20112011 Contents 1 Summary 2 Performance indicators 4 Chairman’s review 6 Chief Executive Offi cer’s review 9 Management discussion of fi nancial results 20 Company overview 24 Governance 37 Remuneration report 49 Security holder information Financial contents 51 Financial statements 58 Notes to the fi nancial statements 106 Independent auditor’s report 108 Corporate directory The 2011 Annual Meeting of Contact Energy Limited shareholders will be held at the Rotorua Convention Centre, 1170 Fenton Street, Rotorua on Wednesday 19 October 2011, commencing at 9.30am. The Notice of Annual Meeting and shareholder voting/proxy form are provided separately to shareholders. Contact Energy Limited Annual Report 2011 1 Summary For the fi nancial year ended 30 June 2011 • Underlying earnings after tax for the year of $150.9 million. An increase of 1 per cent from $149.8 million for the 12 months to 30 June 2010. • Commenced full commercial operation of the Ahuroa gas storage facility and the Stratford peakers – the anticipated fl exibility that these assets will restore to Contact’s generation portfolio has already been evidenced in second half-year earnings. • Commenced construction on the 166 megawatt (MW), $623 million Te Mihi geothermal project. • Consented three key energy developments: – Tauhara 2 – a 250 MW geothermal power station – consented for construction _ on the Tauhara geothermal area near Taupo. – Waitahora wind farm – a 156 MW wind farm – consented for construction in southern Hawke’s Bay. _ _ – Hauauru ma raki wind farm – a 504 MW wind farm – consented for construction along the western coast of the Waikato region to Te Akau South. • Strengthened the company’s balance sheet for investment in growth opportunities, completing a one-for-nine renounceable Entitlement Off er in June 2011. • Finished the fi nancial year with a net debt to net debt plus equity ratio of 27 per cent. • Increased retail sales volumes by 8 per cent, largely due to commercial (Time of Use) customer sales. • Signifi cantly improved health and safety performance – an 11 per cent reduction in employee incidents and a 28 per cent reduction in contractor incidents. For more information, please visit our website at www.contactenergy.co.nz or contact: Investor Relations PO Box 10742 The Terrace Wellington 6143 Phone: 64 4 499 4001 Email: [email protected] 2 Contact Energy Limited Annual Report 2011 Performance indicators Underlying earnings for the period Total operating revenue 250 3,000 231.3 230.4 2,757 2,500 2,231 200 2,220 2,164 1,998 158.7 150.9 2,000 150 149.8 $ million 1,500 $ million 100 1,000 50 500 2007A 2008A 2009A 2010A 2011A 2007 2008 2009 2010 2011 EBITDAF1 Operating cash fl ow per share2 80 74.2 600 567.2 72.0 72.3 543.7 70 500 441.4 60.9 60.2 445.3 60 427.0 400 50 40 $ million 300 Cents per share Cents 30 200 20 100 10 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 Underlying earnings per share2 Net debt/debt+equity 45 35 40 39.55 39.41 32 30 29 35 27 25 25 25 30 27.04 24.78 25 24.00 20 20 cent Per 15 Cents per share Cents 15 10 10 5 5 2007A 2008A 2009A 2010A 2011A 2007 2008 2009 2010 2011 Capital and investment expenditure Underlying return on total assets 600 529.5 6 5.0 500 492.1 468.7 5 4.8 400 4 3.2 2.9 285.2 cent Per $ million 300 3 2.7 200 2 150.7 100 1 2007 2008 2009 2010 2011 2007A 2008A 2009A 2010A 2011A Contact Energy Limited Annual Report 2011 3 Generation by fuel source Wholesale electricity price 14,000 125 12,000 623 110.50 417 492 384 10,000 100 5,506 5,442 3,686 3,741 8,000 4,186 75 57.55 6,000 53.75 Gigawatt hours 53.62 49.69 1,968 2,180 2,311 2,277 2,275 50 4,000 $ per megawatt hour 25 2,000 3,639 3,504 3,543 3,760 3,860 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 Hydro Geothermal Thermal Swaption Retail electricity sales Customer numbers (including LPG franchisees) 700 10,000 49 51 54 58 8,254 600 59 75 75 7,650 7,877 7,703 7,674 8,000 500 67 64 60 6,000 400 300 513 520 479 477 447 Gigawatt hours 4,000 200 2,000 (000s) numbers (ICPs) Customer 100 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 Electricity Gas LPG Underlying return on shareholders’ equity Total assets 6,000 10 5,643 8.82 8.79 5,026 5,148 5,000 4,837 4,585 8 4,000 5.97 6 5.40 $ million Per cent Per 4.67 3,000 4 2,000 2 1,000 2007A 2008A 2009A 2010A 2011A 2007 2008 2009 2010 2011 Profi t distribution and dividends per share Shareholders’ equity 30 28.0 3,500 27.0 28.0 3,236 25.0 3,000 25 2,777 23.0 2,621 2,621 2,660 2,500 20 2,000 15 $ million 1,500 Cents per share Cents 10 1,000 5 500 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 Notes to the graphs Comparatives have been restated to refl ect current period presentation where appropriate. • The above fi nancial statistics, returns and ratios are based on Financial Statements prepared in accordance with New Zealand equivalents to International Financial Reporting Standards (NZIFRS). A Excludes change in fair value of fi nancial instruments and other signifi cant one-off items both net of tax where appropriate. 1 Earnings before net interest expense, income tax, depreciation, amortisation, change in fair value of fi nancial instruments and other signifi cant items. 2 Underlying earnings per share and operating cash fl ow per share have been calculated using the weighted average number of shares on issue during the year. Comparatives have been restated to refl ect the one-for-nine renounceable Entitlement Off er in June 2011. 4 Contact Energy Limited Annual Report 2011 Chairman’s review The fi nancial year ending 30 June 2011 (FY11) was another wet year, with hydro storage levels averaging 120 per cent of mean. In particular the third quarter of the fi nancial year, traditionally a time of lower demand, saw strong infl ows into southern hydro lakes. This, combined with suppressed demand due to more diffi cult economic circumstances, made it diffi cult for Contact to achieve any real growth in earnings when compared to the prior year. In FY11 Contact achieved earnings before net interest expense, income tax, depreciation, amortisation, change in fair value of fi nancial instruments and other signifi cant items (EBITDAF) of $441.4 million, an increase of 3 per cent from $427 million in the 2010 fi nancial year (FY10). Underlying earnings after tax for the year were $150.9 million, an increase of 1 per cent from $149.8 million in FY10. Net debt as at 30 June 2011 was $1,194.8 million, compared with $1,347.1 million as at 30 June 2010. Late in FY11 Contact raised $351 million of equity through a one-for-nine renounceable Entitlement Off er to strengthen its balance sheet for investment in growth opportunities, the fi rst part of which is Te Mihi. Existing term debt comprises US$330 million (NZ$587.3 million notional equivalent) of US private placements of various maturities, $550 million of fi xed rate retail bonds and $100 million of fi xed rate wholesale bonds that mature in May 2014 and April 2017 respectively. Contact has additional liquidity available from $450 million of committed bank facilities, of which nil was drawn at 30 June 2011. The Contact Board of Directors resolved that the fi nal distribution to shareholders would be 12 cents per share, resulting in a total distribution for the year of 23 cents per share, a reduction of 2 cents from the previous fi nancial year. The 2011 distribution to shareholders refl ects the company’s fi nancial performance in the year in review. The distribution represents a payout ratio of 100 per cent of Contact’s underlying earnings. During FY11 Contact completed two signifi cant projects that will provide greater fl exibility for its generation portfolio, support earnings in wet years and provide greater security of supply. These projects are the Stratford peakers and the associated Ahuroa gas storage facility. In the fi rst few months of operation, these facilities have already had a positive impact by reducing costs during periods of low wholesale spot prices and delivering earnings during high price periods. During FY11 Contact also commenced construction on its Te Mihi geothermal development, near Taupo. Once complete, Contact will have a further 114 megawatts (MW) of base load renewable generation, which will provide further fl exibility in its generation portfolio and reduce reliance on its gas-fi red combined-cycle plants. The construction of Te Mihi refl ects Contact’s commitment to renewable generation and its belief that geothermal generation is the country’s most cost-eff ective way to meet future electricity demand. During this period Contact also received resource consents for three signifi cant renewable generation developments, comprising two wind farms and a further geothermal plant. During FY11 Contact increased retail sales, particularly through the Time of Use market. Contact was disappointed to lose residential and small business customers during the period and is committed to off ering excellent service and competitive pricing in what is a very dynamic market.