable the rights to own and use the largely depleted Ahuroa gas field near Stratford for opportunities but provide a backstop when the weather fails to play its part. development into the country’s first underground natural gas storage facility. This is where Contact’s Stratford peaking project will play an important role. The When complete, the Ahuroa storage facility will enable Contact to purchase $250 million project consists of two brand new, high-efficiency LMS-100 gas natural gas when market conditions do not require its use – such as in summer turbine generators and will be the first of these units to be used in Australasia. – and inject it into the reservoir and store it for extraction when the market most The peaking project will be located next to the company’s Taranaki combined- needs it, such as cold winters and peak electricity demand periods. cycle power station.
This gas storage facility will result in valuable flexibility of gas supplies at a time This will be a ‘peaking’ plant – a highly flexible power station that can go from when flexibility is increasingly difficult to obtain under gas supply contracts. cold to full load in less than 10 minutes – as opposed to older baseload gas-fired Current contract arrangements are generally ‘take or pay’ contracts, which require power stations that could take 12 hours to reach full load. set minimum volumes of gas to be taken over a certain period of time, regardless of whether it is needed or not. The Stratford peaking power station is designed to generate electricity when the market most needs it and to rapidly increase or decrease production depending Even if natural gas-fired electricity generation is not required, the gas is either on demand, for example, over peak demand periods when other power stations used for generation anyway or companies like Contact are forced to pay for it, have outages or when hydro and wind energy is unavailable. even if it is not used. Burning increasingly valuable natural gas when the market doesn’t need it is inefficient and a suboptimal environmental outcome. Given that the peaking power station only runs when it is needed, it represents the most efficient use of New Zealand’s limited natural gas resources and enables The $250 million Ahuroa gas storage project will provide the flexibility of gas the country to develop its renewable potential without sacrificing security of supply that Contact needs to operate its power stations as and when required electricity supply. and to meet its customers’ ongoing needs. In May 2009, the two electricity generator units for the power station The Ahuroa reservoir is expected to initially hold around 15 petajoules of gas for arrived at Port Taranaki from Europe, followed closely by the two gas cycling in and out each year, which is close to the annual requirements for a 400 turbines from the United States in June. megawatt combined-cycle power station. Currently, Contact is injecting natural gas into the reservoir, with the target of reaching commercial operation of the The Stratford peaking project will depend upon a reliable but flexible facility in 2010, at which point, gas can be both extracted and injected. This supply of natural gas and is being developed hand in hand with the project was boosted in June 2009 when an additional large gas compressor was neighbouring Ahuroa gas storage facility. imported from the United States and delivered to the site. The new compressor Construction of the project is proceeding well, with commissioning of will be operational in late September 2009. the new power station expected in mid-2010. For more information, please go to www.contactenergy.co.nz/ahuroa. For more information, please go to www.contactenergy.co.nz/peakers.
Combined-cycle gas plant Contact holds consents for a 400 megawatt combined-cycle gas-fired power station at Otahuhu and a 500 megawatt plant at Stratford. These power stations remain on hold while the company focuses on executing its strategy on developing renewables, gas storage and the Stratford peaking project.
Contact’s view (as per the entry limit price graph on page nine) is that renewables represent the most cost-efficient baseload generation for New Zealand, in the absence of a significant change in the cost and supply parameters for domestic gas.
Contact’s Sustainability Report for 2009 Page 15 Contact and the environment
Geothermal generation
Contact is the largest geothermal generator in New Zealand and plans to build on this position with a number of the country’s most important energy projects.
Page 16 Contact’s Sustainability Report for 2009 Our projects – an update
Harnessing the Earth’s heat – Contact’s geothermal development programme Contact continues to make good progress on its geothermal development programme. The company is the largest geothermal generator in New Zealand and plans to build on this position with a number of the country’s most important energy projects in various stages of development.
Geothermal has a critical role to play in New Zealand’s energy future. It’s clean, renewable and doesn’t depend on the weather – providing large volumes of baseload electricity with a very high reliability factor. It’s also the most cost-effective of New Zealand’s generation options and has the capacity to displace existing coal-fired generation with more sustainable and environmentally friendly renewable energy.
Contact has a proud history of leading the world in geothermal generation through ownership of the Wairakei power station – the second geothermal power station built in the world – which turned 50 years old in November 2008 (see page 36).
Contact has extremely experienced geothermal engineers, scientists and geologists working on its four existing geothermal power stations and working to build the company’s geothermal future.
Tauhara phase one Te Mihi power station
Construction of this 23 megawatt geothermal power station is progressing well, Contact has progressed its proposal to develop Te Mihi geothermal power with plant equipment arriving on site during June 2009 and commissioning station, which received final resource consents in September 2008 and is at an expected in mid-2010. The project is located on Centennial Drive in Taupo’s advanced stage of development. industrial zone and will provide enough renewable electricity to power more than Te Mihi will have generation capacity of around 220 megawatts and will be a 20,000 homes. modern and efficient plant. The discharge of geothermal fluid from Te Mihi will be This $100 million investment is particularly significant in that it represents a mixture of infield and outfield reinjection and river discharge. Contact’s Poihipi the first stage of development of the large Tauhara steamfield, which lies to the Road and Ohaaki stations also reinject geothermal fluid back into the earth north-east of Taupo. or evaporate the fluid to air – both methods have significantly less environmental impact. For more information, please go to www.contactenergy.co.nz/tauharaphaseone. A final investment decision has not yet been taken on the power station, the timing of which will continue to be reviewed in light of prevailing economic and Tauhara phase two financial conditions. Contact’s investigations into the Tauhara steamfield show it has a strong geothermal resource, and the company is preparing a detailed resource consent application for a much larger geothermal power station located on the field.
At 240 megawatts and possibly developed in stages, Tauhara phase two will be the country’s largest geothermal power station by a considerable margin, providing enough renewable electricity to power nearly 250,000 homes and costing around $1 billion to develop.
As part of the process of compiling the resource consent application for this project, Contact has introduced a detailed monitoring programme to determine how the geothermal reservoir behaves. This programme is detailed on page 44. Geothermal has a critical role to play in New Zealand’s energy future.
Contact’s Sustainability Report for 2009 Page 17 Contact and the environment
Windgeneration
Simulation of wind turbines at proposed Hauauru- ma- raki wind project
Page 18 Contact’s Sustainability Report for 2009 Our projects – an update
Contact has been advancing two wind farms over the last 12 months. These are currently in the resource consenting process.
Hauauru- ma- raki Waitahora
Contact’s proposed Hauauru- ma- raki wind farm is In seeking to address these issues, Contact In September 2008, Contact filed a resource consent a 540 megawatt project, consisting of up to 180 requested, and was granted, a 12 month application for a 177 megawatt wind farm on remote individual wind turbines and occupying adjournment of the hearing. Over this time, the farmland in southern Hawke’s Bay, near Dannevirke. 34 kilometres of isolated Waikato coastland. additional data will be collected and monitoring Located in the Waitahora Valley, the site has a conducted, to be presented back to the panel when Located close to New Zealand’s major load centre strong wind resource, classified as class one by the hearings resume in mid-2010. of Auckland, the wind farm would cost well over international standards. The site is remote and $1 billion to develop and would provide enough The economics of wind generation continue to be located on pastoral farmland. renewable electricity to power around challenging in the current conditions. With energy In February 2009, resource consent hearings started, 180,000 homes. demand growth slowing as a result of the global based in Dannevirke. The hearings were before recession and with foreign exchange rate movements In August 2008, the project was called in by the a panel of commissioners appointed by the local making the import of wind turbines significantly Minister for the Environment under the Resource consenting authority, Horizons Regional Council. more expensive, Contact’s immediate focus is Management Act, and an independent Board of therefore on executing its geothermal and gas-fired Following three weeks of hearings, the decision Inquiry chaired by an Environment Court judge was peaking projects, with wind projects being developed was taken by the panel to decline resource consents appointed to hear the resource consent application. in parallel, ready for when conditions support them. for the project, with two key issues being around Hauauru- ma- raki was called in under the streamlined perceived problems with discharges to groundwater As the electricity supply and demand graph on page process as the project spanned different consenting during construction and possible visual impact of nine shows, there is a clear role in New Zealand’s boundaries and because of the important the turbines. energy future for wind generation. The graph also contribution the project could make to reducing highlights why the construction of new wind farms Contact appealed the decision, and this appeal New Zealand’s greenhouse gas emissions. features in Contact’s medium-term generation will be heard by the Environment Court. Consent hearings into the project started in May development programme, behind geothermal. Horizons Regional Council used a right of in the south Waikato town of Tuakau. Hauauru- ma- reply to support Contact’s appeal against raki is a large and complex project, and Contact had the judgement. prepared volumes of expert evidence to support Contact remains confident that the issues its application. raised in the original judgement can be During the first three weeks of presenting evidence addressed at appeal and that resource to the hearing, the panel and some submitters raised consents sought for this project will issues around some aspects of the project planning. be granted. This includes detailed earthworks planning, archaeological data and additional monitoring of migratory birds along the coast (see page 27).
Contact’s Sustainability Report for 2009 Page 19 Contact and the environment
Hydrogeneration
New Zealand’s economy has been built on the back of pioneering hydro generation projects across the country. As a result, we have one of the cleanest energy sectors in the world.
The Clyde dam, Clutha River, Central Otago
Page 20 Contact’s Sustainability Report for 2009 Our projects – an update
The future for hydro As New Zealand’s demand for electricity continues to grow and concern around climate change continues to increase, there is a role for new hydro developments in our future electricity mix. The Clutha
When Contact was formed in 1995, the company inherited plans for four new Contact’s process of community engagement on these four options is a fresh and hydro projects on the Clutha River in Central Otago. innovative approach that we believe has not been used before in other generation development projects. For details of the Clutha community engagement process, These plans were originally developed by the Electricity Corporation of please see page 54. New Zealand, with the Roxburgh and Clyde dams on the Clutha being the first of a list of at least six potential projects.
Contact believes the options for future hydro development on the Clutha Hawea gates hydro represent some of the best medium to long-term renewable generation options Contact holds resource consents for a 17 megawatt hydro power station at the for New Zealand. Increasingly, the economics of large-scale hydro developments control gates of Lake Hawea in Central Otago. This project proposes to harness look favourable compared to the likes of wind, and accordingly, Contact has water falling from the lake into the Hawea River, generating renewable electricity started to review the Clutha plans with a view towards identifying a preferred for local communities. option for future development. This project is in the advanced design and engineering phase, and a final The Clutha presents excellent development options in that the river contains investment decision on the project has yet to be made. large volumes of water and is already modified via two large hydro dams at Clyde and Roxburgh.
As the supply and demand graph on page nine illustrates, Contact believes New Zealand is likely to need significant new hydro generation capacity towards the end of the next decade. Contact has begun a process of community engagement on four main hydro generation options for the Clutha, with the intention of selecting a single project for completion around that time.
Community Preferred Consultation Resource Construction feedback option/s and indepth consent on options selected investigations application
2009 2010 ~1–2 years ~1–5 years 2015–2025
Autumn on the banks of Lake Dunstan environmentContact’s Sustainability Report for 2009 Page 21 Contact and the environment
Our power stations Plant output, CO2-e emissions and intensity Our thermal power stations 20051 2006 2007 20082 2009 and our environmental performance Output GWh 3,744 6,649 5,413 5,318 4,127 Around half of Contact’s electricity is generated using natural gas in power stations CO -e in Taranaki, Hamilton and Auckland. Contact also owns a 25 per cent stake in the 2 4 Oakey power station, a 282 megawatt gas or distillate-fired peaking power station Kilotonnes 2,0563 2,854 2,299 2,219 1,806 in Queensland. Contact operates the Oakey station remotely from its Otahuhu B CO2-e intensity power station in Auckland. Each is accredited to the AS/NZS 14001 environmental Tonnes/GWh 456 429 425 417 438 management system. Contact also operates the diesel-fired Whirinaki peaking station on behalf of the Crown, which has leased the Whirinaki site from Contact. Efficiency 5 Over the 12 months in review, Contact’s 35-year-old gas-fired power station at kJ/kWh 8,628 8,130 8,042 8,035 8,292 New Plymouth was decommissioned following the discovery of asbestos in the % 42 44 45 45 43 plant in September 2007. A review of the asbestos removal and decommissioning is set out on page 51. 1. For 2005, the reporting period was the nine months ended 30 June 2005; for 2006 and subsequent years, Contact’s gas-fired power stations play a critical role in providing a secure and the reporting period is the year ended 30 June. reliable supply of electricity. However, during the 12 months in review, extreme 2. The previously advised 2008 figures have been revised, having been calculated from what was incorrect fuel data that came to light during the preparation of this year’s report. The information shown in this year’s hydrology and transmission constraints have prevented the power stations from table is correct. maximising their potential contribution to the energy market. Over the period, our 3. This figure relates to the 12 month period ended 30 June 2005. gas-fired plants generated 10 per cent of New Zealand’s total electricity. 4. Thermal power station greenhouse gas emissions this year incorporate the respective Ministry of Economic Development’s nitrous oxide (N O) and methane (CH ) factors for electricity as found at During the winter months of 2008, transmission constraints prevented thermal 2 4 www.med.govt.nz/upload/63349/GHG%20Report.pdf. These have added a small amount (roughly power from the North Island from reaching the South Island when the hydro lakes 0.26 per cent) to the thermal station’s emissions. were low, and over the spring and summer, high hydro inflows kept wholesale 5. The 2008 and 2009 figures include the Oakey power station, whereas previous years do not. electricity prices low, leading to Contact bringing forward maintenance outages on its gas plants. Otahuhu B upgrade As a result, Contact’s thermal generation output and corresponding greenhouse In November 2008, our Otahuhu B combined-cycle power station underwent a gas emissions were lower than might otherwise be expected in a more scheduled maintenance outage and upgrade. Following the completion of this normal year. outage, the output of the plant increased by 10.25 megawatts – enough new electricity to power around 10,000 homes.
Fuel/water consumption and greenhouse gas Also as a result of the upgrade, the expected low heating value (LHV) efficiency (GHG) emissions improvement of 0.6 per cent was just exceeded by 0.01 per cent. On its own, this efficiency improvement resulted in an annual saving of up to 52,787 gigajoules of Over the year, Contact’s thermal power stations used 34 petajoules (PJ) of natural gas. Also, while these have not been quantified, the combustion changes resulted gas and 78 terajoules (TJ) of diesel. Contact’s thermal stations use water for in the plant’s NO emissions being reduced. cooling. At Otahuhu, this water is estuarine; at the Taranaki and Te Rapa stations, X this is freshwater. Total freshwater usage in our thermal plants has been estimated at less than 500 megalitres during the 12 months in review.
Carbon dioxide-equivalent (CO2-e ) emissions from Contact’s gas and distillate-fired (Oakey) power stations totalled approximately 1,806,000 tonnes, down from 2,219,000 tonnes in the 2008 financial year.
Over the last five financial years, Contact’s gas-fired generation has
produced an average of 2,247,000 tonnes of CO2-e per annum. A breakdown of Contact’s greenhouse gas production from all activities is on page 48.
The heat rate of a power station measures the efficiency of the conversion of fuel into electrical energy – the lower the heat rate, the more efficient the plant. Overall, for Contact’s thermal power stations – including Oakey – the average heat rate for the 2009 financial year was 8,292 kilojoules per kilowatt hour (kJ/kWh).
While the efficiency of Contact’s thermal plant has improved over recent years, including the 2009 year, this year’s overall operational efficiency has been lower. This is due to longer periods of operation at low load that the company’s gas-fired power stations have experienced, as a result of the reduced need for thermal plant due to market conditions. When running at lower loads, the efficiency of the plant is less than when running at its optimum full output state.
Page 22 Contact’s Sustainability Report for 2009 Our geothermal power stations Greenhouse gas emissions from and our environmental performance geothermal generation Geothermal is a renewable form of electricity generation. However, small Following the construction of the gas storage, peaking and geothermal power quantities of CO2 and other greenhouse gases (principally methane) are produced stations currently underway, investment in renewable geothermal energy remains by geothermal power stations. The emission factors for Wairakei’s geothermal Contact’s number one investment priority, with three power stations under various generation noted in this table for the 2009 year are higher than for the previous stages of development, as outlined on page 17. year as a result of a change in assumptions used to calculate the emissions factor.
Contact is New Zealand’s leading generator of geothermal energy. Over the The previous methodology did not include greenhouse gas emissions to the 12 months in review, Contact generated around six per cent of New Zealand’s atmosphere where they were dissolved in cooling water. electricity from hot geothermal steam. Greenhouse gas emissions per unit of geothermal production vary depending on a This section of the report covers the operation and environmental performance range of factors, including the particular steamfield, the location of a well within of the company’s four existing power stations – at Wairakei (including the binary a steamfield and the age of the well. For example, a new well typically produces station), Poihipi Road and Ohaaki. Together, these sites have generating capacity higher levels of greenhouse gases than a mature well. of 327 megawatts. Each is accredited to the AS/NZS 14001 environmental management system. Contact’s geothermal emissions per unit of production have increased due to taking steam from wells producing higher greenhouse gas emissions per tonne of While geothermal is defined as a renewable energy source under the Resource steam than had previously been in use. Management Act, as with all forms of energy production, there are some environmental impacts that require careful management and monitoring. Contact’s geothermal carbon dioxide equivalent emissions Contact’s geothermal generation 2005 2006 2007 2008 2009 20056 2006 2007 2008 2009 Kilotonnes 148 142 178 197 372 Revised CO -e emissions 150 144 178 211 372 Gigawatt hours 1,308 1,820 1,968 2,180 2,312 2 Tonnes/GWh 84 78 90 90 161
6. For 2005, the reporting period was the nine months ended 30 June 2005; for 2006 and subsequent years, the reporting period is the year ended 30 June. environment
On average, around half of Contact’s total electricity is generated using natural gas in our power stations in Taranaki, Hamilton
and Auckland. Contact’s Sustainability Report for 2009 Page 23 Contact and the environment
Discharges of geothermal fluid Total geothermal extraction by steamfield and One of the most significant environmental impacts of Contact’s geothermal disposal of used geothermal fluid for Contact’s operations is the discharge of used geothermal fluid from the Wairakei geothermal power stations, averaged over the power station. 2009 financial year Wairakei uses water from the Waikato River to cool the plant. Water from the river is then mixed with the geothermal fluid, and this water is then discharged back to the river. Contact’s Ohaaki power station also discharges small amounts of Wairakei/Poihipi geothermal fluid to the river. 2007 2008 2009 Geothermal fluid contains a number of naturally occurring elements and minerals, Total geothermal take 145,000 tonnes 152,000 tonnes 148,000 tonnes and discharging these to waterways can have a negative environmental impact. per day per day per day While these discharges are carefully managed within set limits, discharges to the river are expected to reduce when Wairakei is eventually decommissioned. Percentage reinjected 30 per cent 35 per cent 38 per cent to ground Percentage 44 per cent 38 per cent 36 per cent discharged to river as fluid Percentage 23 per cent 23 per cent 21 per cent discharged to river as condensate Percentage 3 per cent 4 per cent 5 per cent evaporated to air
Note: Data previously reported in relation to the Poihipi field has now been incorporated into the above table, which combines the Wairakei/Poihipi data.
Ohaaki 2007 2008 2009 Total geothermal take 31,800 tonnes 35,863 tonnes 36,683 tonnes per day per day per day Percentage reinjected 64 per cent 63 per cent 61 per cent to ground Percentage 36 per cent 20 per cent 23.4 per cent evaporated to air Percentage 17 per cent 2.3 per cent discharged to river
Tauhara 2008 2009 Total geothermal take 3,933 tonnes 4,090 tonnes per day per day Percentage reinjected to ground 100 per cent 100 per cent
Note: This data relates to the operation of the Contact/Tenon direct geothermal heat project.
Page 24 Contact’s Sustainability Report for 2009 Hydrogen sulphide emissions Heat discharge to the Waikato River Hydrogen sulphide is the gas that gives geothermal areas their unique smell. It In June 2006, monitoring equipment was installed both upstream and is released to air both naturally – through geothermal venting and geysers – and downstream of the Wairakei power station to measure the impact of discharging through the process of generating electricity from geothermal resources. warmer water to the river.
Contact monitors hydrogen sulphide levels at the Wairakei Village residential area Contact’s resource consents require that the downstream river temperature must every hour. The data shown is the annual average of that data. not increase by more than five degrees Celsius (˚C) after reasonable mixing of separated geothermal water and cooling water from the Waikato River. The eventual decommissioning of the Wairakei power station will eliminate discharges Ambient hydrogen sulphide levels monitored to the river. at the Wairakei Village 2005 2006 2007 2008 2009 Average Waikato River temperature increase downstream Micrograms per cubic metre 2.93 2.58 1.96 2.32 2.06 from Wairakei power station (average) 2007 2008 2009 1.89˚C 2.2˚C 1.61˚C Arsenic discharges to the Waikato River Arsenic is a naturally occurring element in geothermal fluid and is contained in the used geothermal fluid Contact discharges to the Waikato River.
In 2007, Contact started monitoring the concentration of arsenic in separated geothermal water, and last year’s Sustainability Report was the first time this data has been recorded and reported.
Arsenic discharges to the Waikato River 2007 2008 2009 Total arsenic 90.6 tonnes 90.2 tonnes 99.85 tonnes discharge to river environment
Contact’s Sustainability Report for 2009 Page 25 Contact and the environment
Hydro volumes and spill Contact records any hydro spill and the reasons for that spill.
Over the 12 months in review, Contact released 1.34 billion cubic metres of water from Lake Hawea into the Clutha hydro scheme. From Lake Dunstan behind the Clyde dam, 15.77 billion cubic metres of water were used for electricity generation. From Lake Roxburgh behind the Roxburgh dam, 16.39 billion cubic metres of water were used for electricity generation.
Total spill for the period was the equivalent of 531.78 gigawatt hours (GWh) generation. Of this, 414.98 GWh were spilled due to insufficient transmission capacity. The volume of water spilled due to transmission limitations was significantly more than Contact’s entire storage capacity in Lake Hawea and represented enough wasted generation potential to power more than 40,000 Our hydro power stations homes for a year. Again, this serves to illustrate how critical a strong transmission and our environmental performance network is to the efficient operation of the market. The remainder was spilled for operational reasons, including management of high-flow periods and for periods Contact owns and operates two of the country’s largest hydro generation power when the cost of generating electricity was greater than the price Contact would stations located at Clyde and Roxburgh on the Clutha River in Central Otago. have received for its generation.
Together, these power stations have generating capacity of 752 megawatts By way of comparison, during the same 12 months in 2008, Contact spilled and form a critical part of New Zealand’s hydro generation backbone. Both a total of 9.2 GWh of potential generation, with just 2.1 GWh spilled due to of these power stations are accredited to the AS/NZS 14001 environmental insufficient electricity transmission. management system.
Over the course of the 12 months in review, Contact’s Clyde and Roxburgh dams Greater flexibility for our hydro generation generated nine per cent of the country’s total electricity. Contact also operates the With proposals for more wind farms in the Central Otago region, it will be control gates at the Lake Hawea dam, with water from Lake Hawea entering the increasingly important for the region’s hydro power stations to be able to operate Clutha system and providing water for the Clyde and Roxburgh dams. Lake Hawea in partnership with those wind farms, generating electricity to ensure a constant is a storage lake only and does not currently generate any electricity at the Hawea electricity supply such as during times when the wind doesn’t blow. dam (see page 21). In order to achieve this alongside the day-to-day hydro generation, it is important to maximise the flexibility with which hydro power stations can operate. Hydro generation In February 2009, Contact applied to the Otago District Council to raise the level Contact’s hydro generation fluctuates depending on rainfall and snowmelt into of Lake Roxburgh, the reservoir behind the Roxburgh dam, by 60 centimetres. the Clutha catchment. The first half of the year in review was characterised by a period of severe drought over the winter of 2008, with extremely low The extra 60 centimetres of operating range in Lake Roxburgh would increase the hydro inflows and the removal of a large chunk of South Island demand – the generation output and flexibility of the Roxburgh dam and would be raising the 180 megawatts of Tiwai Point load – all combining to restrict generation from lake back to its original operating level. Contact’s Clyde and Roxburgh dams. The dam is designed for the proposed higher level, and the impact on the steep In the second half of the year, the South Island drought turned to a deluge, with and rocky shoreline of Lake Roxburgh would be negligible. Under periods of high South Island hydro generators, including Contact, forced to spill large inflows, the lake would be lowered below current levels to minimise flood risk. volumes of water through the hydro dams to manage flood conditions Historic huts and tailings along the Roxburgh Gorge, walking tracks and boat and because the regional transmission network in the lower South ramps around the lake at Roxburgh and Alexandra would not be affected. Island was limited and unable to accommodate full generation production. This situation was exacerbated by the Tiwai Point outage, Submissions on this proposal closed in March, and we will report on which resulted in a surplus of generation in the lower South Island, developments in next year’s report. with which the transmission system could not cope. Transpower is implementing a solution to the lower South Island transmission limitations, which should alleviate the problem late in the 2009 calendar year.
For more information on the factors that impacted Contact’s hydro generation over the year, including an illustration of hydro storage extremes over the year, please see pages 12 and 13 of this report. The volume of water spilled due to insufficient transmission Contact’s hydro generation 20057 2006 2007 2008 2009 capacity was significantly more Gigawatt hours 3,981 3,065 3,639 3,504 3,543 than Contact’s entire storage
7. For 2005, the reporting period was the nine months ended 30 June 2005. capacity in Lake Hawea.
Page 26 Contact’s Sustainability Report for 2009 Biodiversity Protecting unique environments
The Taupo region is blessed with a strong geothermal resource, and it is also an area of unique biodiversity.
Contact is a key partner in the Taupo community and takes its responsibility for protecting unique environments seriously.
At Wairakei, we are aware of the presence of the Christella sp.‘thermal’, a thermo- Bird monitoring radar equipment at Hauauru- ma- raki wind farm site tolerant fern found in some geothermal areas due to the warm moist conditions. We will report more fully on this fern, including its location and the steps taken to protect it from operations, in next year’s report. Bird monitoring at Port Waikato Through the company’s geothermal generation activities in the area, Contact - - is funding a range of initiatives to preserve, protect and better understand the As part of our consent application process for the Hauauru ma raki wind farm in region’s geothermal features, including the unique geothermal biodiversity. the Waikato, the Department of Conservation (DOC) raised the possibility that turbines might be located on migratory paths for wader-bird species such as the With this in mind, the Wairakei Environmental Mitigation Charitable Trust was wrybill and the South Island pied oystercatcher (both of which are IUCN listed). created in 2004 with $1 million in funding from Contact. The trust is made up of six trustees appointed from Fish and Game New Zealand, the Department of In consultation with DOC, Contact commissioned a shorebird survey utilising Conservation and Contact. two radar units and up to 21 bird spotters who will be stationed at each of the proposed turbine clusters during the migratory seasons. The radars are mobile The purpose of the trust is to help to avoid, remedy or mitigate environmental so they can be moved within a 34 kilometre stretch of coastline and up to six effects created by the operation of the power stations as much as possible, kilometres inland. through facilitating research for the protection and enhancement of: The purpose of the programme is to accurately identify species, flight paths and the variety of geothermal characteristics within the volcanic plateau within population data and the extent to which the birds may be vulnerable to collision Environment Waikato’s regional boundary risk with turbines.
the variety of geothermal characteristics with protected geothermal The radar units are used to identify passing flocks within a range of approximately systems, as defined in the Waikato Regional Plan, and other geothermal 10 kilometres and to record GPS location and flight paths. This information is systems within Environment Waikato’s regional boundary passed on to the on-the-ground bird spotters who identify species and numbers as they fly within their viewing range. aquatic habitat and amenities (including rivers, lakes and wetlands), water quality and fishery values in the upper Waikato River catchment area The survey will be carried out over four seasons (one was undertaken in January/ (Lake Taupo outlet to Ohakuri dam). February this year), with the next survey to be undertaken over July/August 2009. This will be followed by surveys in January/February 2010 and July/August 2010. Since it was established, the trust has allocated more than $1.3 million to a range of environmental mitigation projects that meet these objectives. Once the monitoring data from each migration study has been collated, we will work with DOC to assess any potential impact a wind farm may have on migratory For more information on the trust and its work, go to www.wemct.co.nz. birds and agree mitigation and/or avoidance measures if required. The following projects have been allocated We will provide more information about this programme in next funding over the 2009 financial year: year’s report. Tokaanu Recreation Reserve project Revegetating land of ecological Department of Conservation (Taupo/Turangi) and cultural significance This project will look at the design and costs of conservation options for restoration attempts at the reserve. Ultimately, this proposal aims to see The Puketoi Range, the location for Contact’s proposed Waitahora fluid flows in the geothermal system within 200 metres of the Tokaanu wind farm, has long been a traditional food-gathering source for bathhouse and restoration of the thermal features at Tokaanu, including local Rangitane- o Tamaki Nui a Rua (Rangitane).- However, since the the Taumatapuhipuhi geyser. deforestation of the area for farming early this century, the number of eels and birds in the area has declined significantly. This follows the 2005 project (Tokaanu Thermal Area sinter formations) and 2007 project (Tokaanu Reserve restoration and protection). As part of our consent application for the Waitahora wind farm, Contact has committed to revegetating 10 hectares of wetland, returning the land to its Orakei Korako Cave and Thermal Park (Orakei Korako) project original state, with obvious benefits for water quality and aquatic life such as the long-fin eel and koura. Wilding pines are a nuisance in areas where native forest does not occur, such as above the bushline, in mineral belts and tussock grasslands. The revegetation programme will involve lakeside plantings and fencing the area In areas such as these, wilding pines create a major intrusion and from stock to stimulate regeneration of the wetland and encourage the return - - modification to natural ecosystems. of aquatic life. As part of Contact’s application for our Hauauru ma raki wind farm, we have offered substantial tracts of wetland for bird habitat and areas for The Orakei Korako Cave and Thermal Park (Orakei Korako) project vegetation restoration to mitigate for those areas that would be lost. involves the control and removal of wilding pines at these locations.
Contact’s Sustainability Report for 2009 Page 27 Contact and the environment
Procurement strategy In last year’s report, we stated that we were developing a procurement strategy across the company and would report back on progress in this report.
We have started to implement policies and best practices that support Contact’s Green goal to obtain the best overall value – consistent with the company’s standards and Code of Ethics – when making purchasing decisions.
In 2009, recognising that Contact will achieve the best overall value through a sustainable supply chain, we are implementing a new initiative to enter into office relationships only with suppliers that align with strategic procurement objectives. Contact’s Green Office programme is company-wide with a mandate to reduce the impact the company has on the environment at work. Contact’s Green Office programme We have a committed Green Team, with members at most sites to ensure that our company initiatives take hold.
A number of green initiatives were created and delivered over the past 12 months. We measured electricity consumption at all but one of our sites to provide an internal benchmark that we can improve on in the future. In addition, we made recommendations to all sites on how we can reduce energy consumption, many of which were undertaken this year.
We also built on our current recycling programme including undertaking waste audits and introducing new signage to encourage recycling. We began implementing a procurement strategy incorporating paper use directives, and in June this year, we acknowledged World Environment Week across the organisation.
I can save paper
Page 28 Contact’s Sustainability Report for 2009 Kilograms of rubbish per FTE per annum systems and installing sensor lighting devices on office and computer equipment. lowering hot water temperatures and thermostats, refurbishing air-conditioning These included installing check metering where possible, changing skylights, (approximately 345,000KWh)by implementingsome simple changes. that Contact could save more than $30,000 per annum in electricity costs audits at 11 Contact sites around New Zealand. Smart Power calculated In April 2007, Smart Power Limited, based in Wellington, undertook energy How efficientare we? Team wasasked toeducateandassist newandexisting employees. This involved A3posters andremindersvia atallsites. The Green intranetstories Office immediatelydrive. responded byimplementinganacross-site recycling Both Wellington and Wairakei saw a rise in landfill waste audit-on-audit. Green February asset results outbelow. andMarch2009,with follow. will Moreaudits waste and measure against previous audits. The most recent audits were held in We run regular waste audits at our sites. These monitor the level of landfill over two years as staff are prompted to think before they throw. wefacilities. have Asaresult, witnessed adramaticreductioninlandfillwaste of arubbishbin.We alsoprovideorganic,plastic, paperandglass recycling For more than two years, we have provided all staff with a small red box in lieu Contact’s waste management strategy covers all our offices and generation sites. Recycling atContact Numbers 8, 9, 10 are as per audits undertaken by Smart Power. undertakenbyNumbers 8,9,10areas per audits Smart indicated areforAmounts allContact sites (whether offices or generationplants). 10 20 30 40 50 60 70 80 90 77,141,289 (KWh) p.a. prior to changes Electricity used gainsatall efficiency Contactsites Electricity 0 Waste tolandfillperfull-timeemployee(inkilograms) Jan 07 Wellington 8 of programme($) efficiencies – cost Investment in 40,178 Feb 08 Levin annum (KWh) savings per Electricity 253,060 Jun 08 Wairakei 9 Feb 09 annum ($) savings per Estimated 25,459 Lower Hutt 10 subsequent reports. work will be completed this year, and we will report on progress in It is our goal to measure and monitor power use at all our sites. Further thatcanthenbeused forone portal futurebenchmarking. data through the retail billing system. We collate this information into undertake a monthly meter read, while others are able to determine We use various systems to measure electricity at our sites. Some sites saving enhancementsifrequired. will allow us to compare periods accurately and make further energy consumption atoursites. This Contact hasbeguntomeasureelectricity Direct energyconsumption dumped materials. On 5and6June,volunteers moved intocollect theremaining team picked up18dumpedcarbodiesfromoneside oftheCluthaRiver. committed theirtime.The bigclean-uptookplace on4June.The Contact andmorevolunteersand businesses andequipment, donatedmachinery plannedevolved, clean-upthanwasoriginally A bigger asgroups river oftheproject. different aspects and Contact eachgrouptakingresponsibility Energyonboard,with for ofConservation, OtagoDepartment Regional Council,Central Excavating The groupgot otherCentral Otago organisations,includingthe Day 2008. for oftheCluthaRiver tocelebrate aclean-upofpart World Environment The Sustainable Living reference groupinCentral Otago developed ideas tocelebrateenvironmental activities World EnvironmentDay. in toinspiretheir toparticipate award forcommunity outstandingefforts MAD4CO received theCommunity Action for World Environment Day Otago) team. award-winning at ParliamentoftheMAD4CO aspart (Makingadifference for Central Contact EnergyClyde damGenerationAssistant Cathy Marshflewtheflag 4June2009 accepting theawardatParliament, Cathy (right) Case study: worldwinners environment Contact’s Sustainability for Report 2009 Page 29
Contact and the environment
World Environment Day – 5 June 2009 World Environment Day was established by the United Nations General Assembly in 1972 to mark the opening of the Stockholm Conference on the Human Environment. Commemorated annually on 5 June, World Environment Day is one of the principal vehicles through which the UN Our staff speak up stimulates worldwide awareness Green Office surveyed our staff in May 2009. A good level of response means that of the environment and enhances we can illustrate key findings with confidence. political attention and action. A lightweight 2009 saw a step up in carbon infused Contact’s participation in wooden writing vessel Staff are aware and supportive of our need to reduce World Environment Day, the environmental impact of our office operations providing an opportunity for 70 us to take personal, group and company action for 60 our environment.
Many Contact sites Let’s acknowledge 50 World Environment Day contributed time, together by making good choices materials or 40 You won’t wear your computer out by turning it off more than once per da more energy to start a computer than to keep it running. machinery while out energy than keeping it on” exists for every device you can think of. So to a meeting and take your wooden writing vessel with you ins in the community Percentage 30 The myth of “turning it off uses more planting trees, y. It does not take
tead. turn it off when you go cleaning beaches World Environment Day 05 June 2009 20 and recycling. Green Green Office office 10 ran a team competition, intranet stories and hosted a climate change speaker 0 from the National Institute of Water and Atmospheric Strongly Agree Neutral Disagree Strongly agree disagree Research (NIWA) at head office. Preference 2007 2008 2009
How important is Contact’s performance? 70
60
50
40
Percentage 30
20
10
0 Very Sort of Not really Not at all No comment Preference Financially Environmentally
Recognition through awards
Contact won the Community Action for World Environment Day award for its efforts to inspire the community to participate in environmental activities to celebrate World Environment Day.
Page 30 Contact’s Sustainability Report for 2009 Our carbon-neutral offices GHG emissions by business activity (2008 year) carboNZeroCertTM certification is being sought for the 2009 year for our 3.8% corporate office operations, including at all of our electricity generation offices. 10.2% The carboNZero programme was established in 2001 by Landcare Research New Zealand and is based on more than a decade of research on climate change, greenhouse gas measurement and carbon monitoring. The programme is based on the following steps: measure, manage, reduce and then offset unavoidable emissions. 19.7% 52.3% Greenhouse gas emissions for Contact’s office operations were 3,487 tonnes of CO2-equivalent for the 12 month period 1 July 2007 to 30 June 2008. Contact is currently gathering data for the 2009 financial year in preparation for continued certification. The office at the Crown-owned Whirinaki power station and staff travel associated with its management are included in this 13.9% calculation, as Contact staff have control over travel and energy use at the site.
General operations (excluding power station fuel combustion emissions) Head office Power station offices Call/service centres Contact corporate office operations emissions (2008 year) LPG offices
19.7%
Contact has investigated methods to reduce the amount of travel, such as by video-conferencing instead of travelling to meetings. The company is committed to maintaining this momentum, driven by the Green Office team, by introducing video-conferencing facilities in its new Auckland office and by trialling video calls 59.5% from a desktop computer, including utilising an on-demand web meeting service.
Target: To continue to reduce Contact’s corporate office emissions per full-time 20.8% equivalent staff member.
Carbon Disclosure Project
Scope 1 Scope 2 Scope 3 For the third year running, Contact contributed to the Carbon Disclosure Project (CDP) in June 2009. The CDP is an independent not-for-profit organisation that Scope 1 refers to GHG emissions that occur as a direct result of our business operations and are within holds the largest database of corporate climate change information in the world. Contact’s control. Examples are waste to landfill and fleet car travel, i.e. petrol, diesel and LPG. This annual international survey on GHG emissions and their management Scope 2 refers to GHG emissions from electricity use, purchased from the grid. provides insight into the strategies deployed by companies in relation to Scope 3 emissions arise as a consequence of Contact’s activities, but occur from sources not owned climate change. or controlled by Contact such as GHG emissions from air travel (domestic and international) and car rental and taxis (i.e. petrol, diesel and LPG). Contact believes it is important to maintain transparency about our emissions and our strategies to manage those emissions. Alongside our commitment to sustainability reporting, participation in programmes such as the CDP is a useful way to keep investors and other stakeholders informed of our performance, plans and objectives. It is important to maintain transparency about our greenhouse gas emissions and our strategies to manage them.
Contact’s Sustainability Report for 2009 Page 31 Contact and the environment
LPG Making a difference with LPG Reticulated LPG network
Whether it’s ensuring a ready supply of hot water, gas for the barbeque or simply offers greener alternative filling up the car, LPG offers a competitive, convenient source of fuel. Our reticulated network in the South Island is the largest in the country, taking As New Zealand’s largest LPG retailer, Contact meets around 48 per cent of the LPG direct to customers with no need for delivery vehicles or cylinder storage, country’s total demand for bottled, reticulated and automotive LPG. freeing up valuable space for commercial customers and making it a clean and efficient fuel. The use of LPG and natural gas not only takes a load off the electricity supply system – important during times of increased demand and tight supply – it also Last year, Contact’s reticulated LPG network supplied approximately 19,000 provides an efficient fuel for domestic, vehicular and light industrial purposes. tonnes of LPG to around 3,000 residential and commercial customers.
LPG offers customers many benefits, such as instant, continuous hot water The network, which covers approximately 160 kilometres throughout that never runs out and more flexibility in heating, with gas heating providing Christchurch and its surrounding districts and 130 kilometres throughout Central immediate results. Otago, provides consistent supply pressure and removes the need for customers to monitor their cylinder supply. It also allows customers to pay for their actual Through its nationwide LPG network, Contact can provide a wide range of heating metered monthly consumption. options for domestic and industrial customers throughout the country. As well as supplying reticulated LPG to a range of small and medium-sized entities To encourage the use of LPG this year, Contact launched its improved and industrial clients ranging from restaurants to manufacturing plants, Contact is DualEnergy™ discount – a 40 cent per day discount for customers who have working with a number of property developers to supply new developments either both their electricity and gas accounts with Contact. The result for electricity from our existing network or our bulk storage facility. and natural gas or LPG customers is a discount of over $160 every year. Electricity and natural gas customers also receive a single bill each month.
With consumers searching for more efficient and environmentally friendly fuels to Fuelling up with LPG power their homes and lifestyles, there is a growing future for LPG. LPG remained a competitive fuel source over the year in review. What’s more, LPG
emissions contain significantly less CO2 than petrol and less nitrogen oxides (NOX) and fewer particulate emissions than petrol or diesel, making it a good choice Reducing CO2 emissions with LPG for customers. Contact’s supply of LPG to commercial and industrial customers displaces The graph below shows a price comparison with 91 octane petrol after allowing other conventional fuels that produce more carbon dioxide and other harmful for the 30 per cent LPG/petrol conversion factor. emissions. In the year in review, we supplied 77,000 tonnes of LPG to customers throughout New Zealand. Of this, approximately half was sold to industrial customers. LPG price comparison with 91 octane petrol We estimate that our LPG supplied to commercial, industrial and residential 2.5 customers and for transport use displaced 3.85 petajoules of energy demand. Based on this, and the assumption that displaced electricity was from Contact’s thermal plant at its average greenhouse gas (GHG) emission rate, Contact’s 2 supply of LPG as an alternative fuel has reduced GHG emissions by
around 130,000 tonnes of CO2-e in the 2008/09 year. 1.5
Recycling cylinders Dollars 1 All LPG cylinders must be recertified every 10 years in order to remain safe for use. Where a cylinder fails its recertification because of a faulty valve, we will change the valve over so that the cylinder can be 0.5 reused. Where a cylinder fails the test because it has been subjected to some form of damage or is rusty (common where a cylinder is used on a boat), we will remove the remaining gas from the cylinder before 0
recycling it for scrap metal. Jun 08 Aug 08 Oct 08 Dec 08 Feb 09 Apr 09 Jun 09
Last year, Contact gained 2,900 LPG pump price (plus 30 per cent) LPG customers, taking total LPG Lowest discount Fuelcard price at red dot sites (plus 30 per cent) 91 octane petrol customers to 53,700. To let customers know they’re making a good choice when they travel in a taxi that fuels up on LPG, we have provided Rockgas LPG ‘Every journey makes a difference’ stickers or magnets for taxi fleets that meet certain criteria.
Page 32 Contact’s Sustainability Report for 2009 Contact and the community
community
Contact’s Sustainability Report for 2009 Page 33 Contact and the community
Contact recognises that its success relies, at least in part, on the support of communities. We therefore aspire to be a great neighbour – ‘the neighbour you want’, in the communities in which we operate.
We love a good challenge and are committed to doing our best to live up to the ‘the ethos of being ‘the neighbour you want’. For Contact, this means: being an active and long-term contributor to communities
supporting things that have a beneficial impact in the community neighbour being mindful of the impacts of our operations on communities and you doing our best to ensure our neighbours fully understand these impacts trying to understand and respond to the needs of our communities
communicating with communities in a way that is open and want’ easily understood. We recognise that, while it is easy to say these things, living them is another matter – there is always room for improvement. We are committed to listening, learning and finding new ways to meet the needs of our community stakeholders, including our customers and our physical neighbours.
Our almost 1,000 staff based around New Zealand, from Northland to Southland, are our frontline community ambassadors. They have day-to-day responsibility for our community interaction.
Page 34 Contact’s Sustainability Report for 2009 Supporting warmer, drier, healthier homes Extending a hand to the community
New Zealand’s poorly insulated housing stock is an issue of significant national One of the best ways we can contribute to the community is through being a great importance. The recent findings of the Contact-sponsored research by Professor employer and providing our staff with the opportunity to participate in a number Philippa Howden-Chapman into the negative health effects of poorly insulated of our community-based sponsorships and activities. homes and the recent government announcement of a $323 million assistance We will look to expand our staff’s opportunity to contribute to their communities in package are testament to this. the year to come through the roll-out of an exciting new volunteer programme. Contact has played an active leadership role in assisting the delivery of insulation From food bank collections to blood bank donations, from blankets for the SPCA retrofitting programmes, through helping fund more than 5,000 retrofit to river clean-ups and washing windows at the local retirement home – this year, installations across New Zealand via the Healthy Homes projects. Contact staff did it all. The Government’s new assistance package is focused on delivering the benefits In an extension of the employee engagement programmes established in the 2008 of warmer, drier homes on a much larger scale. Through our experience and track financial year around our major sponsor partnerships, Contact staff were again record, we are well placed to assist. challenged to take part in December’s Contact Big Give.
Teams from across the country banded together to come up with innovative and Warming up New Zealand heart-warming ways to demonstrate the true spirit of Christmas.
Warm, dry, energy-efficient homes have clear public health benefits, and Whether on a grand scale, such as our Wairakei staff building a new walking and as a retailer with direct contact with around 600,000 customers across the cycle track, or an act of simple kindness, such as our Clyde dam staff visiting rest country, we’re keen to help our customers maximise the benefits of warmer, home residents in Central Otago with a piece of Christmas cake and a glass of healthier homes. good cheer, our staff wholeheartedly embraced the idea.
Over the next six months, Contact is planning to launch its energy-efficiency To enable our employees to continue this great community work, much of which channel, a programme that will see Contact partner with an insulation company is carried out in their own time, in the 2010 financial year, we will roll out our to provide customers with access to quality insulation and an installer network, new Contact employee volunteer programme. The programme allows employees allowing customers to take advantage of the Government subsidy. one paid day special leave to volunteer their time, skills and/or services, either as a team or as individuals, to the local cause of their choice. We look forward to Target: Insulate the homes of 1,000 customers over the next financial year. reporting on the many community activities resulting from this new initiative.
Continuing last year’s theme of ‘physical challenge’, the month-long Bikewise Investment in the community challenge proved popular, with 15 per cent of Contact employees taking part, logging an impressive 26,667 kilometres in the process.
We concentrate a significant portion of our community investments in a number of community communities of focus, recognising the importance of these areas to our continued operation. These communities are based around some of our major generation plants, including Wairakei/Taupo, the Clutha communities of Central Otago and Taranaki.
From funding kindergarten climbing walls and netball uniforms, to ‘big days out’ for special needs and disadvantaged children, our generation and retail site community sponsorship funds were again instrumental in providing a helping hand to their local communities, investing around $35,000 across the country.
At a regional level, Contact built on our long-standing relationships with the likes of the Contact Alexandra Blossom Festival and ushered in a number of new partnerships such as the Lake Taupo Cycle Challenge and Taranaki-based Waves Youth Health, Development and Support Service.
In total, Contact’s investment in sponsorship over the 2009 year was $1.3 million.
More information on the range of national and local sponsorships is contained in the following pages.
Contact’s Sustainability Report for 2009 Page 35 Contact and the community
It was only right that Contact celebrate with the surrounding community and those who have contributed to 50 years of renewable geothermal energy at Wairakei. Wairakei’s 50 years of renewable geothermal energy On 14 November 2008, Contact celebrated the Wairakei power station’s 50th anniversary.
An icon in global geothermal development, it was only right that Contact celebrate the event with the surrounding community and those who have contributed to 50 years of renewable geothermal energy.
In recognition of this milestone, we opened the power station to the public, providing a range of entertainment activities.
The celebrations attracted visitors from across the country and included the Hon. Georgina Te Heuheu, Taupo Mayor Rick Cooper and local triathlete and Olympian Bevan Docherty who confessed to using the station grounds as a training venue in his earlier days.
We also wanted to acknowledge those who had contributed to the success of the station, by hosting a formal reunion dinner. This event was attended by more than 500 people, including past and present staff and many of our geothermal associates. 10 years of efficiency at Taranaki combined-cycle power station The 10 year anniversary of our Taranaki combined-cycle power station in September 2008 was a significant milestone.
We took advantage of this as an ideal opportunity to invite the people of Taranaki to come take a look around and get to know us a little better.
The event was a real success with around 900 people attending and taking advantage of the opportunity to tour the site and talk to our staff.
Public open day at the Taranaki combined-cycle control room
Page 36 Contact’s Sustainability Report for 2009 community Community trusts Wairakei Charitable Trust
Last year, we told you about the Wairakei Charitable Trust, which Contact established in partnership with hapu that hold manawhenua (authority over the land) in the area.
Contact has continued with its annual contribution of $100,000 to help fund restoration work at the Tokaanu Recreation Reserve and the control and removal of pine at the Orakei Koraka Cave and Thermal Park. You can read more about these projects on page 27. Sponsorship manager Craig Griffiths (right) and Taranaki combined-cycle manager Sam Floriani (centre) with the Contact Hauauru- ma- raki Charitable Trust Waves Youth Health, Development and Support Service team. We are working with members of the Port Waikato, Waikaretu and Te Akau communities on developing the Contact Hauauru- ma- raki Charitable Trust which will be established alongside the Hauauru- ma- raki project (see page 19 for more information). Taranaki A trust with an initial value of $450,000 is to be established by Contact to benefit communities around the Hauauru- ma- raki project. The trust fund would be Waves Youth Health, Development increased by $50,000 per annum for five years, dependent on the project being given the green light. and Support Service
An additional community package is also being established for the three schools In 2009, Contact trialled a new approach to sponsorship, asking the public to in the area. suggest what they would like us to sponsor.
The trust proposal is the result of several months of consultation with Home to our Taranaki combined-cycle power station, the Stratford peaking representatives from the Te Akau, Waikaretu and Port Waikato communities project, the underground Ahuroa gas storage facility and our customers, the regarding the principles and framework of a community support programme. Taranaki region is an area of increasing importance for Contact. After traditional methods were unsuccessful in identifying an appropriate opportunity for our Contact sees community support programmes as one way it can contribute to the involvement, we decided to take a different approach. What else do we do long-term benefit of the wider community. in Taranaki? Contact launched a Taranaki-wide campaign to get the public to say We will report our progress with the trust and schools’ community packages in Taranaki combined-cycle gas turbine power station what they thought the region needed, aptly named ‘What does Taranaki Contact generates around fi ve per cent of New next year’s report. Zealand’s total electricity from our Taranaki need?’ Using advertising in press, on local radio stations and by way of combined-cycle gas turbine power station, located in Stratford. flyers, we encouraged Taranaki locals to go online and submit their ideas Contact also has two major projects underway right here in Taranaki. The Ahuroa gas storage for what they believed the region needed. Certain criteria were required, project and the Stratford peaker project. Ahuroa gas storage project and we received more than 50 great responses. The $250 million Ahuroa gas storage project is a fi rst for New Zealand. It will enable Contact to take natural gas at off peak times such as Using a panel of locals and Taranaki personalities including Contact’s summer and securely store it underground in the depleted Ahuroa gas reservoir for times of own Power Station Manager Sam Floriani, along with TV One weather peak energy demand – like winter. The Stratford peaker project presenter Jim Hickey, More FM radio presenter Beth Findlay-Heath, and The Stratford peaker project will provide fast Justice of the Peace John Young, we were able to establish three finalists and reliable cover for periods of peak demand, when the wind isn’t blowing and when hydro lakes are low. At peak load these units will to put to the public vote. generate enough electricity to supply up to 200,000 homes and will be a signifi cant addition to New Zealand’s generation system. After more than 1,200 votes were captured, Contact established that what For more information on what we do, go to contactenergy.co.nz Taranaki needed (and wanted) was a youth worker and youth activities for the free Waves Youth, Health and Development Service based in New Plymouth and accessed by around 3,000 youths in the wider Taranaki region. Vote for your This is a first for Contact and has been a great way to give the public the favourite opportunity to tell the company what it should get involved with in the community Help us do something that Internet: www.contactenergy.co.nz Address: PO Box 624 by visiting Email: [email protected] Wellington 6140 rather than Contact deciding for them. Telephone: 0800 80 9000 New Zealand makes the diff erence. RXXX 06/09 whatdoestaranakineed.co.nz
Contact’s Sustainability Report for 2009 Page 37 Contact and the community
The Contact Epic mountain bike race around Lake Hawea
Central Otago Contact has a strong presence in Central Otago, providing sponsorship to the Contact Alexandra Blossom Festival in September and the Contact Epic in April.
Contact Epic
In its second year of existence, the Contact Epic, a 125 kilometre circumnavigation of Lake Hawea, delivered a stunning day for all involved.
Held on ANZAC Day, Saturday 25 April, the organisers and around 640 athletes from around New Zealand (and even from overseas) were spoilt with beautiful weather, stunning scenery and a superb ANZAC dawn ceremony.
This year’s volunteer groups, who did a great job keeping the athletes on track and who benefitted financially from Contact’s involvement in the event, were:
Makarora Emergency Services
Hawea Flat School PTA
Lake Hawea Community Centre
Hawea Community Association Inc.
Contact Alexandra Blossom Festival
For last year’s Alexandra Blossom Festival, Contact increased its level of investment as principal naming rights sponsor of the whole event, including the Contact Grand Procession.
The opening day of the festival did not provide the greatest weather; however, the organisers and participants in the Contact Grand Procession ‘floated’ out in style. With many beautifully handcrafted blossoms on this year’s floats, a new schools category and a Contact float created especially for the Senior Queen, the Contact Grand Procession was a great way to showcase the talents of the participants and the festival princesses for 2008.
Page 38 Contact’s Sustainability Report for 2009 community Taupo Other sponsorships Contact’s major sponsorships in the Taupo region this year have been the Contact supports a range of initiatives, including the Wellington Loop in which inaugural sponsorship of both the Lake Taupo Cycle Challenge and the Contact six inner-city secondary schools in Wellington are linked by very high-speed Huka Mountain Bike Challenge. broadband in an educational experiment.
We are also contributing to the establishment of a United World College in Lake Taupo Cycle Challenge New Zealand. The global network of 12 United World Colleges was established by the founder of the Outward Bound movement, and its honorary president is November 2008 was the first time Contact had been involved with the renowned Nelson Mandela. 160 kilometre Lake Taupo Cycle Challenge, and it will not be the last. The colleges take 16–19 year olds who have shown a passionate commitment An established event in Taupo with more than 11,000 competitors, the cycle to making a difference, mix them with their peers from around the world and challenge provided a great way for Contact to get involved with locals, by produce an astonishing proportion of the world’s future leaders. sponsoring the more than 1,000 hard-working volunteers that help make the event happen each year.
Contact provided brand new high-visibility vests for the volunteers to ensure they were seen and safe out on the course and also offered a well-earned BBQ lunch on With more than 11,000 the following Sunday as a reward for all those involved. competitors, the Lake Taupo Staff engagement In another first, Contact fielded a team of 92 staff for the race in Taupo, Cycle Challenge provided a encouraging them to make up teams with their workmates or do the hard yards and ride alone – pushing themselves towards a personal goal. We provided great way for Contact to get expert advice and training programmes for all staff, holding seminars on the basics of riding, nutrition, race tactics and safety. We also provided staff with involved with locals. a branded race top, which they wore with pride – and which also made them stand out from the crowd.
Contact Huka Challenge
In association with the Lake Taupo Cycle Challenge this year, Contact also sponsored the inaugural Contact Huka Mountain Bike Challenge race run in tandem with the road cycle around the lake.
The Contact Huka is a ‘not for the faint-hearted’ 70 kilometre mountain bike race that crosses Contact’s Wairakei power station as well as heading into the Wairakei Forest and visiting the Aratiatia dam and Huka Falls.
The first year of the event saw around 230 hardy finishers, with times for the event ranging between three and a half hours and eight hours and 49 minutes!
Contact’s Sustainability Report for 2009 Page 39 Contact and the community
Triathlon NZ The Tri NZ schedule of events for this year’s Contact Tri Series gave seven regions the chance to host a local event and an opportunity for Contact to engage with those important communities. Since Contact signed on as principal partner with l l ’ uoY Triathlon New Zealand last year, the number of n e v e r participants taking part in the nationwide Contact wonk u nl it Tri Series has risen a staggering 38 per cent. y o u One of the most compelling parts of the story is that seven per cent of T R I all staff, including contractors – many of whom have not taken part The relationship between the two organisations C o Sne iats Tr ct in a triathlon in their lives – had a go, including Managing Director was recognised when Contact and Tri NZ won David Baldwin who completed the full event. SPARC’s Commercial Partnership Award at the inaugural Sport and Recreational Sector Through the relationship, Contact has reached communities that are Awards. The award recognises exceptional important to the business, through a triathlon at Kinloch (near Wairakei, partnering with a commercial entity in the where Contact’s geothermal plants are located) and Wanaka (near the sport and recreation sector. company’s hydro developments) as well as Rotorua, Whangamata, Timaru, Takapuna and Wellington. Over the last 12 months, Contact and Tri NZ have used a range of media including outdoor, magazines, local Scorching Tri Series press and a special purpose microsite to promote the campaign The Contact Scorching Tri Series is a four-year partnership with the brother and (www.393.co.nz). w w w 39c no. 3 . z sister owners of the event. Many of Contact’s Wellington staff, including a high proportion of first-timers, are among the crowds who take part in the series. The Among the more innovative methods events are known for their innovations and originality. of promotion was the creation of a personalised, interactive invitation that allowed people to paste a digital photo of themselves competing in a triathlon and send the clip to their friends and a two-minute viral video about the astonishing Anthony Sepie and his story of courage and persistence. Contact also promoted the Tri Series through some of its own channels, including its customer newsletter, internal staff communications and company website. From Tri NZ’s perspective, the organisation saw a significant increase in Recognition through awards awareness, with Tri NZ having to put up ‘sold out’ signs at many of the races and events across the country. Contact received the inaugural 2009 Commercial Partnership Award in 2009 Tri NZ’s Carl Jackson commented: “It’s all been done cost-effectively using real in the New Zealand Sport and Recreation Sector Awards for its partnership people in promotions, and it’s been a lot of fun and great for staff morale when with Triathlon New Zealand. much of the business environment is gloomy.”
Page 40 Contact’s Sustainability Report for 2009 Customers Reconnecting with customers We heard our customers, and right now ‘Getting it right’ is something every business strives for. we’re working hard to strengthen their Every so often, we get it wrong, and the first people to let us know are our customers. trust and confidence with even better Last year, our customers made it quite clear they value and service. Great news perceived a link between price increases and a proposed Contactfor increase to the fee pool from which directors are paid, customers! which was not acceptable to them. The result was a loss of customers, a drop in our favourability ratings and a Two-winter price promise bruise to our brand. At Contact, we know that price certainty is important for
customers. That’s why this year we launched our two- No electricity price rises bef The message was loud and clear, and we’ve been the end of winter – 2010!
I f y o u ’ r e a C o n t a c t c u s t o m e r i n C h r i s t c h u r c h , i t ’ s ore winter price promise, which promises customers in prices won’t go up before the en intensely focused on rebuilding the trust and confidence an increase (excludes EC levies a And as a Contact c d of winter – in 2010! That’s two bills. There’s our DualEner ustomer, there arend lots taxes). of ways You don’t needt to i m e t o r e s t e a s y Online OnTime 12% p make paying them ev whole winters (and a summ gy Rockgas LPG and elect call, sign up, or do anything because tour electricity rompt payment discount, we an could help you save mo Wellington, Christchurch, Hawke’s Bay and Eastland en easier. A n d i f y o u ’ r e n o t a C o n t a c t c u s t o m e r – t h e r e ’ s ner otoo) bwithout e t t e r t i m e t o b e c o m e o n e ! ricity discount of over $160 inc o b e n e fi t . of our customers and other stakeholders by C a l l u s o n 0 8 0 0 2 6 6 8 4 8 o r vd iSmoothPay, s i t c o n t evening a c t e n out e rney gyou and y . cmanage o . n zyour t oener fi n d o u t h o w w e c a n m a k e t h e d i ff e r e n c e l GST every year, o r monthly electricity billsgy t o y o u r e n e r g y b i l l s . ur providing a range of new offers, in addition to no tariff increase before October 2010. to the usual outstanding customer service from our How will you spend dedicated team across New Zealand. your Fixed pricing plan Recently, we launched a number of competitive gas + $160 Another way Contact is seeking to relieve the E n jo y electricity the security of a offers that are proving to be popular with our financial pressure for Contact customers is by two year discount? fi xed plan. customers and with other consumers that are providing price certainty in their energy bills. not currently with Contact. All our marketing and customer communications comply with Launched in June, new customers in Auckland, relevant laws. Rotorua, Taupo, southern Hawke’s Bay, Wairarapa and Central Otago are now able to
Join Contact and sign up to a two year fi xed plan take advantage of our fixed pricing plan, which for your electricity* — and get $80 off your energy bill!
Stacks of benefits If you live in the guarantees customers the same price for the w e c a n h e l p . Wairarapa and e l e c t r i c i t y *S f i o g r n t wu p t o C o n t a c are looking for the o y e a r s a n d To get this great off er call 0800t b e376 f o r0 e 1 A u g u s security of a fi x t o fi n d o u t h o w w e$ 8 c 0 a i n n c l u d i n g G S T t 2 0 0 9 aed n plan d g on e tyour a ele o f f y o u r t h i r d e n e next two years. f i x e d p l a n f o r y o u r m a k e t h e d i ff e r e n c e ctricity, 72 r g y b i l l . I t ’ s t h a t e a As the only energy provider in or visit contactenergy.co.nz t o y o u r e n e r g y b i lsy. l s . New Zealand that provides both Target: To continue to develop and introduce electricity and natural gas or LPG to Our DualEnergy new customer offers. electricity with us will receive a discount of 40 cents a da customers nationwide, we want to that rewards customers withdiscount Fly Buys on natural gas and electric Call us on 0800 266 827 or visit means www.contactenergy.co.nznew and existing customers who combine their to find out how we can make the difference to your energy bills. y – that’s over $160 incl GST every year. We’re also the only energy co CON4142.4 reward customers who have both The DualEnergy available for PrePower account discount is effective 1 May 2 ity. accounts or Rockgas LPG gas (natural gas or Rockgas LPG) and
s or Time of Use business acco their electricity and gas accounts . 009 and applies to accounts at th unts. 40 cents per day excludes G e same property. The DualEne mpany S a v ni g ST. Fly Buys not available on business with Contact. rgy discount is not o n y o u r e n e r g y b i l l w il b e m u s ic t o y o u r e a r s In April 2009, we launched our new DualEnergyTM discount for customers who have both their electricity and gas or LPG accounts with Contact. Switch to Contact Energy The result for electricity and natural gas customers and you could save on your electricity and gas is a single bill each month and, including LPG Online customers, savings of more than $160 per year. saves more than time. Saving money and saving the environment
Over the last year, Contact has focused Get a DualEnergy™ discount of electricity and natural gas/LPG from us. Save money with our over $160 every year heavily on promoting our online billing online and pay by direct debit or internet banking*. 12% Online OnTime prompt payment discount (including GST) when you get both Switching’s easy – we take care of everything! Call 0800 376 076 service, with the result being a 244 per to compare our pricing with your current provider and find out how we can when you get your bill
Fly Buys are only available to residential Contact customers and excludes Rockgas LPG and PrePower. *Online OnTime 12% prompt payment discount replaces our usual 10% prompt payment discount and is available to residential customers who get electricity and/or naturalmake gas thefrom usdifference and excludes LPG, business accounts, PrePower and payments made by any means by credit card. Full terms and conditions for DualEnergy™ and cent increase in the number of customers Online OnTime are available at www.contactenergy.co.nz who view and pay their bills online. to your energy bills.
To encourage customers to take advantage of online billing, Contact CE_13837 launched its Online OnTime offer in Paying bills has always been quicker online, with our March. The offer rewards customers your billOnline online OnTime and pay 12% your prompt bill the payment e dis (excludes credit cards). What will you who receive their bill online and Call us on 0800 266 830 or visit contactenergy.co.nz but to now fi nd it out can how also we save can you money asiest waycount of all – by direct debit or internet make the diff erence . All you need to do is choose to get spend the extra cash on? Online OnTime 12% prompt payment discount is instead of and not in addition to, the standard 10% prompt payment discount and is available to residential Contact customers. It excludes to Rockgas your LPG, energy business accounts, bills. PrePower and any payments made by credit card (including direct de pay on time with a 12 per cent payment by credit card, or internet banking payment by credit card). Fly Buys not available on business accounts or Rockgas LPG. banking discount on their total bill.
By June 2010, we hope to have increased bit the number of online billing customers by 60 per cent. Contact’s Sustainability Report for 2009 Page 41 Contact and the community
Customer profile – at home Sometimes it’s the little things that count most.
Excellence in customer service
Providing outstanding service to around 600,000 customers is an important part of the way we do business at Contact. To ensure we continue to meet our customers’ needs, we undertake a quarterly survey to find out what they think of us.
The results are good. Over the past year, our Customer Experience Monitor Maureen Broom discussing the benefits of being with Contact, undertaken by independent research company Conversa and covering 450 over a cup of tea with Communications Advisor Louise Griffin. residential and SME customers each quarter has shown scores between 8.2 and When 84-year-old Maureen Broom from Paraparaumu Beach on the Kapiti 8.8 out of 10. Coast became a DualEnergy™ customer, one of the things that pleased her Over the 12 months in review, our call centres in Levin and Dunedin answered most was the fact the bill came with a real envelope for her to post in 1.3 million phone calls in an average of 44.5 seconds each. We also reduced the her payment. average time taken to answer a call from 56 seconds (July 2008 to 31 December Mrs Broom likes to manage her bills by cheque payment, so having just one 2008) to 31 seconds (January 2009 to June 2009). bill to pay for electricity and gas was one less thing to worry about. “It’s so Target: To maintain customer satisfaction ratings around 8.0 or greater. much easier to keep track of when there’s just one account,” she says. The discount for having both gas and electricity is welcomed by Mrs Broom, who is on a fixed income, but equally appreciated is the communication she Helping customers manage their bills receives from Contact. and reduce consumption “There was a small error when my gas was connected for DualEnergy™. We are committed to providing our customers with practical tips on how they Apparently, there was a cost to be paid, but I received a letter from Contact can reduce their energy use, both through our website and in our regular that said it would pick up the cost. I find Contact communications very customer communications. friendly, personal and honest.
Where a customer’s bill is significantly higher than usual, we send a letter “Switching to DualEnergy™ was a really good move. It was so easy, and I tell outlining possible reasons for the increase along with some tips on all my friends about the discount and how much simpler the one account is.” avoiding high bills such as cleaning lamps and light fittings regularly and blocking off the fireplace when it is not in use. Making it easy to communicate Another way we help customers to better manage their bills is by evening out their energy payments throughout the year using our We want it to be easy for our customers to communicate with us. That’s why we SmoothPay system. With SmoothPay, customers make regular direct have practices in place to address language, cultural, low literacy and disability- debit payments of the same amount throughout the year, doing away related barriers to safely using electricity and accessing customer support. with the shock of big winter energy bills. To ensure language is no barrier, our Customer Service Representatives Over the next 12 months, we will make it even easier for customers have a list of Contact employees fluent in other languages. Where a with the launch of our new Online Home Check-up – a customised tool customer requires an interpreter, these employees are able to call the to help customers understand where their energy goes and what steps they customer back and ensure their questions are answered and their can take to reduce consumption and save on their energy bill. We’ll report more requests actioned. on this next year. For the hearing impaired, we work with New Zealand Relay to assist Target: 16,000 customers using the Online Home Check-up by June 2010. customers to access our services. To provide additional support, we also have a team dedicated to responding to queries received through email or fax.
Recognition through awards Over the last year, we also completed a number of website enhancements to make it easier for visually impaired customers. This includes increasing the font size Levin Call Centre Manager Jean Gant won the Manawatu Contact Centre 2008 on our website from 10pt to 11pt, increasing the darkness of our text colour and Manager of the Year Award in the ‘over 50 seats’ category. standardising links throughout the site to enhance readability.
Page 42 Contact’s Sustainability Report for 2009 Customer profile – at work Resolving customer complaints On the carpet
The Electricity and Gas Complaints Commission (EGCC) is an independent body Tania Pauling, General Manager for carpet manufacturer Godfrey Hirst, says set up to handle complaints from customers about electricity and gas companies. the company looks for three key factors when choosing its supplier partners.
Contact has continued to develop strong dispute resolution processes where “Whatever we do, when we put a contract out for tender, we go to three disagreements may arise with customers, and this is reflected in reduced parties. Our decision is weighted on pricing, which must be competitive, complaints to the EGCC. but we’re also looking at a company’s size and the people we will be working with. For the 12 month period to 31 March 2009, there were 104 complaints to the EGCC, down from 183 for the same period in 2008. “Contact measures up on all three criteria.
“Our supplier relationships are very important, especially when it come to Providing support for vulnerable and something as crucial as energy.” medically dependent customers While Godfrey Hirst is already committed to energy-efficient processes, the company is always pleased to hear from Contact Commercial Sales Manager At Contact, we know that it is especially important that customers have access Cory Franklin about any initiatives that might reduce energy expenditure or to power, no matter what their situation. We want to ensure our customers improve operations. stay connected. “Cory came in to talk with us about carbon credits, which was of interest – Where customers are having difficulty paying their bill, our customer services we appreciate that kind of input,” Tania says. team will actively work with them, discussing payment options and working to When Godfrey Hirst sold off a scouring part of the business recently, it was find a solution. able to sort out the contract with the purchaser through Contact Account For our medically dependent and vulnerable customers, we have processes in Manager Paul Bull, who was working with the other party. place to assist them and ensure that they remain safe. “That’s one of the advantages of working with a large company,” Tania says. Disconnection for any customer is a last resort. From our retail customer base “Contact’s size makes transactions across business easier. They know other of around 600,000 LPG, natural gas and electricity customers, 940 customer businesses and are known. It makes things a lot easier.” accounts (less than 0.2 per cent of all customers) were disconnected as a result of non-payment over the 12 months in review. Any residential disconnection follows a stringent four-step process, with disconnection requiring sign-off from Contact’s smart meters equipped three managers. for the future
Contact’s smart meters were selected with the future firmly in mind, after a Cutting costs for commercial customers comprehensive review of the global market.
Contact’s commercial team works closely with our larger customers to help reduce The meters are designed to allow households to benefit from the introduction of their power consumption and maximise energy savings. smart appliances and from pricing plans that enable customers to choose to use electricity when it is most cost-effective. By installing products such as Ecogate dust extractor systems and air-to-air heat exchangers, and undertaking energy audits, Contact is able to attract new business, They have the capability to support in-home displays and will be able to conserve energy and help businesses improve their financial performance. communicate with appliances in the future, with the use of a simple plug-in module. Automated communication between our smart meters and smart Ross Berry, Contact’s Solutions Manager, Commercial Sales, had previously home appliances is just one of the benefits we will see through the identified an issue in the amount of energy being used for commercial roll-out of this technology. dust extraction. We are also working on new retail pricing structures to enable In researching a solution, he came across a proven United States system called customers to take full advantage of the superior information from smart Ecogate. Ecogate is an on-demand energy-saving dust, mist and fume extraction meters and benefit from lower electricity prices at non-peak times. system for commercial and industrial ventilation. Contact has been talking with appliance manufacturers on how we can The potential for a scaled-down version for New Zealand use seemed huge. There work together towards an automated solution where, for example, the are up to 1,000 customers around the country for whom Ecogate may be suitable. smart meter will alert the dishwasher when national electricity demand “Typically, in a carpentry operation, you would see all workstations running their and price is low. dust extraction ventilators at the same speed all day, whether or not they are Contact has already made estimated bills and manual meter readings a being used,” Ross says. “Ecogate provides the business owner with a straight- thing of the past for 42,000 Christchurch customers for whom smart meters forward way to save energy by lining up the level of ventilation to the load being have been installed. The Christchurch roll-out is nearly complete, and we plan experienced by each work station.” to deploy smart meters into all our customers’ properties across the country Contact also assists commercial customers through energy audits. Ross recently over the coming years. undertook an energy audit for a company in South Auckland that had been taken over by a new owner. To the owner’s delight – and consternation – Ross and his team discovered that their power factor correction unit was not connected and that the simple act of reconnecting it would save the company an estimated $30,000 a year of unnecessary lines charges. community Contact’s Sustainability Report for 2009 Page 43 Contact and the community
Protecting local communities As a major generator of electricity from renewable sources, Contact is harnessing the power of nature to generate clean, climate-friendly electricity for customers.
Operating large hydro facilities on one of the country’s most powerful rivers brings with it occasional risk of flooding. With geothermal generation, there has also been a suggestion that land subsidence could cause property damage. In responding to both of these scenarios, Contact has developed robust community compensation schemes to protect local communities.
Flood protection for communities along the Clutha In 2007, Contact was granted resource consents to operate the Clyde and Roxburgh dams for a further 35 year period. Conditions that Contact accepted in relation to these consents see the company play a vital role in protecting communities between the Clyde and Roxburgh dams from flooding.
Under these consent conditions, Contact has accepted a compensation regime through which Contact will compensate property owners between the Clyde and Roxburgh dams for damage to property arising as a result of flooding.
The Taupo community – protection from possible land subsidence damage In the past, it has been suggested that there is a link between geothermal generation, land subsidence and property damage. To test this, in early 2005, Contact purchased two residential properties in Taupo that were thought to be at most risk of damage from land subsidence.
An independent and comprehensive monitoring regime was established covering these buildings, and the results have shown that the buildings are not being damaged. This monitoring regime is continuing and is in addition to the ongoing monitoring of possible land movement that we undertake as part of our regular activities.
We have agreed to a compensation regime whereby, if buildings in certain areas are damaged as a result of land subsidence from geothermal electricity generation, Contact is obliged to put right any damage. This obligation is a condition of Contact’s geothermal resource consents, which set up a regime for establishing any claims of property damage in the future.
This obligation provides the community with certainty and confidence that it will be protected from any future damage to property as a result of land subsidence from Contact’s geothermal generation.
In May 2007, Contact was granted resource consents to continue operating the Wairakei power station until 2026. A condition of these new consents was for Contact to undertake a greater level of monitoring of possible land subsidence in the Taupo area.
Over the 12 months in review, Contact has undertaken a subsidence investigation and monitoring programme, designed to more fully understand and manage land movements in geothermal areas. Under this programme, Contact has drilled nine geothermal monitoring wells and three geotechnical wells, each taking numerous core samples for laboratory testing to determine the rock properties responsible for fluid movement and compaction. As part of this effort, Contact has recently purchased an additional property in the area to facilitate monitoring.
Core samples from geothermal drilling at Wairakei comm unity Page 44 Contact’s Sustainability Report for 2009 Building relationships and increasing cultural awareness Contact is committed to building close relationships with Maori.- This includes consulting with tangata whenua in areas where we currently generate electricity as well as in areas where we are investigating generation options.
Consistent with this, over the 12 months in review, Contact has extended its Maori- cultural awareness programme beyond its Senior Management Team to include managers at our generation sites and those involved in the development of our projects.
The programme aims to provide Contact employees with a better understanding of Maori- protocols and perspectives and includes a workshop on the Treaty of Waitangi.
Recognising the importance of Maori- culture and its significance, over the last year, Contact has conducted Maori- blessings at the site of its Stratford peaking and Tauhara binary plants, and the company’s head office in Wellington. Contact has also included kapahaka performances at events such as the celebration of 50 years of the Wairakei power station.
Additionally, Contact has worked closely with tangata whenua around our gift to Taupo.
A closer look at engagement with tangata whenua – a gift to Taupo
Late last year, Contact announced it would donate an eight metre high sculpture to the Taupo community, marking 50 years of geothermal electricity generation at Wairakei power station.
During early stages of planning, one of the ideas put forward was a carved waharoa, or spiritual entrance, through which acknowledgement and respect is given and received by tangata whenua (hosting tribe) and manuhiri (visitors).
When the decision was made to proceed with the waharoa, Contact arranged a hui with Tuwharetoa- iwi to discuss the story the waharoa would tell, the look of the waharoa and where this would be located. As a result of the hui, the iwi offered us their support and advice, even offering assistance with selection of the tree that would eventually become our waharoa.
Contact then contracted talented local master carver Delanie Brown, who is of Ngati- Tuwharetoa- descent, to design and carve the sculpture – working closely with Ngati- Tuwharetoa- kaumatua- to receive the stories, wisdom and historical knowledge that will underpin the stories depicted in the carving.
Contact’s Sustainability Report for 2009 Page 45 Contact and the community
Our performance
Over the 12 months in review, there were a total of 1,041 events or incidents Health,Safety reported. Of those, 398 were safety-related, up from 310 in the 2008 year. The increase in reporting, particularly of near-miss events, continues to be and the Environment encouraged. All near-misses are considered free learning opportunities that allow (HSE) us to investigate and remedy the causes that could lead to harm in the future. Of most disappointment, including contractors on Contact-controlled sites, Contact recorded 10 lost time injuries (LTIs) over the period, up significantly from two in the previous year.
Contact’s total recordable injury frequency rate (TRIFR) was 8.8 injuries per Despite placing a huge emphasis and resource on Contact’s health and safety million man hours for the 12 months in review, up from 7.2 in the 2008 year. performance, there is still a great deal to be done to meet our own standards and regulatory requirements. We are particularly disappointed with our health and Target: Reduce TRIFR to 6.0 over the next 12 months. safety performance over the 12 months in review; turning this around will be a key priority for the business over the coming year. Total events recorded 11 Our performance in this area is all the more disappointing in that the company’s results for the 2007 and 2008 financial years showed very 2005 2006 2007 2008 2009 positive trends. However, while the result is disappointing, over the People events 325 232 252 310 398 year, Contact introduced a comprehensive new health and safety (includes near-misses) management system, which provides the platform for continuous improvement in this critical area. 11. These figures relate to the 12 month period ended 30 June in each year. This section details the company’s health, safety and environmental performance for the year, covers some key initiatives in this area and, for the first time, discusses two serious accidents that have particularly Improved outcomes for field contractors concerned the company. This level of disclosure reflects the company’s While the health and safety performance of Contact’s onsite contractors was commitment to a transparent discussion of health and safety matters, disappointing, there was a pleasing improvement in the health and safety with the goal being increased learning and awareness and, ultimately, performance of our field contractors, comprising mainly meter readers. fewer accidents. Over the 2009 financial year, Contact invested a significant amount of time and resource reinforcing the importance of health and safety best practice to our field contractors, including delivering HSE presentations to field contractors and Ensuring the health and safety introducing a contractor audit system.
Alongside better recording of known hazards on sites – dogs, slippery paths and of people and the environment difficult access, for example – the result of efforts to improve field contractor health and safety has been significant. is an absolute priority. Over the year, the total recordable injury frequency rate for field contractors decreased by 25 per cent, with a slight increase in event reporting. Page 46 Contact’s Sustainability Report for 2009 Lost time injuries (LTI) and total injuries recordable (TRI) performance history Staff Contractors LTIFR TRIFR LTI Exposure hours LTI Exposure hours Staff Contractors Staff Contractors Total TRIFR 2007 4 1,529,041 4 622,408 2.62 6.43 7.6 17.4 11.2 2008 1 1,789,736 1 971,945 0.56 1.02 6.15 9.26 7.2 2009 3 2,292,030 7 1,128,415 1.3 6.0 6.2 13.7 8.8
• Total recordable injuries (TRI) includes all injuries resulting in medical treatment, restricted work or lost time. • Exposure hours are the hours worked by staff and contractors during the financial year. • Frequency rates (FR) are per one million hours worked.
• Retail field contractors (e.g. meter readers) and LPG contractors working outside Contact sites are not included.
Key safety risks Environmental events
Contact’s key safety risks that have been highlighted by our events and Over the year in review, Contact undertook an independent internal review of investigations are: the company’s resource consent compliance and environmental management systems and processes. not taking enough time to complete a job – we had three lost time injuries (LTIs) relating to people rushing to complete a task The audit highlighted a number of instances that impacted on our overall consent compliance. These instances were minor or technical in nature, contractor drilling activities – we had three LTIs and three medical covering areas such as reporting, monitoring and reviewing of plans. None treatment incidents due to poor practices at our geothermal of these instances resulted in adverse environmental effects. drilling operations contractors failing to follow processes during plant outages (see page 52). Spills to the environment
Over the 12 months in review, Contact recorded six spills to the environment. Combined employee and contractor lost time cases All were minor, and none led to lasting adverse environmental impacts. and LTIFR – 12 month rolling average In all of these spills, an investigation was undertaken and appropriate changes 4 8 made to prevent recurrence. Lessons learnt from these events have also been passed to other stations for implementation as appropriate. 6 3 2.9 2.6 2 4 Spills to the environment 1.8 1.8 1.8 1.8 1.8 Number of LTIs 1.5 rate Frequency 12 1.3 1.3 1.3 2005 2006 2007 2008 2009 1 2 0.7 Number of spills 1 3 2 1 6
0 0 Jul 08 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09 12. For 2005, the reporting period was the nine months ended 30 June 2005, for 2006 and subsequent years, the reporting period is the year ended 30 June.
Lost time cases
LTIFR 12 month rolling average
Target: Develop a preferred contractor database.
community Contact’s Sustainability Report for 2009 Page 47 Contact and the community
Contact’s greenhouse gas disclosure Fines, prosecutions, notices and In order to understand Contact’s greenhouse gas (GHG) footprint, all operational regulatory non-compliances emissions from all sources for the year have been brought together and There have been no fines or prosecutions this year. summarised below. Contact has notified the Department of Labour on five occasions relating to health and safety events that have occurred at our sites. One of these incidents Source of emissions GHG emissions GHG emissions involved contractors working on our sites, three involved employees and one (tonnes (tonnes per GWh involved equipment failure. One of these five events was a contractor falling from CO -equivalent) CO -equivalent) 2 2 scaffolding at the site of our Otahuhu power station, and this incident is detailed Thermal generation13 1,806,376 438 on page 52.
Geothermal generation 372,754 161 Target: Over the next 12 months to have no notifiable health and safety events. Offices and operations13 3,487 N/A – travel, energy use, waste etc Sulphur hexafluoride (SF )14 582 N/A 6 While continuing to focus on the Total 2,183,199 218 development of low emission renewable
13. Thermal generation emissions do not include those from electricity generation from the Crown’s electricity generation projects, Contact Whirinaki power station. However, the office and operations emissions do include Contact’s Whirinaki office and operations emissions as these are within Contact’s control. also holds carboNZero certification for the
14. SF6 is a particularly strong greenhouse gas. Its potential to contribute to climate change is nearly 24,000 times greater than carbon dioxide. Contact, like most electricity generators, uses SF as an 6 company’s offices through the Landcare insulator gas in high voltage circuit breakers. The majority of Contact’s power stations contain some
SF6 but its usage is minimal. This year, 12.8 kilograms was lost to the atmosphere from pinhole leaks, nine kilograms was deliberately used to assist in detecting a condensor leak and 2.54 kilograms was Research carboNZero programme. used to top up circuit breakers.
While continuing to focus on the development of low emission renewable electricity generation projects, Contact also holds carboNZero certification for the company’s offices through the Landcare Research carboNZero programme (see page 31). Emissions from electricity generation will be captured under the emissions trading scheme currently being reviewed by Parliament and which Contact continues to support.
The Clyde Dam, Central Otago
Page 48 Contact’s Sustainability Report for 2009 How did we perform against our plans? HSE communications
At the beginning of the year, we set ourselves four key health and safety Good communication is essential to effective safety management. Over the last objectives. The following table shows how we performed against these: year, we have initiated the following:
A safety week was held in September 2008, coinciding with the New Zealand Safety Week. Objectives Performance A HSE intranet site has been launched for all company-wide To improve HSE The new HSE management system has been HSE information. management systems implemented during the year. The findings of an as measured by an audit held at the beginning of the year, and those A HSE newsletter has been initiated, with four issues being published in the external reviewer of the audit at the end of the year, demonstrate 2009 financial year. improvements. A HSE booklet has been developed for all employees and contractors, Our ACC workplace safety management programme as a simple and clear guide on the value the company places on safety and (WSMP) level improved from secondary to tertiary – what we expect from our staff and contractors. the highest grade available. To increase and Workshops have been held across the business to share our learning review investigations of our significant incidents. The
from health and close-out rate and management involvement in LPG Purpose safety incidents incident investigations has increased markedly. New internal communication mechanisms are used to share Commitments, principles and the findings of many incidents. values To work with Our contractor performance is still below the standards contractors to required and progress on this objective has been Company-wide HSE policy HSE framework improve the disappointing. Incidents this year demonstrate that HSE documents effectiveness of our our drilling contractors and maintenance contractors operations failed to identify and manage hazards effectively. HSE management standards Contact’s active supervision of contractors undertaking (what) high risk activities did not have the required focus. Company-wide HSE protocols, To set up an A company-wide service provider is in place, with HSE management procedures and guidelines enhanced company- a network of occupational health nurses supporting system (what and how) wide occupational all Contact’s sites. An injury prevention training health monitoring programme is in place. Business HSE Business unit HSE plans and business-specific procedures documents (what, where, when, how and who) programme
Site operational HSE procedures (interpreting the company-wide requirements at the site level) HSE management system
Significant progress has been made in the consolidation of Contact’s HSE management system. Working with our major shareholder, Origin Energy, we are developing systems and practices that will lead us to continuous improvement in safety management, environmental performance and operational excellence. We recognise that this will take time and have embarked upon a five year structured programme of work. Working with our major We started the 2009 year with the introduction of 20 HSE management standards that will guide us on this journey. shareholder, Origin Energy, To understand Contact’s performance against these standards, we undertook a health, safety and environment audit, which acts as our benchmark in this area. we are developing systems Governance of HSE performance and management is a critical part of our and practices that will lead us management system. During the financial year, the Board HSE Committee met in July 2008, November 2008 and April 2009, and the Executive HSE Committee to continuous improvement met in September 2008, November 2008 and March 2009.
In addition, on a weekly basis, the company’s Senior Management Team reviews in safety management, the incidents of the previous week with the assistance of site managers and tracks progress in addressing the underlying issues causing these incidents. environmental performance Target: Development of a preferred contractor HSE criteria and implementation and operational excellence. of a programme of work with key contractors aimed at meeting this criteria.
Contact’s Sustainability Report for 2009 Page 49 Contact and the community
We are determined to Drug and alcohol testing We continually review and change our policies to address issues that may affect the safety of our operations. In this regard, we are introducing a new company- review and change our wide drug and alcohol policy. This is an extension of a policy that has been successfully applied to our LPG business for a number of years. Consultation with policies and procedures employees and their representatives has been extensive and is continuing. to address issues that Target: Introduce a new company-wide drug and alcohol policy. may affect the safety Crisis and emergency management Emergency plan exercises are a regulatory requirement on all LPG, generation of our operations. and drilling sites, as are fire emergency evacuations for all offices. All regulatory requirements in terms of crisis and emergency management were met over the financial year. A new crisis and emergency management plan is being developed over the 2010 year.
Occupational health update
Safe LPG cylinder handling An occupational health service provider for Contact was appointed in December 2008. The service has established regular visits to all Contact sites, branches and Concern over the number of incidents resulting from untrained personnel offices by qualified occupational health nurses to monitor occupational health of incorrectly filling LPG cylinders led to a training initiative by Contact all Contact employees. Energy that caught the eye of Hon. Kate Wilkinson, Minister of Labour. Since the establishment of the company-wide occupational health service, monitoring and wellbeing initiatives undertaken include: Overfilled or leaking cylinders can cause fire and explosions in homes. The way cylinders are filled makes the difference between rehabilitation support for work and non-work injuries/illnesses safe cooking or heating in a home and a potentially disastrous workstation assessments situation. Ensuring the person doing the filling is properly trained in the safe way to do this is vital. annual health/fitness-to-work monitoring, e.g. hearing, lung function, vision, drugs and alcohol testing (LPG only) Contact is committed to increasing the level of training in this area and decided to take the lead. Working with the Department of Labour, healthy hearts promotion Contact hosted a cylinder filling training workshop at Kaiapoi to ensure skin checks all attendees were properly trained in the handling of LPG. men’s and women’s health seminars The Contact training workshop involved practical and theoretical components. It was attended by 33 people from filling stations across pre-employment medicals (predominantly for LPG and some Canterbury and the Minister of Labour. generation candidates)
flu vaccinations
six monthly physio assessments and manual handling training for LPG cylinder fillers/handlers
noise survey of LPG operations.
Page 50 Contact’s Sustainability Report for 2009 Target: To further develop the occupational health service over the 2010 year. When the news about swine flu first came out from Mexico and the United States in May 2009, the company’s pandemic plans developed in 2008 were quickly put into practice.
New Plymouth asbestos removal programme Asbestos management Contact’s New Plymouth power station has made a major contribution During the year in review, Contact undertook a comprehensive and independent to New Zealand’s power supply over the last three decades. review of all of our properties to determine the full presence of asbestos. When Contact discovered asbestos lagging in areas of its New Plymouth The purpose of the asbestos review was to: power station not shown on its asbestos register, the site was immediately determine the most stringent asbestos management regulations closed down and work was undertaken to remove all asbestos from the site. from around the world In June this year, after 19 months of being sealed off, the New Plymouth adopt the requirements of these regulations and determine definitive boiler and turbine houses received confirmation that they may now be asbestos registers for all the properties either owned or leased by Contact considered acceptable for reoccupation.
define management requirements for any asbestos identified Over the 19-month removal period, the site was sealed and 727 tonnes of asbestos carefully removed and disposed of according to asbestos disposal advise on a suitable asbestos management framework and practices requirements. This was a major piece of work for Contact’s staff and review the survey and records associated with the management of asbestos contractors, particularly as, during the winter of 2008, one generator unit in land at Wairakei and advise as to how this may be improved to meet at the site was operated to help meet New Zealand’s energy demand during world best practice. a period of tight electricity supply. Staff worked under difficult conditions in full asbestos personal protective equipment, including breathing The review was undertaken over the period October 2008 to May 2009. Parsons equipment, to operate this unit for the good of the country. Brinkerhoff of Sydney undertook the asbestos in buildings review, while Tonkin and Taylor undertook the asbestos in land review.
The outcomes and findings of these reviews are as follows: Pandemic preparedness
Asbestos registers for each site have been updated detailing where Contact’s pandemic preparedness plan is important to ensuring that asbestos is present, what state it is in and the risk level that this poses. the company can continue to operate effectively under pandemic Against each record, there is a recommendation and priority on how to conditions. We continue to ensure we are familiar with the plan and manage the asbestos. that it is able to be implemented quickly and efficiently. Representatives from across all our sites held conference calls during the recent swine There are several locations where asbestos has been identified that flu pandemic to make sure that arrangements and provisions were in require immediate attention and removal within a few months. place according to these plans and that supporting medical resources An approach for development of an asbestos governance framework were available. is outlined, including a policy, defined accountabilities and procedures Contact’s pandemic response plans are aligned to the Ministry of Health for monitoring, inspection and working with asbestos. plans, and we co-ordinated all our responses with those of the Ministry.
The current management of asbestos in land at Wairakei is adequate; Managing safe travel of our employees was our first concern, particularly as, however, records management needs to be improved to meet world best at any one time, there can be a significant number of managers, engineers practice and a management programme established that addresses and professional staff travelling overseas for work purposes. possible changes in land use in the future. On the home front, we emphasised that our people could and should stay away In response to these recommendations, a team has been established to define from work with our full support if they demonstrated any flu-like symptoms or and implement the work programme. Actions are being taken to address the high needed to look after family members who were ill or away from school. priority issues raised in the Parsons Brinkerhoff report, namely the instances of asbestos material requiring removal. The supply of electricity and gas is an essential service, and we maintain resources and personnel levels to ensure these services can be maintained through any sustained pandemic period. community Contact’s Sustainability Report for 2009 Page 51 Contact and the community
Case study: Safety management at Otahuhu
Our team at Contact’s Otahuhu combined-cycle gas-fired power station prides itself on its commitment to supporting each other and helping each other out. That same support and helpfulness exists amongst many of the contractors that are often on site.
But it was those very desirable qualities that contributed to a serious harm incident in May 2009 where a contractor on the site fell from scaffolding and was badly injured. This was a serious accident that is one of the most disappointing occurrences for the company over the year.
The activities being undertaken at the time were typical of maintenance work on the site. They involved working at height, stripping lagging off the heat recovery steam generator pipework. The work was being undertaken by one of our contractors with involvement of two other contracting companies.
Contact is responsible for supervising all of the contractors on our sites and for ensuring they meet our health and safety standards.
All the parties involved in this regrettable accident contributed in some way to it occurring. The accident involved a contractor climbing over a safety rail on the scaffolding to release some cladding that had become caught up while it was being lowered to the ground. A scaffolding plank, which was not fully secured, tipped, causing the contractor to fall almost five metres onto concrete. The incident was reported to the Department of Labour.
The contractor involved had offered to help some other (unrelated) contractors on a job to which she was not assigned or trained. Her helpfulness was offered at the expense of working to critical safety procedures.
It was not the only accident that occurred at Otahuhu during its six-month outage. Three other incidents occured in which people were less seriously injured because they were hurrying or offering to help others, without giving sufficient thought to their actions.
Fortunately, none of the injuries sustained by these individuals resulted in permanent harm and all have either fully recovered or are on their way to full recovery.
Our Otahuhu team is undertaking a number of measures to make sure that these accidents are never repeated.
A HSE advisor was appointed to support the team and to provide practical expert HSE advice and input to all operational activities, and a workshop was held for the whole team to review how safety practices at Otahuhu are delivered. In the longer term, the site is supporting and contributing to a programme of work to improve contractor management competencies and achieve unified standards in contractor management across all of the company’s operations.
Contact has learned the hard way that the best way to help each other is to support a working environment where all safety procedures and practices are rigorously understood and adhered to and that no shortcuts are taken.
It’s not an easy thing to discuss serious health and safety failings, especially when the result is somebody being badly hurt, but Contact will continue to highlight the areas where we have not performed to our own standards as part of the process of ensuring we learn from these mistakes.
Taranaki combined-cycle power station community Page 52 Contact’s Sustainability Report for 2009 Case study: Health and safety management in practice
Contact’s Te Rapa cogeneration power station has a planned maintenance and inspection programme on its gas turbine that goes out to 2015 as part of a long-term maintenance agreement with the turbine manufacturer, General Electric (GE).
Some months ago, the planning started for the hot gas path inspection (HGPI), scheduled to last for 14 days. A hot gas path inspection involves removing the turbine casing and inspecting and replacing components such as the rotating blades that spin at more than 5,000 revolutions per minute.
During mid-May, an international consultant to Contact was on site at Te Rapa as part of an engineering risk assessment of Contact’s three gas turbine power stations. The consultant asked manager Leigh Amos whether he was aware that a known design defect with the first row of compressor blades used at Te Rapa had in fact caused failures of 13 similar gas turbine units around the world. The answer was “no”, but it soon became obvious that, if not addressed, this could become a major risk to the operation of the plant.
The consultant strongly recommended that the compressor blades be replaced as soon as possible. The obvious course of action was to combine the replacement with the upcoming hot gas path inspection in order to limit the time that the plant would be out of production. Added to this was the need to make use of the maintenance window provided by the power station’s major customer, Fonterra, during June, when its plant is closed for the winter. (Te Rapa generates electricity and also supplies steam directly to the neighbouring Fonterra plant for its production processes.)
The dilemma facing the team was that the scale and scope of the work required to replace the compressor blades was significantly greater than that of the original hot gas path inspection. Specifically, it would require major lifting work to be undertaken, as the enclosure housing the compressor would need to be dismantled to gain access to the rotor. GE had previously confirmed it could accomplish the additional work within the original planned outage duration of 14 days, but that this would require working around the clock non-stop for the full period.
The Te Rapa team considered the implications of working a 24/7 roster during the outage period.
This led the team to the conclusion that the safety risks associated with the 14-day programme were potentially significant, and as a result, GE was requested to provide an alternative programme that allowed for work during daylight hours only. The daylight option presented by GE pushed the outage duration from 14 to 20 days, which meant the unit would not be available for generation as early as originally planned, with all the economic implications that go with that.
Some quick decisions had to be made, as the work was due to start in about two weeks. Within the context of the particularly strong safety culture at the Te Rapa site, a strong case was made for the adoption of the 20-day programme, and this was discussed with Contact’s senior management.
The major impact of this decision is that Contact’s staff and contractors undertook the blade replacement work in an environment that significantly reduced their exposure to safety risks – meaning that everyone involved had a far greater chance of returning home unharmed to friends and family at the end of the working day. community Contact’s Sustainability Report for 2009 Page 53 Contact and the community
Community case study: The Clutha – a new approach to community engagement
As Contact looks to the possibility of further hydro developments on the Neil is Contact’s Hydro Development Manager, based at the Clyde power Clutha River (see following page), we are trying a new way of engaging with station, and has lived all his life in Central Otago. He is passionate about hydro local communities. generation, saying that New Zealand’s economy and quality of life has been built on the back of pioneering hydro generation projects. Traditionally, companies have selected a preferred option and, from there, started a period of structured community consultation before filing a resource “I’m convinced we can identify and develop a project on the Clutha that will consent application. benefit the region and the country,” he says.
Having inherited four sets of plans for different hydro developments on the “We need to continue to responsibly develop our renewable resources to Clutha and coming to the process of reviewing these plans with no preferred enable us to maintain our energy self-sufficiency and avoid the need for option in mind, we’ve decided to place all of these plans in the public domain New Zealand to import thermal fuels. The Clutha is an already modified river and invite the public to give us their views. that has the potential to generate large volumes of renewable electricity that we will need to power our economy. Through the process of reviewing the existing plans and listening to the views of Clutha communities on each of the options, we will come to a decision about “Any development on the Clutha would lead to a massive injection of which one of the four projects to advance. investment into the region and lead to significant development opportunities.”
We’re using the internet as a channel for reaching people and explaining what Neil says hydro development could lead to the forming of a lake, new lakeside we are doing and why. Key information we hold on each of the four options developments, improved amenities and tourism opportunities and the has been uploaded to a new website at www.contactenergy.co.nz/clutha, possibility of parallel commercial opportunities, such as irrigation schemes. and a discussion board has been set up to allow for views to be posted and “There’s huge scope for a project to be developed by Contact in partnership discussions to be held over each of the options. with the local community, with the goal being a scheme that delivers clear In addition, we’ve set up a freephone number (0800 66 33 35) and email regional and national benefits,” he says. address ([email protected]) for anybody to contact us with questions or comments. www.contactenergy.co.nz/clutha We’ve been really pleased with the level of feedback from across the country, and in particular from local communities. There has, as expected, been a wide [email protected] range of views expressed, from blanket opposition to any further development to acknowledgement of the benefits that would come with development.
The process of engaging with local communities and managing the programme of work associated with selecting a preferred hydro development option is run by Cromwell resident, Neil Gillespie. 0800 66 33 35
Contact Hydro Development Manager Neil Gillespie
Page 54 Contact’s Sustainability Report for 2009 Lake Hawea
Wanaka Luggate Queensberry
Cromwell
Clyde
Alexandra
Keeping
in New hydro on thecontact Clutha? You can visit the new website at www.contactenergy.co.nz/clutha
Roxburgh Our hydro man, Neil Gillespie, taking in the view above the Clyde Dam. Ideas and opportunities
New Zealand will need new electricity generation projects to kee With concern increasing about the impact of climate change, ele gases into the environment. Where are the best clean energy projects to power our economy, our lifestyles and our futures? Contact is developing a wide range of generation projects, including wind, geothermal and natural gas-fired power stations. But we believe New Zealand will also need more hydro p up with increasing demand over the next 10, 20, 30 years and beyon generation and, in August last year, we announced that ctricity will need to be generated without releasing more greenhouse we were reviewing plans that the company inherited f farmers; developing tourism, recreation and sporting four hydro developments on the Clutha. facilities around a possible reservoir; upgrading local services; developing lake-side residential developments; In April, we launched a new website detailing each of or supporting and developing local walking and cycling these options, and invited Clutha communities to review projects. The potential for one of these projects to really these plans and provide feedback on them. We believe the or kick-start more tourism, growth and investment in the Beaumont Clutha contains some of the best future hydro options in region is unlimited – what are the other ideas and options? I’m passionate about Central Otago and its people, and I’m New Zealand, and we want to hear from local communities We want you to tell us. passionate about hydro energy. Pioneering decisions made d. about how one option might be developed to benefit the as far back as 100 years ago have provided the country region and the country. There’s no question that any development will also have with hydro-based electricity systems that are the envy of impacts, and these vary a great deal across each of the the rest of the world. These hydro projects have provided This discussion we are now holding is a brand new projects. Again, the challenge is to fully understand the approach that we believe will help us better understand the clean energy to power our economy and our way of life impacts and then work out how we can minimise and for over a century. these projects and the opportunities that come with them. mitigate them to try and deliver a positive project for There’s no doubt that any hydro development on the people and the environment. Carefully developed, and with a strong commitment to Clutha will represent massive investment in the region local communities and the natural environment, new We’ve decided to investigate these Clutha options at lea hydro development can again provide a boost to our and will lead to ongoing benefits for local communities. in part because the river is already home to two iconic country and our region. Towns The scale of the up-front investment will be in the range large-scale hydro dams at Clyde and Roxburgh, and our of between $300 million and $1.5 billion. preference is to avoid altering the country’s remaining To visit the new website, go to Lawrence Our challenge is to discuss these projects with local virgin rivers. www.contactenergy.co.nz/clutha, like to speak or meet with us, please email us at communities and identify how any one of them could We’re at the beginning of a long process, and there’s st be developed so as to maximise the benefits to Clutha [email protected] no rush. We hope to be able to identify a preferred Hydro Project Manager Neil Gillespie on communities and to make the project a genuine development option in 2010 and, from there, begin or if you would community asset. a more focused consultation around that option. or contact our Existing dams This could be through developing a project hand-in-hand Since we launched the new website we’ve received a lot of 0800 66 33 35 with a local irrigation scheme for local vineyards and feedback – a large amount of which has been positive and Contact constructive. There has also been a reasonable level of . other views that enable us to better understand the issues 0800 66 33 35 important to local communities. It’s important that we continue to hear the full range of views from across the www.contactenergy.co.nz/clutha
entire community. Please check out our website and send [email protected]/nz New options us your thoughts. us Tuapeka Mouth www.contactenergy.co.nz/clutha community Contact’s Sustainability Report for 2009 Page 55 Contact and the community
At Contact, our human resources strategy focuses on ensuring the sustainability of our organisation through actively engaging our people and Contact – developing our capability.
Sustainability means being clear about what we need, sourcing talented people the employer and then ensuring we harness and continue to develop that talent once people of join us. the future Engagement is defined as “employees’ willingness and ability to contribute to the company’s success, in large part by delivering discretionary effort on a sustained basis”. Employee engagement matters, as it is linked to better business results and behaviour that leads to high performance.
Our human resources strategy is aligned with Contact’s strategic goals, vision and values.
Who is Contact?
Contact has around 1,000 employees based across New Zealand from Auckland to Invercargill. The Contact team covers a wide range of diverse positions and New Zealand’s energy sector responsibilities. The following data provides a snapshot of our workforce. is dynamic and rapidly Mix of employment types changing, resulting in the 1,000 900 continuous challenge of 800 finding, recruiting and 700 600 retaining the best people. 500 400 Number of employees 300 200 100 0 2008 2009 Full-time Part-time Fixed Casual Page 56 Contact’s Sustainability Report for 2009 Age of the workforce Gender and salaries 450 Last year, we reported a narrowing in the gap between the average salaries paid 400 to men compared to women across the top four tiers of our organisation. This year, we see this gap increase as a result of a number of organisational changes in 350 our management structure.
300 The widening of the gap over the past year does not reflect a difference in our recruitment or selection practices or in our pay outcomes or reviews. It is a 250 reflection of compositional structure changes within tiers 2, 3 and 4. We lost 200 a number of senior women in tiers 2 and 3. In addition, a number of tier 3 roles were newly created to support strategic/project initiatives that, by their Number of employees 150 specialised nature, required much higher than average salaries. These roles were filled by males, and this was a significant contributor to the widening gap. 100
50 Salary comparison by gender – tiers 2–4 of management 0 Average base salary ($) 2008 2009 160,000 Baby boomers 1946–1964 Generation X 1965–1980 140,000 Generation Y after 1981 Not disclosed 120,000 Traditionalists/Veterans before 1945 100,000 80,000 60,000 Location of employees 40,000 30% 20,000 0 2008 2009 Female Male
20% At an organisational level, we also saw the number of female employees increase by six per cent and the number of males increase by 10 per cent. A major contributor to this gender growth difference is that 43 per cent of all external appointments were within our engineering or technology groups. Of these new % of employees appointments, 83 per cent were male. 10% Gender split 700 600 0% Auckland Bay of Plenty Canterbury Hawke’s Bay 500 Otago Southland Taranaki Waikato 400 Wellington Lower Hutt Levin Oakey 300
Number of employees 200 100 0 2008 2009
Female Male
Contact remains focused on ensuring equal opportunities within its recruitment, selection and remuneration policies, which will continue to be achieved through consistent and fair decision-making based on robust practices. This year, Contact has refreshed its gender friendly policies including our flexible working and parental leave practices.
Target: Continue to ensure that there are no barriers to diversity of employment and workplace opportunities. community Contact’s Sustainability Report for 2009 Page 57 Number of employees 100 150 200 250 300 more service. more service. than five years, and 63 per cent of employees have completed two years or 37 per cent of employees at Contact have been with the organisation for more Length ofservice Contact andthe Page 58 50 0 community Length ofservice Contact’s Sustainability for Report 2009 0-1yrs 2008 1-2yrs 2009 2-5yrs 5-10yrs 10-15yrs 15-20yrs 20+yrs
Number of employees Average number of days per FTE % turnover oftheseEach areasisshowingapositive trendover theyear inreview. level of services provided through the employee assistance programme. to lookattherateofemployee resignations, thelevel ofsick leave taken andthe theinternalhealthofanorganisationis A simple buteffective way ofmeasuring Organisational healthindicators 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00 10.0 12.0 14.0 16.0 18.0 100 150 2.0 4.0 6.0 8.0 50 0 0 Staff turnover2008and2009 Employee assistanceprogrammeusage Paid and unpaidsick leave Sick leavetaken Total clients Paid sick leave 07/08 2008 2008 Total sessions Unpaid sick leave 08/09 2009 2009 Contact as an employer – Work-life balance what do our staff think? The concept of work-life balance is based on the notion that paid work and personal life should be seen less as competing priorities and more as complementary In order to understand the views of our employees, we undertake a elements of a full life. comprehensive annual workplace staff survey, which comprises eight sections covering three main areas (as noted below) and provides a holistic picture of the The 2008 work-life balance survey results help Contact to understand how its health of Contact’s organisational culture. general workplace culture is affecting the extent to which employees are using work-life balance initiatives. This is done by obtaining responses to five key aspects The annual workplace survey covers the following: of organisational culture that affect or block the link between work-life balance A. Brand and productivity. 1. Vision and values Compared to last year, work-life balance has improved for all existing factors. 2. Positivity index Contact has added one additional factor, being co-worker support. 3. Collaboration index
B. Health and safety 4. Health and safety culture Index results for work-life balance 2007 and 2008
C. Culture 5. Employee engagement 6. Great place to work 5.0 7. Work-life balance 8. Workplace audit
Data was collected through web-based questionnaires, with qualitative information being gathered via face-to-face interviews. 4.5 In September 2008, 644 Contact employees (66 per cent) participated in the company’s workplace survey. 1 2 3 4 5 6 7 Great place to work 2008 2007
One of the key ways to measure employee satisfaction is to look at whether employees believe the organisation is a great place to work or not.
In 2008, the result for the great place to work index has improved for all factors compared to 2007.
In 2008, the continuum results show 33 per cent of employees find Contact a great place to work.
The results below show that 88 per cent of employees believe that Contact is a good or great place to work, compared to 83 per cent in 2007.
Great place to work
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Bad Poor Good Great 2007 2008
Contact’s Sustainability Report for 2009 Page 59 Contact and the community
Employee engagement The employee survey results Employee engagement is defined as “a willingness and ability to contribute to the company’s success, in large part by delivering discretionary effort on a sustained basis”. Employee engagement matters, as it is linked to better business results provide senior managers and behaviour that leads to higher performance. Over the year, a comprehensive internal staff survey was conducted that, among a range of other measures, with information about what looked at engagement levels. On the scale of one to seven, with one being disengaged and seven being highly people in the organisation engaged, Contact’s staff engagement levels continue to benchmark favourably with global companies. Contact’s employees’ level of disengagement also continues to be very low, with just over five per cent being disengaged compared are thinking, and why. to a global figure of 24 per cent of public sector workers. In relation to the Contact staff survey results, benchmark results for other organisations are from research conducted by Towers Perrin that included a large number of global organisations and responses from 85,000 employees. Health and safety Employee engagement Average response The purpose of obtaining survey data about the health and safety culture is to 100% support and inform Contact’s initiatives to create an excellent health and safety 90% work environment that makes all employees ‘leaders in safety’. The Health and 80% Safety Culture Survey assesses: 70% 60% relevant factors that indicate an excellent health and safety culture 50% 40% employees’ awareness of health and safety practice and procedure 30% managers’ responsiveness to health and safety initiatives. 20% 10% The health and safety culture index has increased from 4.6 in 2007 to 5.2 in 0% 2008. This is an improvement of 0.6 and illustrates that employees have a better Disengaged Moderately Highly engaged awareness and understanding of Contact’s health and safety policy and procedures. engaged However, this has not been reflected in the company’s health and safety Contact Energy Other organisations (average) performance over the year, and converting greater awareness and engagement into better health and safety performance remains a focus.
Index results for health and safety culture 2007 and 2008
Employee engagement is 5.2 defined as: “a willingness and ability to contribute 4.6
to the company’s success”. 1 2 3 4 5 6 7 2008 2007
Much more detailed reporting on Contact’s health, safety and environment performance is included under the community section on pages 46 to 53.
Target: To increase employee engagement at Contact.
Page 60 Contact’s Sustainability Report for 2009 What’s important to our people? The following graph shows that our employees rated the seven key workplace factors as very important to them. There was a low variance (between 1.1 The workplace audit provides the necessary information to identify employee and 1.4 points) between the importance of these factors to employees and perceptions of their workplace and how they feel about working for the how the company was performing in reality. This suggests a higher degree of organisation. The results are used to improve the ability to attract and retain high- staff satisfaction. performing employees that will maximise the return of investment in people and result in lower operational costs. Workplace audit This part of the survey assessed how the company performed against seven key workplace factors. The employee survey results provide senior managers with 2.0 information about what people in the organisation are thinking and why.
Overall, the index results for the workplace audit have improved in 2008 compared to 2007, with an increase from 4.7 to 5.0 and an improvement with a 1.5 1.5 reduced gap in 2008 of 1.2 compared to 1.4 in 2007. 1.4 1.4 1.4 1.4 1.3 1.3 1.3 1.3 1.3 1.2 1.2 1.2 1.1
Overall index results for workplace audit 2007 and 2008 Gap 1.0
5.0 0.5
0.0 Communication My work Our workplace Conflict management Participation Support Leadership 4.7
1 2 3 4 5 6 7 2008 2007
2008 2007
Contact’s Sustainability Report for 2009 Page 61 Contact and the community
Employee benefits Programmes and processes to ensure Contact offers a range of benefits to staff. All permanent employees who work the availability of a skilled workforce full-time or part-time are entitled to receive these benefits, including: Contact has and is implementing a number of organisational initiatives to improve KiwiSaver – employees who joined prior to 17 April 2009 receive people capability and to deliver on identified priorities. matched contributions up to four per cent, and new members receive The majority of staff are New Zealand residents, but Contact competes in the a two per cent contribution global market for skilled staff. reduced premiums with Southern Cross Healthcare
free entry into Triathlon NZ events. Human resources – the 2009 year in review The year in review has been characterised by building the strategies and embedding the foundations for improving organisational capability across our Building capability business. In addition to creating a people development plan for 2010, Contact:
Contact maintains a strong commitment to staff by providing career development delivered an enhanced talent management process to include succession opportunities wherever possible. In this regard, job opportunities are advertised planning and targeted development internally before any external recruitment takes place. established a centralised learning and development team within Just under a half of all vacancies for the year were filled by either existing staff Human Resources to support an organisational approach to learning or candidates referred to Contact by existing staff. and development Source of hires delivered a third graduate development programme developed a mentoring programme and commenced a pilot with year two graduates 20% started development of a comprehensive organisational induction programme. 54%
The year in review was
26% characterised by building the strategies and embedding the Internal movement External Staff referrals foundations for improving capability across our business.
Page 62 Contact’s Sustainability Report for 2009 Contact maintains a strong commitment to staff by providing career development opportunities wherever possible.
Future initiatives Career and skill development Identified priorities for the year ahead include: programmes for the year ahead
the development of a management capability development framework and Contact will focus on the following key elements to enable a high- generation technical competency framework to assess capability, align performing culture. learning and development solutions, manage performance and recruit people into the organisation Building leadership the roll-out of management and leadership solutions that will improve Strong leadership is an important part of developing a culture and strategy. To this manager capability and Contact outcomes end, Contact will design, develop and deliver leadership programmes for all tiers providing targeted professional development and career opportunities that of Contact, from executive to line management. This will include: will improve employee engagement developing a management capability development framework recruitment based on agreed capabilities that are aligned with culture piloting an advanced leadership development programme and business strategy piloting a leadership development programme implementing an induction programme that will engage new employees in their first 90 days, a time-critical element to retaining staff and piloting the Brava frontline manager coaching programme supporting high performance. a continued commitment to the Outward Bound staff leadership programme These priorities will be addressed through the following programmes: developing a managers’ essential toolkit. Flexible work arrangement programme Building core capability We want our company to be a great place to work and believe that positively Contact will develop a programme of workshops to be piloted over a six considering flexible working arrangements will increase employee commitment month period focused on the development of identified core capability and assist them in achieving a preferred work-life balance. needs of our staff. Talent and succession management processes Induction process Contact has embedded and continues to refine its talent management process, Contact will roll out a new corporate induction process that gives new which identifies potential future leaders and skilled and experienced experts. employees an introduction to the organisation from before they start Among other benefits, it enables Contact to identify development and succession through the first 90 days of their employment. Managing this period well opportunities for individuals within business units and across the organisation. is critical to retaining staff and achieving high performance.
Generation technical competency framework The development and implementation of this framework will ensure there is a robust base for determining what and how we recruit, train and develop our people to ensure they are competent and that we continue to grow competence through succession.
community Contact’s Sustainability Report for 2009 Page 63 Contact and the community
Mentoring programme Compliance with legislation Contact wants to place a greater importance on the integration of high potential new employees to promote networking and teamwork, as well as passing on Managing change across our organisation knowledge, skills and attitudes from experienced colleagues. A mentoring programme is being piloted to support this. While there is no specified minimum notice period regarding operational changes, typically, Contact will provide employees or their representatives two to four weeks’ notice of possible significant operational change. Graduate programme Without stating a notice period, the Employment Relations Act requires an Contact has and will continue its commitment to the graduate development employer, who is proposing to make a decision that will or is likely to have an programme. This year, 15 graduates started at Contact, and all are participating adverse effect on the continuation of employment, to provide potentially affected in a 12 month development programme. This includes a range of workshops to employees with access to relevant information and an opportunity to comment on develop their capability and participation in enterprise projects to contribute to that information. This requirement is generally interpreted, in effect, as providing Contact outcomes. employees the opportunity to influence the decision before it is made.
If redundancy is a potential outcome, some Contact collective agreements require Learning management system one week’s prior notice to the union before consultation begins. There is no notice With an increase in targeted capability investment comes the need to underpin period specified for other types of operational change. the framework with a learning management system functionality. This would If redundancy is confirmed, Contact collective agreements require one month’s allow Contact to plan, track and report training records and competencies on notice of termination. Other individual employment agreements at Contact an organisation-wide basis. A project will begin to determine whether current require between one and three months’ notice of termination. human resource systems can be enhanced to deliver this functionality or whether a new system will be required. Dispute processes Performance management Contact policies, the Code of Conduct and the Recruitment Policy prohibit discrimination. Though not exclusive to discrimination, Contact has processes for Managers conduct performance discussions on a regular basis with their team monitoring and addressing employment relationship issues or formal grievance members across the year, both formally and informally. actions that are raised by employees. Information on these processes is made Over the next 12 months, Contact will be implementing a performance available to all staff through employment agreements and on the intranet. management tool that will streamline the process throughout the organisation. In the last 12 months, three Contact employees raised disputes through these This will enable Contact to have visibility of key objectives across the business, processes. One employee action was based on alleged discrimination – related to reduce the amount of paper and allow it to report on the number of employees medical incapacity for a role – though this action was settled at mediation. receiving regular performance reviews. Target: To report on investment in human capital improvement as a percentage Compliance of total personnel costs. Contact complied with the requirements of all of New Zealand’s employment legislation over the year. Employees are entitled to freedom of union association and to collective bargaining, and 14 per cent of the company’s employees are members of the separate collective agreements that are represented by a single union.
community Page 64 Contact’s Sustainability Report for 2009 Engaging withour stakeholders
As a major employer, we communicate with our approximately 1,000 staff members working in generation sites, call centres, offices and on the road. We maintain important relationships with suppliers and contractors.
As a supplier of an essential service, we correspond with government.
As one of New Zealand’s largest publicly listed companies, we connect with our shareholders.
And as a producer that keeps the country warm and the kettle on the boil, we are in constant touch with our customers and the communities in which they live.
We value each of these stakeholder groups highly, and in everything we do, every action we take, we keep front of mind the impact we have on our stakeholders.
Our stakeholder engagement strategy is based on identifying key stakeholders and developing meaningful ways to engage with them on a regular basis.
From the engineers who generate our electricity through to our customers boiling water for a cup of tea, Contact interacts with hundreds of thousands of stakeholders every day.
Contact’s Sustainability Report for 2009 Page 65 Contact and the community
Stakeholder Nature of Our approach Actions/interactions relationship Shareholders • Shareholders expect • Comply with all New Zealand securities law and • Produced clear and comprehensive half year and full year and investors superior returns and NZX Listing Rules requirements. shareholder communications. ethical behaviour. • Prepare accurate, timely and informative Half • Released relevant continuous disclosure reports to the NZX Year, Annual and Sustainability Reports. as required. • Conduct investor briefings and roadshows. • Raised $550 million in Contact’s first retail bond issue. • Engage with retail and institutional investors • Held an annual meeting for shareholders. throughout the year. Retail • Customers expect • Build retail processes that support a positive • Launched new products to the market. customers reliable, fairly customer experience. • Launched increased DualEnergyTM discount, resulting in savings priced electricity, • Improve product and service offerings to better for customers who have their electricity and natural gas/LPG with great service and meet our customers’ needs. Contact. to be treated respectfully as • Recognise and reward customer loyalty. • Undertook a monthly customer satisfaction survey to monitor our performance. individuals. • Proactively resolve customer complaints in a • Contact seeks timely fashion. • Simplified our web page signup process. enduring • Improve online access for customers and increase • Provided customers with a variety of payment options at relationships with the number of online signups. no extra cost. customers, based • Ensure customers have a wide range of payment on our ability to • Reduced customer call answer times from an average of 56 seconds options. understand and in the first half of the year to 31 seconds in the second half. meet their needs • Ensure compliance with all relevant consumer • Provided training on the Fair Trading Act to retail staff. and the quality of and safety laws and regulations. • Provided training to external retail contractors on the Fair Trading the relationships Act, Privacy Act and Door to Door Sales Act obligations. established over time. Commercial • Commercial • Improve product and service offerings to better • Contact launched products to the market that were a direct result customers customers meet our customers’ needs. of customers’ needs e.g. Ecogate (see page 43). expect reliable, • Provide budgetary certainty for • Fixed-price, long-term pricing plans. competitively commercial customers. priced electricity, • Undertook energy audits for commercial customers. • Make it easy for commercial customers great service and • Demand-side management. innovative offers. to implement solutions. • Continued to look for economic commercial solutions • Engage customer segments and groups e.g. dairy. for customers. • Build processes that support a positive • Dedicated account management. customer experience. • Employees provided with training on the Fair Trading Act and • Ensure compliance with all relevant consumer Consumer Guarantees Act. and safety laws and regulations. Staff • Staff seek rewarding • Retain and develop key talent. • Continued the employee value proposition tool to help Contact work at Contact and better understand its people and what is important to them. • Ensure health and safety is a top priority. expect Contact to • Undertook an annual workplace survey. be a safe, healthy • Encourage and facilitate good personal health workplace. and fitness. • Undertook a health, safety and environment (HSE) audit. • Contact seeks to • Introduced 20 HSE management standards. attract and retain • Set up an occupational health monitoring programme. the best and most dynamic staff. • Shared learnings from safety incidents across the business. • Actively encouraged staff to become physically active through entries to Contact-sponsored sport events.
Page 66 Contact’s Sustainability Report for 2009 Stakeholder Nature of Our approach Actions/interactions relationship Communities • Communities in • Comply with resource consents. • While there were instances that impacted on our consent where Contact which Contact compliance, there were no instances resulting in adverse • Foster relationships at a local level. operates operates expect us environmental impacts. to obey the law and • Regular open and honest communications. • Provided community updates in newspapers, detailing the latest resource consent • Consult communities on issues as required. news from the sites and Contact’s work in local communities. requirements, • Be mindful of the impacts of our operations and protect the natural • Held an open day at Taranaki combined-cycle power station. ensure our neighbours fully understand these environment and • Celebrated 50 years at Wairakei by opening the station to the impacts and what we are doing to mitigate them. engage with them public and providing a range of free activities across the day. honestly and openly • Celebrate and share key milestones with the • Continued to support events in the communities in which we and be willing local community. operate through our ‘local treasure’ programme. to support the • Provide local sponsorship in the communities in needs of the local • Provided 0800 numbers for questions and comments – promoted which we operate. community. through our community updates. Communities • Communities • Regular, open and honest communications with • Followed open and transparent consultation for all our projects. where Contact where Contact is these communities. Clutha is planning planning to build • Clutha: foster constructive ongoing relationships to build new new operations and • Launched our interactive Clutha website to facilitate a with the local community, iwi, regional and operations where operations conversation around possible development options with Clutha district councils, around proposed hydro or where are currently communities. developments on the Clutha. operations are underway expect • Set up a freephone number, email address and discussion board • Hau auru- ma- raki wind farm and transmission underway Contact to be for questions and feedback. available for and line: to foster constructive relationships with • Actively engaged with local media to stimulate conversation open to acting on local landowners, iwi, regional and district around possible development on the Clutha. feedback at all councils, Members of Parliament (MPs), times. Department of Conservation (DOC), Ministry Hauauru- ma- raki of Economic Development (MED), Electricity • Contact aspires to • Followed open and transparent consultation processes. Commission and Transpower. be ‘the neighbour • Interacted with local landowners. you want’ in our • Waitahora wind farm: to foster constructive communities around relationships with local landowners, iwi, regional New Zealand. and district councils, MPs, DOC, MED, Electricity Commission, Transpower and the community. Government, • Government and • To provide high-quality information and informed Over the year in review, Contact made a number of submissions – Parliament and MPs expect honesty analysis to central and local government, officials, the most significant being: government and integrity in regulators and industry groups. • Local Government and Environment Select Committee – agencies the dealings with Resource Management Act Simplify and Streamline Bill including the Contact – no Electricity surprises. • Electricity Commission – winter review Commission, • Contact expects • Special Parliamentary Select Committee reviewing the Commerce to be heard on Emissions Trading Scheme Commission, major policy • Electricity Commission Wairakei ring grid investment test Gas Industry issues relating to Company • Ministry of Economic Development – draft regulations for its business and stationary energy in the Emissions Trading Scheme devotes a team to regulatory • Ministry of Economic Development – thermal and legislative moratorium regulations submissions and • Electricity Commission – annual security and reserve energy briefing officials and needs assessment 2008 parliamentarians as appropriate. • Ministry for the Environment – renewable energy National Policy Statement • Electricity Commission – High Voltage Direct Current public conference • Electricity Commission – market design review options paper. Apart from the fee Contact receives for managing the Crown’s Whirinaki peaking station, the company received no funding from central government for any purpose.
Contact’s Sustainability Report for 2009 Page 67 Contact and the community
Stakeholder Nature of Our approach Actions/interactions relationship Industry • Contact competes • Be a fair, law-abiding and strong commercial • Member of the Electricity and Gas Complaints with other competitor. Commission Scheme. participants in • Contribute to industry forums where appropriate. • Participated in energy CEO forum. the electricity and gas markets • Constructively support and contribute to • Membership of: organisations that service the energy sector. and complies • New Zealand Business Council for Sustainable Development with a variety • New Zealand Wind Energy Association of legislative, regulatory and • Sustainable Business Network industry standard • Gas Industry Company and LPGA practices. • Gas Association of New Zealand • AWATEA (Aotearoa Wave and Tidal Energy Association). Social agencies • Contact works • Comply with Electricity Commission protocols • Referred customers to social services agencies for assistance (primarily Work actively with on the treatment of low-income and vulnerable as required. and Income) social agencies customers and the interaction between energy • Offered free home energy audits on a discretionary basis to on an ongoing retailers and social agencies. customers in need. basis, including • Develop innovative ways to assist customers in when customers • Continued to support the Family Health Trust. financial difficulty to improve their circumstances find themselves in while managing Contact’s exposure to debt. financial difficulty or struggling to meet their energy costs. Media • Media expect • A corporate communications team operates to • Corporate communications team available at all times. Contact to be open, channel all media enquiries appropriately. • Communicated with the NZX and media through half and full year accessible, honest • The Managing Director is available to media on results, annual meeting, press statements and conferences, and in and timely in our major issues and announcements. response to specific media questions on an ongoing basis. communications. Local • Local authorities • Be open and transparent in relationships with key • All of Contact’s operations are provided with appropriate resource authorities set the operating local authority officials. management authorisations. environment for our • Submit in a constructive manner on policy • There is a high level of awareness of Contact’s operations within regional generation statements and plans. regional authorities. and generation development • Lodge high-quality and comprehensive resource • Contact is considered as a constructive, professional and operations. consent applications. environmentally responsible member of the community. • Administer • Build and operate assets according to resource • Our operating history is accurately reflected in reports to councils. resource consent consent conditions. applications. • Report on non-compliance as required. • Monitor compliance with resource consents. Tangata • Iwi expect a • Contact seeks win-win outcomes with iwi • Consultation with affected hapu, iwi and claimant groups whenua respectful and whose interests are affected by Contact’s regarding operations and plans for Contact’s access to Wairakei constructive generation activities. and Tauhara geothermal steam-fields and around Contact’s gift to working relationship Taupo (see page 45). with Contact. • Blessing of new sites by local iwi. • Maintaining • Cultural awareness courses for senior managers and site managers. ancestral connections to wahi tapu (sacred areas) and taonga (treasures) that might be affected by Contact’s operations.
Page 68 Contact’s Sustainability Report for 2009 Contact’s financial performance
financial performance
Contact’s Sustainability Report for 2009 Page 69 Contact’s financial performance
Despite managing a year of unique challenges that we do not Financial sustainability expect to be repeated, 2009 was The 2009 financial year was a challenging one for also a year in which Contact took Contact, with electricity transmission constraints, extreme hydrology patterns and uncertain electricity a number of steps to strengthen demand coming together to negatively impact earnings. the company’s financial position. This Sustainability Report covers the key financial measurements for the financial year. A full breakdown of Contact’s financial performance, including the company’s financial statements, analysis of contributors to the full year results and detail around Contact’s governance are contained in the Contact Energy 2009 Annual Report at www.contactenergy.co.nz/annualreport.
Retail bond issue
In March 2009, Contact opened a retail bond issue, giving investors the opportunity to purchase up to $300 million of five year, unsecured, unsubordinated fixed-rate bonds. The bonds have an interest rate of 8.00 per cent, payable quarterly, and are rated as BBB by Standard & Poor’s.
The purpose of the bond issue raising was to provide additional funding to support Contact’s capital investment programme including investment in geothermal development near Taupo and new gas-fired peaking capacity at Stratford, as well as the country’s first underground natural gas storage facility near Stratford and for general operational purposes.
On 31 March, less than a month after the offer opened, the bond issue closed, having raised $550 million.
This offer was the most successful bond issue in the history of the New Zealand market for a below A-rated company and New Zealand’s fourth largest bond issue ever. The successful issue provides the company with additional financial resources and investors with a fair return on investment during a period in which capital markets are constrained.
Profit distribution plan
In March 2009, Contact also implemented a profit distribution plan, which is designed to retain more cash within the business – both to strengthen the Recognition through awards company’s financial position and to support its investment programme.
Contact received a Gold Award for its Annual and Sustainability Reports from Under the new profit distribution plan, instead of receiving cash dividends, all the Australasian Reporting Awards, established 55 years ago to encourage shareholders in the company receive distributions in the form of non-taxable effective communication of financial and business information. Contact was bonus shares, with the option to have those shares, or a portion of them, bought also a finalist for a supreme award in the first-time entrant category. back by Contact for cash, as a fully imputed dividend. Of the total number of bonus shares issued, 77 per cent were retained by shareholders, and 23 per cent were bought back by Contact. This resulted in around $49 million of cash being retained within Contact that would otherwise have been paid as cash distributions.
This is a very pleasing outcome that not only retains greater levels of cash within Contact, but also shows that our shareholders support our investment programme and want to own more shares in the company.
Page 70 Contact’s Sustainability Report for 2009 Financial statistics See page 73 for notes to the graphs.
Underlying earnings for the period Total operating revenue
300 3,000 2,757
250 241.6 232.8 2,500 231.2 2,330 2,222 200 197.1 2,000 1,998 1,759 160.6 150 1,500 $ Millions $ Millions
100 1,000
50 500
2005 2006A 2007B 2008B 2009B 2005 2006 2007 2008 2009
EBITDAF1 Operating cash flow per share2
90 84.1 600 567.2 557.0 543.7 80 71.6 73.8 72.3 500 489.1 70 445.3 60 400 50.3 50 300
$ Millions 40 Cents per share Cents 200 30 20 100 10
2005 2006 2007 2008 2009 2005 2006 2007 2008 2009
Underlying earnings per share2 Net debt/debt+equity
45 41.10 35 39.32 39.60 40 30 30 27 35 33.52 25 30 27.35 23 23 23 25 20
20 cent Per 15 Cents per share Cents 15 10 10 5 5
2005 2006A 2007B 2008B 2009B 2005 2006 2007R 2008 2009
Contact’s Sustainability Report for 2009 Page 71 Contact’s financial performance
Capital and investment expenditure Underlying return on total assets
600 6 5.3 500 488.8 5 4.5 4.6 4.4 400 4 3.0
300 cent Per 3 $ Millions 282.0 200 2 138.7 149.2 100 90.5 1
2005 2006 2007 2008 2009 2005 2006A 2007RB 2008BC 2009B
CEN relative to the NZX50 Shareholder return
180 100% 10.0 160 140 80% 8.0
120 60% 6.0 Base Base 100 40% 4.0 80
60 20% 2.0 YE share price (bar)
Cumulative return (YE) (line) Cumulative 0% 0.0
2005 2006 2007 2008 2009 01/07/04 01/10/04 01/01/05 01/04/05 01/07/05 01/10/05 01/01/06 01/04/06 01/07/06 01/10/06 01/01/07 01/04/07 01/07/07 01/10/07 01/01/08 01/04/08 01/07/08 01/10/08 01/01/09 01/04/09 01/07/09
CEN NZ NZX50
Generation by fuel source Wholesale electricity price
14,000 125 12,000 6,649 5,413 5,351 106.90 4,702 4,094 10,000 100 92.84
8,000 75 56.08 6,000 54.72 53.70 Gigawatt hours 1,765 1,968 2,180 2,311 50 4,000 1,820 $ per Megawatt hour 25 2,000 3,982 3,065 3,639 3,504 3,543
2005 2006 2007 2008 2009 2005 2006 2007 2008 2009
Hydro Geothermal Thermal
Retail electricity sales Customer numbers (including LPG franchisees)
700 10,000 49 51 54 600 85 79 75 75 8,000 7,564 7,800 7,609 67 7,213 7,361 500
6,000 400
300 513 515 513 520 479
Gigawatt hours 4,000 200
2,000 (000s) numbers (ICPs) Customer 100
2005 2006 2007 2008 2009 2005 2006 2007 2008 2009
Electricity Gas LPG
Page 72 Contact’s Sustainability Report for 2009 Underlying return on shareholders’ equity Total assets
6,000 10 9.47 5,432 5,241 5,000 4,985 8.28 8.02 4,580 8 7.96 4,381 5.46 4,000 6 3,000 Per cent Per $ Millions
4 2,000
2 1,000
2005 2006A 2007RB 2008B 2009B 2005 2006 2007R 2008C 2009
Profit distribution and dividends per share3 Shareholders’ equity
30 28.0 3,500 27.0 28.0 2,904 2,904 2,942 25.7 26.0 3,000 2,552 25 2,381 2,500 20 2,000 15 $ Millions 1,500 Cents per share Cents 10 1,000
5 500
2005 2006 2007 2008 2009 2005 2006 2007R 2008 2009
Notes to the graphs Comparatives have been restated to reflect current period presentation where appropriate.
• The 2005 reporting period was for the nine months ended 30 June 2005 and the results of that period have been annualised where appropriate for the purposes of the above graphs; for 2006 and subsequent years the reporting period is the year ended 30 June.
• The above financial statistics, returns and ratios are based on Financial Statements prepared in accordance with New Zealand equivalents to International Financial Reporting Standards (NZIFRS).
R Denotes years in which Contact’s property, plant and equipment were revalued. The revaluation affects total assets, shareholder funds and related ratios.
A Excludes gain on disposal of subsidiaries and change in fair value of financial instruments, both net of tax.
B Excludes change in fair value of financial instruments and other significant one-off items both net of tax where appropriate.
C The 2008 total assets have been adjusted to reflect the presentational changes of financial instruments and deferred financing costs.
1 Earnings before net interest expense, income tax, depreciation, amortisation, financial instruments and other significant items. The year ended 30 June 2006 was the first year in which changes in the fair value of financial instruments were recognised within the Income Statement in accordance with NZIFRS.
2 The number of shares used for the current and prior year comparatives in the ‘underlying earnings per share’ and ‘operating cash flow per share’ analysis has been adjusted for the impact of the bonus shares issued under the profit distribution plan (PDP).
3 The number of shares used in the ‘profit distribution and dividends per share’ analysis has not been adjusted for the impact of the bonus shares issued under the PDP and represents the number of ordinary shares on issue at the dividend declaration date less any shares held as treasury stock. The total distribution paid is in respect of each financial year. Prior to 2009, all distributions were fully imputed cash dividends. For the 2009 financial year the PDP operated as a non-taxable bonus issue, with any shares bought back being fully imputed cash dividends.
Contact’s Sustainability Report for 2009 Page 73 GRI index
Introducing the Global Reporting Initiative (GRI) index
The tables on the next four pages might look formidable, but they are actually quite simple.
The GRI is the world’s most widely used framework for sustainability reporting. It sets best practice standards around what is material and what principles and indicators organisations can use to measure and report on the social, environmental and financial performance.
Contact’s previous Sustainability Reports have been based on this index but, this year, we have committed to more detailed reporting against the framework. From this table, you can see what we have covered, what we have partially covered, what we have not covered or is not applicable and what we are setting as a reporting target for the following year’s report. GRI # GRI indicator Status Page Contact’s level of compliance EU4 Length of above and underground Contact does not 2002 C C+ B B+ A A+ transmission and distribution lines N/A provide transmission services in accordance by regulatory regime Self-declared EU5 Allocation of CO -e emissions Mandatory 2 Contact does not allowances or equivalent, broken N/A provide transmission services Third party down by carbon trading framework checked 3 Report parameters Optional 3.1 Reporting period 1 3.2 Date of most recent previous report 1 3.3 Reporting cycle 1
AR Annual Report Yes No Partially 3.4 Contact point for queries 1 Intend to report next year N/A Not applicable Report scope and boundary 3.5 Process for defining report content 1 GRI # GRI indicator Status Page 3.6 Boundary of the report 1 1 Strategy and analysis 3.7 Limitations on the scope and boundary 1 1.1 Managing Director’s statement 4–6 of the report 1.2 Description of key impacts, risks, 6, 9–11 3.8 Reporting on other entities AR 50, 54 opportunities 3.9 Data measurement techniques and 1 2 Organisational profile basis of calculations 2.1 Name of organisation 1 3.10 Explanation of effect of restatements 22 2.2 Primary brands, products and/or Inside front 3.11 Significant changes from previous 1 services cover reporting periods 2.3 Operational structure AR 27 GRI content index 2.4 Location of headquarters Inside front 3.12 Table on standard disclosures 74 cover Assurance 2.5 Countries of operation Inside front cover, 22 3.13 External assurance 78 4 Governance, commitments and engagement 2.6 Nature of ownership and legal form AR 27 2.7 Markets served Inside front 4.1 Governance structure AR 27–53 cover, 2–3 4.2 Is Chair the executive officer? AR 29 2.8 Scale of the reporting organisation AR 27 4.3 Independent and/or non-executive AR 29 2.9 Significant changes 51, 70 Board members 4.4 Mechanisms for shareholder and Contact’s Notice of 2.10 Awards received Throughout Meeting provides employees to provide recommendations opportunity for EU1 Installed capacity broken down by shareholders to ask Inside front or direction to the highest governance questions of the Board. primary energy source and regulatory cover body Contact’s constitution regime provides opportunity for resolutions to be put to the company’s AGM. EU2 Net energy output broken down by 22-Thermal Both can be viewed at primary energy source and regulatory 23-Geothermal www.contactenergy.co.nz regime 26-Hydro 4.5 Linkage between compensation and the AR 40–49 EU3 Number of residential, industrial, organisation’s performance Inside front institutional and commercial 4.6 Processes in place for the highest cover, 3 customer accounts governance body to ensure conflicts AR 35–39 of interest are avoided
Page 74 Contact’s Sustainability Report for 2009 GRI # GRI indicator Status Page GRI # GRI indicator Status Page 4.7 Process for determining the Economic performance qualifications and expertise of the EC1 Economic value generated and distributed 70–73 members of the Board for guiding the AR 27 EC2 Financial implications and other risks organisation’s strategy on economic, 9 environmental and social topics and opportunities due to climate change EC3 Coverage of defined benefit 4.8 Internally developed statements of AR 39–48 mission or values, codes of conduct plan obligations and principles relevant to economic, 8 EC4 Significant financial assistance received 67 environmental and social performance from government and the status of their implementation Market presence 4.9 Procedure of the Board for overseeing EC6 Policy, practices and proportion of Our procurement policy the organisation’s identification is currently under AR 27 spending on locally based suppliers at development. Where and management of economic, appropriate we use significant locations of operation local suppliers, however environmental and social performance. a material spend is on high-cost power 4.10 Processes for evaluating the station componentry not AR 30 manufactured in NZ. Board’s performance EC7 Procedures for local hiring 62 Commitments to external initiatives Indirect economic impacts 4.11 Approach to risk management AR 34 EC8 Development and impact of 4.12 External economic, environmental and infrastructure investments/services 35, 37 social charters, principles or other 9, 31, 74 provided primarily for public benefit initiatives to which the organisation subscribes or endorses Plant decommissioning 4.13 Memberships in associations/industry EU9 Provisions for decommissioning of sites 68 51 associations (e.g. asbestos) 4.14 List of stakeholder groups engaged by System efficiency 65–68 the organisation EU12 Transmission and distribution losses as 13 4.15 Basis for identification and selection of a percentage of total energy 65–68 stakeholders with whom to engage Environmental Contact’s management approach in terms of environmental indicators is found on pages six and 14–32. 4.16 Approaches to stakeholder engagement, including frequency of engagement by 65–68 Energy type and by stakeholder group EN1 Materials used by weight or volume 22, 29 4.17 Key topics and concerns raised through EN2 Percentage of materials used that are 29 stakeholder engagement and how these 65–68 recycled input materials are managed EN3 Direct energy consumption 29 Economic EN4 Indirect energy consumption Contact is an Contact’s management approach in terms of economic indicators is found in the Annual Report N/A energy generator and pages 70–73. Supply EN6 Initiatives to provide energy-efficient or renewable energy-based products EU6 Management approach to ensure short- and services, and reductions in energy 9, 35 and long-term electricity availability 9, 10, 11 requirements as a result of these and reliability initiatives EU10 Planned capacity vs projected Water electricity demand over the long-term, 9 broken down by energy source and EN8 Total water withdrawal by source 22–26 regulatory regime Biodiversity Demand-side management EU13 Biodiversity of offset habitats compared 27 EU7 Demand-side management programmes to the biodiversity of the affected areas including residential, commercial and 41–43 EN11 Land in or near protected areas and industrial programmes areas of high biodiversity value outside 27 EU11 Average generation efficiency of protected areas thermal plants by energy source and by 22 EN12 Description of significant impacts of regulatory regime activities, products and services on Research and development biodiversity in protected areas and 27 areas of high biodiversity value outside EU8 Research and development activity protected areas aimed at providing reliable and 9, 43 affordable electricity and prompting sustainable development Contact’s Sustainability Report for 2009 Page 75 GRI index (continued)
GRI # GRI indicator Status Page GRI # GRI indicator Status Page EN13 Biodiversity of replacement habitats LA3 Benefits provided to full-time 62 compared to the biodiversity of the 27 employees areas that are being replaced EU14 Programmes and processes to ensure 56, 62, 64 EN14 Strategies, current actions and future the availability of a skilled workforce plans for managing impacts on 27 EU15 Percentage of employees eligible to biodiversity 57. We report retire in the next five and 10 years, employee age, but do EN15 IUCN Red List species and national broken down by job category and not break down by 27 category or region. conservation list species by region Emissions, effluents and waste EU16 Policies and requirements regarding EN16 Total direct and indirect greenhouse gas health and safety of employees 22, 23, 48 46, 47 emissions by weight and employees of contractors and subcontractors EN17 Other relevant indirect greenhouse gas 22, 23, 48 emissions by weight EU17 Days worked by contractor and subcontractor employees involved EN18 Initiatives to reduce greenhouse gas 47 9, 29, 31, 32 in construction, operation and emissions and reductions achieved maintenance activities EN19 Emissions of ozone-depleting EU18 Percentage of contractor and 48 49. We report on substances by weight subcontractor employees who contractors overall and do not distinguish EN20 NO , SO and other significant air have undergone relevant health between contractors X X 22, 25, 48 emissions by type and weight and safety training and subcontractors. EN21 Total water discharge by quality Labour/management relations 22, 24, 25 and destination LA4 Employees covered by collective 64 EN22 Total weight of waste by type and bargaining agreements 29, 51 disposal method LA5 Notice period for operational changes 64 EN23 Total number and volume of 47 Occupational health and safety significant spills LA6 Workforce representation in joint EN24 Weight of transported, imported, management-worker health and 49 exported or treated hazardous waste 51 safety committees and percentage of transported waste shipped internationally LA7 Rates of injury and absenteeism, and number of work-related fatalities 47, 58 Products and services by region EN26 Initiatives to mitigate environmental LA8 Serious diseases programmes in place impacts of products and services, and 9, 31 to assist workforce members, their 51 extent of impact mitigation families or community members EN27 Percentage of products sold and their Training and education packaging materials that are reclaimed 32 LA10 Training per year per employee by by category 62, 63 employee category Compliance LA11 Career and skill development 63, 64 EN28 Value of significant fines and total programmes number of non-monetary sanctions for 48 LA12 Employee performance and career non-compliance with environmental 64 laws and regulations development reviews Transport Diversity and equal opportunity EN29 Environmental impacts of transporting LA13 Composition of governance bodies and products and materials and transporting 31 breakdown of employees per category 57 members of the workforce according to diversity categories Social performance: labour practices and decent work LA14 Salary ratio by gender 57 Contact’s management approach in terms of social indicators is found on pages six, 54 and 65–68. Approach to labour indicators is found on pages 46–53 and 56–64. Approach to human resources indicators is on pages Social performance: human rights 56–64. Investment and procurement Employment practices LA1 Workforce by employment type, HR1 Significant investment agreements 56, 57 50 employment contract and region including HR clauses/screening LA2 Number and rate of employee turnover 58. We report employee turnover but HR2 Percentage of significant suppliers and by age group, gender and region not by region or gender. contractors that have undergone HR 49 screening and actions taken
Page 76 Contact’s Sustainability Report for 2009 GRI # GRI indicator Status Page GRI # GRI indicator Status Page HR3 Employee training on human rights No incidents of human Anti-competitive behaviour rights violations Non-discrimination SO7 Legal actions for anti-competitive behaviour, anti-trust and 41, 48 HR4 Incidents of discrimination and 64 monopoly practices actions taken Compliance Freedom of association and collective bargaining SO8 Value of fines and total number of non- monetary sanctions for non-compliance 41, 48 HR5 Risk to freedom of association and 64 with laws and regulations collective bargaining Social performance: product responsibility Child labour Contact’s management approach in terms of indicators around products is found on the inside cover and pages 32 and 41–43. HR6 Risk of child labour No incidents of child labour Customer health and safety Forced and compulsory labour PR1 Health and safety impacts of products 42, 50 HR7 Risk of forced or compulsory labour No incidents of forced and services or compulsory labour PR2 Non-compliance with health and safety Indigenous rights regulations governing products 41–43, 48 HR9 Incidents involving rights of No incidents and services involving rights of indigenous people indigenous people EU25 Number of injuries and fatalities to Social performance: society the public involving company assets, No incidents involving injuries or fatalities to including legal judgements, settlements the public Community and pending legal cases of diseases EU19 Participatory decision-making processes with stakeholders and 54, 66–68 Products and service labelling outcomes of engagement PR3 Product and service information Inside cover, 41 EU20 Approach to managing the impacts No incidents of involuntary displacement of displacement PR4 Non-compliance with product and service information and labelling 41, 48 SO1 Managing the impacts of operations 44 regulations and voluntary codes on communities PR5 Customer satisfaction 42, 43 EU22 Number of people physically or economically displaced and PR6 Laws, standards and voluntary codes No incidents 41 compensation, broken down by of displacement related to marketing communications type of project PR7 Incidents of non-compliance with No material incidents EU23 Programmes, including those in regulations and voluntary codes of non-compliance partnership with government, to concerning marketing communications 41–43 improve or maintain access to EU24 Practices to address language, cultural, electricity services low literacy and disability-related Disaster/emergency planning barriers to accessing and safely 42, 43 and response using electricity and customer support services EU21 Contingency planning measured, disaster/emergency management plan Compliance 51 and training programmes, and recovery/ PR9 Value of fines for non-compliance restoration plans with laws and regulations concerning No incidents of fines for Corruption the provision and use of products non-compliance and services SO2 Percentage and total number of business units analysed for risks AR 30 Access related to corruption EU26 Percentage of population unserved in Inside cover SO3 Employees trained in anti-corruption Training not required licensed distribution or service areas as no incidents of policies and procedures corruption EU27 Number of residential disconnections 43. We report on disconnections but SO4 Actions in response to incidents No incidents for non-payment, broken down by not on disconnection of corruption of corruption duration of disconnection durations Public policy EU28 Power outage frequency Contact does not N/A provide transmission services SO5 Public policy positions and participation EU29 Average power outage duration Contact does not in public policy development 13, 67 N/A provide transmission and lobbying services EU30 Average plant availability factor by Inside cover energy source and by regulatory regime
Contact’s Sustainability Report for 2009 Page 77 Environmental Resources Management
Independent Assurance Report to Contact Energy Limited Commerce House, Level 2, 13 Commerce Street Contact Energy Limited (Contact) appointed ERM New Zealand Limited (ERM) to provide assurance on selected information PO Box 106234, presented it its 2009 Sustainability Report. Auckland City 1143 Scope of Work New Zealand The Report covers Contact’s operations for the 12 months to 30 June 2009, unless stated otherwise in the text. Data and Telephone: +64 9 303 4664 statements outside of the reporting period have not been verified. ERM performed this work in accordance with ERM’s verification Facsimile: +64 9 303 3254 methodology, which is based on the international assurance standards: ISAE 3000, AA 1000 AS and ISO 19011. ERM was asked www.erm.com to conduct a Type 2 High level engagement, across a selection of material data streams, to include two site visits, and to review Contact’s performance against the AA1000 Principles of Inclusivity, Materiality, and Responsiveness in reporting. Our Assurance Activities included: • Face to face interviews with management to understand the processes in place for managing the selected assurance subject matters. • Reviews of a sample of relevant documentation, and testing of selected evidence at Contact’s office in Wellington, New Zealand, regarding: 1. Data accuracy, including data trails from original site-based data retrieval to the final Report, for a representative sample of material parameters. 2. Robustness of data capture processes, including collation, transcription, internal reporting and controls in place, such as internal data verification checks. 3. Adequacy and relevance of key statements made throughout the Report, including cross-checking of reported data, for a representative sample of key statements. 4. Effectiveness of mechanisms in place for Report preparation. • Interviews with representatives of three independent stakeholder agencies. • Reporting our assurance findings to management, as they arose, to provide them with the opportunity to correct them prior to finalisation of our work, and review of the presentation of information to ensure consistency with our findings. The scope specifically excluded data and statements relating to financial information. Respective Responsibilities and ERM’s Independence Contact was responsible for preparing the Sustainability Report, including the collection and presentation of data and statements within it. ERM’s responsibility was to express assurance conclusions in line with the agreed scope of work. The data and statements in the Report reviewed by ERM did not include any work with which ERM had been involved. ERM operates strict conflict of interest checks and we have confirmed our independence to Contact for the delivery of our assurance assignment. Our Conclusion On the basis of its scope of work, and in consideration of the limitations of the assurance engagement presented above, ERM concludes, in all material respects, that Contact’s Sustainability Report 2009 appropriately reports on key performance indicators for the 12 months to 30 June 2009. In conjunction with this Independent Assurance Report, ERM will provide a more detailed Management Report to Contact. Key Observations and Recommendations Based on its scope of work, and without affecting our conclusions, ERM provides the following key observations relating to good practice: • The 2009 Report demonstrates transparency and openness by addressing the loss of retail electricity customers and the way in which transmission constraints have impacted on the company in the past year. • The commitment to report against the GRI G3 Guidelines is a positive step and a significant achievement in the short time Contact has been reporting Sustainability performance. ERM also provides the following key recommendations for improvement: • Improving the accuracy and reliability of information recorded and reported in the company’s events database (including environmental and health and safety data) should be a priority for the coming year. An ongoing commitment to address this issue remains outstanding. • In relation to reporting greenhouse gas emissions, improvements could be made by formulating structured documentation templates and associated systems, to improve the consistency, comparability, and accuracy of year-on-year data collection.
ERM New Zealand Limited (ERM) 27 August 2009 Auckland, New Zealand
ERM is an independent global provider of environmental, social and corporate responsibility consulting and verification services. Over the past 5 years we have worked with over half of the world’s 500 largest companies, in addition to numerous governments, international organisations and NGOs.
Page 78 Contact’s Sustainability Report for 2009 Feedback form
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Board of Directors (www.contactenergy.co.nz/board) The Contact Energy Annual Meeting Grant King, Chairman We encourage shareholders to attend and participate at the company’s Annual Meeting, and we provide a forum Phillip Pryke, Deputy Chairman whereby any shareholders can submit written questions to David Baldwin, Managing Director be addressed at the meeting. Contact webcasts its Annual Meetings and publishes the minutes on its website. Bruce Beeren Contact’s 2009 Annual Meeting will be held at the Michael John Milne Fowler Centre, Wakefield Street, Wellington, on 22 October Karen Moses 2009. A notice of meeting was posted to all shareholders in Sue Sheldon September 2009 and can also be found on the company’s website at www.contactenergy.co.nz/annualmeeting. Senior Management Team (www.contactenergy.co.nz/smt) Financial calendar David Baldwin, Managing Director Final distribution announced 14 August 2009 Steve Bielby, General Counsel and Company Secretary Record date for final distribution 28 August 2009 Graham Cockroft, Chief Operating Officer Cut-off date for receipt of election Jason Delamore, General Manager, Retail notices for buy back of bonus shares under Profit Distribution Plan Noon, 17 Sept 2009 Luc Hennekens, Chief Information Officer and General Manager, ICT Final distribution date 22 September 2009 Liz Kelly, General Manager, Development and Acquisitions End of first quarter 30 September 2009 Nigel Thomson, Acting Chief Financial Officer Annual Meeting 22 October 2009 Head office Half year end 31 December 2009 Level 1, Harbour City Tower Results announcement for the half year ended 31 December 2009 February 2010 29 Brandon Street, Wellington, New Zealand End of third quarter 31 March 2010 Postal address Financial year end 30 June 2010 PO Box 10742, The Terrace, Wellington 6143, New Zealand Telephone +64 4 499 4001 Facsimile +64 4 499 4003 Email: [email protected] Website: www.contactenergy.co.nz
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