Contact Energy Plans To Upgrade New Plymouth Power Station
Contact Energy Ltd today announced plans to restore dual-fuel capability to its New Plymouth power station to help meet
possible gas shortfalls as the Maui gas field winds down.
The planned refurbishment of New Plymouth’s capacity to burn fuel oil as well as natural gas was announced today by
Contact’s chairman, Mr Phil Pryke, at the company’s Annual Meeting in Christchurch.
“Restoring New Plymouth power station’s capability to run on liquid fuel is a key ingredient in our planning to deal
with possible gas shortages over the next few years.”
The redetermination of economically recoverable reserves released last week confirmed the warning first issued in late
2001 that the Maui field has significantly less gas remaining than was previously estimated.
“There is no magic bullet solution to this issue,” said Mr Pryke. However, there are a number of clear areas where there
is obviously a requirement for swift action:
the flow-on impacts of last week’s Maui redetermination need to be settled rapidly. In particular, the parties need to
swiftly resolve revised usage profiles that will apply to remaining reserves; the so-called “use it or lose it”
provisions of the Crown Minerals Act should be strictly enforced. Those with an ownership interest in known but
undeveloped gas reserves must either be encouraged to develop them now, or to get out of the way for others who will.
This applies particularly to the Pohokura and Kupe fields; as the Government has already recognised, there is urgent
need for a regime that guarantees open access to the gas transmission system. Without that, no investor will move
willingly to develop non-Maui resources; the industry needs to develop a gas balancing regime that can manage short term
fluctuations in gas availability. Progress on this issue that is already working on these issues of gas balancing and
pipeline access.
This issue - security of supply and the steps needed to ensure it - together with the maintenance of internationally
competitive pricing to users, are essential underpinnings to the future development of the economy as a whole.
“There is no option here just to ‘muddle through’,” said Mr Pryke. “Failure to act decisively on these issues not only
increases the likelihood of under-investment in new energy sources and generation, but also increases the likelihood of
pressure for a political solution.
“It would be disastrous, for example, if the problems in the gas market were to be addressed by attempts at further
reform in the electricity market.
“While I acknowledge that there is scepticism in some quarters about New Zealand’s electricity market arrangements, the
fact is that they are working well – giving clear signals to and prompting action by all parties on both the short and
long term trends in electricity supply and demand.
“The plan to restore dual-fuel capability at the New Plymouth plant” is a clear example of the electricity market
working.
“Such problems as do exist are concentrated in the gas market. It is essential therefore that any regulatory focus
remains on gas sector issues and allows the electricity market to continue to function and mature,” Mr Pryke said.
New Plymouth Dual-Fuel Project
The plan to restore dual-fuel capability will provide greater certainty about the future of the New Plymouth plant, one
of the older thermal stations in Contact’s generation portfolio, and will create an additional element of back-up to the
national electricity system.
“Such additional back-up may be particularly valuable if and when gas shortages coincide with hydro shortages,
especially at times of peak demand such as winter,” said Contact’s chief executive, Mr Steve Barrett.
However, its dual-fuel equipment requires replacement and Contact has applied for a new resource consent allowing the
plant to run on liquid fuel.
The upgrade will apply to four of the 100 MW units at New Plymouth, although Contact will only apply for permission to
run a maximum of three units on liquid fuels at any one time.
“By refurbishing four units, Contact will be insuring itself against the possibility of plant being unavailable due to
maintenance or breakdown,” said Mr Barrett.
New Plymouth was already a valuable part of Contact’s generation fleet, providing portfolio flexibility and back-up to
Contact’s Otahuhu-B plant.
“That role will be considerably enhanced with the purchase of the Taranaki Combined Cycle plant at Stratford and an
upgrade to dual-fuel capability.”
CHAIR’S SPEECH:
CONTACT ENERGY ANNUAL MEETING Chairman’s Address 11 February 2003
Introduction
(Slide: Contact logo)
Ladies and gentlemen – welcome to Contact’s fourth Annual Meeting. It is a great pleasure to Chair Contact’s first AGM
on the Mainland. In opening the meeting I would like to acknowledge that we are guests of both the city of Christchurch
and of the tangata whenua of Te Wai Pounamu, Ngai Tahu.
There are present in person and by proxy or representative more than five shareholders holding shares carrying at least
5% of the voting rights entitled to be exercised. As Chairman of the meeting I hold 2,944 proxies carrying 49,477,034
votes. A quorum is present, and I declare the meeting to be open for business.
I want to begin by introducing the Board members. Seated from my left, they are the Chief Executive and Managing
Director, Mr Stephen Barrett, the Deputy Chairman Mr Bob Edgell, Mr John Milne, Mr Ray Vickers and Mr Tim Saunders.
Seated next to Mr Barrett is David MacKenzie, Contact’s legal adviser.
(Slide: Directors names)
Shortly I will provide an overview of Contact’s progress last year and our strategy for the challenges that lie ahead.
But first I will outline the agenda for today, and detail a few housekeeping matters.
Meeting Agenda and Protocol
(Slide: Meeting agenda)
Immediately after my presentation, our Chief Executive Steve Barrett will discuss last year’s results as well as an
overview of the first quarter of this financial year, which we announced yesterday.
We will then break for questions, before moving on to the four resolutions outlined in the Notice of Meeting. I will
introduce each resolution and give a brief statement about the Board’s position. The floor will then be opened for
discussion on each of the resolutions before a poll is taken.
In respect of the voting on the matters set out in the notice of meeting, I have determined that we will be using a poll
because of the number of people here today, the fact that many shareholders are represented by representative or proxy
and the fact that one of the proposed resolutions requires a 75% vote. You should all have a ballot paper like the one
up behind me on the screen. This deals with the resolutions on the agenda. Each of the resolutions will be put to the
meeting, and you will be asked to mark your ballot paper in accordance with your views. At the conclusion of the
meeting, I will ask you to submit your voting paper in the boxes provided at each exit.
(Slide: Contact logo)
The constitution requires that our auditors shall act as scrutineers and will oversee the counting of votes. Before the
meeting ends, we will discuss general business. You will again have the opportunity to raise any matters you wish to
have discussed.
There is a tradition at Contact meetings of robust debate – a tradition I believe it is important to preserve. This
being the first time we have held the Annual Meeting in the Mainland, we are expecting plenty of comment and questions.
Your Board and management will strive to respond fully to your queries and concerns. There are two microphones, situated
at the connecting points for the main aisles (point). When matters arise for discussion, shareholders who wish to speak
should queue behind these microphones and wait to be introduced by our attendants.
I will rotate the speaking rights around each of the microphones. I am conscious that a number of you may wish to speak.
I do not want to restrict you, but as a matter of courtesy to others who may also want to speak, please keep your
comments brief and to the point.
The meeting will conclude when the general business discussion concludes. We will announce the results of the
resolutions as soon as possible after the meeting both to the Stock Exchange and by placing public notices in major
metropolitan newspapers. When the meeting has formally ended, we will provide refreshments in the foyer. Please feel
free during this time to talk with Board or Contact senior management members – they will all be wearing name
identification badges.
I would like to record that no apologies have been received.
Turning now to the main events of 2002:
Financial results
(Slide: Bar Graph showing net surplus since 1997)
Contact produced a solid performance in 2002, in line with our strategy of building a company that balances its
wholesale and retail businesses to provide strong, secure earnings.
Our net surplus of $107 million confirmed that this is a company with a clear view about where it’s heading and how it
is going to get there. The 2002 result reflects a particularly strong contribution from our retail business, which has
achieved a 50% growth in sales volume over the last three years.
This, together with the rapidly tightening gas supply situation (which I will address in more detail later), introduces
on-going challenges to managing that strategy.
We will continue to carefully balance the needs of our retail and wholesale businesses to ensure that we do not lose
sight of the principal obligation to enhance shareholder wealth over time.
Now I would like to turn to an issue that will affect the future performance of Contact. Indeed, it has important
implications for the whole New Zealand economy.
Security of Supply: Maui and Demand Growth
(Slide: Maui platform)
The phrase “security of supply” is one that you, as shareholders and the nation as a whole, will be hearing a lot over
the coming year. New Zealand is entering a new energy era. The abundant low-cost energy sources that we have enjoyed
over the last generation will soon begin to run down.
When I first worked on gas issues as a callow youth in 1975 (it amazes me to think that is 28 years ago) none of us
could really imagine a time when we could no longer rely on Maui being there. In reality, however, the pressure on New
Zealand’s energy supplies has been building for a while. The Maui gas field has been such a huge, low cost energy source
that a false sense of security set in about the capacity to meet New Zealand’s future energy needs.
Under the Maui gas contracts, the Government took most of the risk associated with the development and performance of
the field – risks that in the end were borne by taxpayers. Those days are over. We face an energy future that is more
complex and demanding than we have experienced for the last 25 years.
As residents of an island blessed with abundant hydro resources, some of you might doubt the notion that the end of the
Maui era is of national importance. I would like to make a couple of observations.
As 2001 showed, Mother Nature can be fickle. It was the flexibility provided by Maui that filled the gap left by a
shortage of hydro resources across the entire country.
Second, more than any other single influence, it has been the presence of cheap Maui gas that secured New Zealand’s
position as having among the lowest priced electricity from the users perspective in the developed world. The benefits
of this have been felt , directly or indirectly, across the whole nation.
While it has been common knowledge since the 1970’s that the Maui field would run down by around 2009, that prediction
was heavily revised in 2001. There will be substantially less Maui gas available over the next seven years than was
previously expected. Indeed we can envisage circumstances where supply constraints will bite as early as the middle of
this decade, if not earlier in the event of extreme conditions such as we experienced in 2001.
In addition we must face the fact that as the field runs down the likelihood of short term supply interruptions will
increase.
What does that mean for energy users and for New Zealand’s economy?
Firstly, it is important to recognise that most of our thinking on future gas issues tends to be dominated by
consideration of the need to replace Maui to meet existing demand. However, there is another important factor at play,
and that is the inexorable growth in demand driven by the development of the economy as a whole.
This means we need new gas supplies – and that need is urgent. At present, there are only two major known gas reserves –
Kupe and Pohokura. It is Contact’s view that the Government and the gas industry must give much greater attention to the
commercial development of these fields.
Putting it bluntly, we see this as the nation’s number one energy priority.
The country’s future gas needs will have to be met by smaller gas fields – and not enough of them have been discovered
let alone developed to cover the shortfall left by Maui. There has, in our view, been too little urgency in developing
known gas reserves. And in our view the lack of a truly competitive market on the gas supply side has compounded this
problem.
There is no magic bullet solution to this issue. However, there are a number of clear areas where there is obviously a
requirement for swift action:
Firstly, the energy industry needs to know exactly where it stands following last week’s Maui redetermination. The
necessary negotiations must be efficient and focused. In particular, the parties need to swiftly resolve the usage
profile that will apply to remaining reserves; Secondly, we will be looking to the Crown to see that the so-called “use
it or lose it” provisions of the Crown Minerals Act are strictly enforced. Those with an ownership interest in known gas
reserves must either be encouraged to develop them now, or to get out of the way for others who will. This applies
particularly to the Pohokura and Kupe fields; Thirdly, as the Government has already recognised, there is urgent need
for a regime that guarantees open access to the gas transmission system. Without that, no investor will move willingly
to develop non-Maui resources; Fourthly, the industry needs to develop a gas balancing regime that can manage short term
fluctuations in gas availability. Indeed, I note that Contact is involved in a forum to progress this issue that is
already working on these issues of gas balancing and pipeline access.
This issue - security of supply and the steps needed to ensure it - together with the maintenance of internationally
competitive pricing to users, are essential underpinnings to the future development of the economy as a whole.
Let me be frank. There is no option here just to “muddle through”. Failure to act decisively on these issues not only
increases the likelihood of under-investment in new energy sources and generation, but also increases the likelihood of
pressure for a political solution.
It would be disastrous, for example, if the problems in the gas market were to be addressed by attempts at further
reform in the electricity market.
While I acknowledge that there is scepticism in some quarters about New Zealand’s electricity market arrangements, the
fact is that they are working well – giving clear signals to and prompting action by all parties on both the short and
long term trends in electricity supply and demand.
In other words, such problems as do exist are concentrated in the gas market. It is essential therefore that any
regulatory focus remains on gas sector issues and allows the electricity market to continue to function and mature.
(Slide: Shot of Otahuhu-B)
The recent Maui redetermination means the energy industry now has a much better understanding of where it stands.
The industry clearly needs fuel for existing power stations, for industrial gas users, and there is a need for new gas
discoveries if new, high efficiency gas-fired power stations are to be built.
It also means that New Zealand’s energy needs are likely to be met by a more diverse range of sources in the future. We
will probably see more use of renewables, geothermal and coal developments – and maybe even imported fuels such as
diesel and liquefied natural gas.
The sector will strive to maintain flexibility. But it will come at a greater cost. And that will flow through into
higher electricity prices in the home and in business Having said that, even after the necessary increases have worked
through, New Zealand is likely to continue to enjoy among the lowest electricity prices in the developed world.
Contact’s Business Strategy
(Slide: Collage shot)
Inevitably, the pressures created by the security of supply issue have significant implications for Contact and you as
shareholders.
Firstly, it has impacts on our objective of maintaining a balance between our retail and electricity generation
businesses. This remains the key to our capacity to continue delivering strong returns to shareholders.
Let me explain.
As our retail base has grown strongly in the last three years, so we have needed to seek new sources of generation. Our
conditional agreement to purchase the Stratford power station is designed to provide that generation, improve Contact’s
gas position and to allow further retail growth to occur.
Integration and balance – they are the key words in Contact’s business plan.
Secondly, it requires Contact to seek greater fuel reliability through efforts to obtain new gas, expand our generation
capability as new fuel sources are identified, and to pursue upgrades of existing plant.
While the development of options for renewable resources such as wind and solar energy may appear attractive, the fact
remains that the current technology for harnessing such sources is not yet cost-competitive and can often involve
difficult resource consent issues. For the time being, gas remains a highly cost-effective option for new generation.
Resource consent and location issues also complicate potential hydro developments. At the few remaining sites with real
potential, the community is clearly indicating opposition to such projects. Gaining resource consents would be likely to
take years. Not to mention that the best sites also tend to be in the South, whereas the strongest load growth is in the
top half of the North Island.
The bottom line is that we cannot wait that long and must act quickly to improve our fuel reliability. For proof of
that, look no further than last week’s outages at the Maui platform.
To that end, we are pleased to be able to announce today that we are undertaking an important new project to restore
dual-fuel capability at the New Plymouth power station.
Steve Barrett will have more to say about this in his presentation, but let me say that had we been able to run New
Plymouth on liquid fuels during last week’s outage, we would have done so, and stress on the system would have been
reduced accordingly.
Our decision to make New Plymouth capable of burning liquid fuels is a sign of the times and is only one of the many
actions needed by the industry to cover looming supply gaps.
This initiative is a key ingredient in our planning to deal with possible gas shortages over the next few years.
In the meantime, uncertainty about future gas supplies remains a key factor in Contact’s decision to put on hold the
development of a new combined cycle gas-fired plant at Otahuhu.
And finally, the increased cost of new fuels will inevitably mean that higher costs will be pushed through the whole
sector. In other words, energy prices will inevitably rise to reflect the rising cost of inputs.
Stratford power station
(Slide: Stratford power station)
Let me spend a moment on our planned acquisition of the Stratford power station in Taranaki, which we announced just
before Christmas.
At $500 million, it is the largest single transaction in Contact’s history and we are pleased to have received Commerce
Commission clearance last week for the purchase.
While the deal still requires approval by a majority of NGC’s shareholders, I want you to understand that this
acquisition is a key to delivering further strong earnings growth.
The addition of the Stratford power station to Contact’s assets will give us headroom for growth while preserving our
proven strategy of integration and balance. And we will be able to achieve that growth without committing to building a
new plant at a time when future gas supplies remain uncertain.
Steve will provide more detail about this new asset in his presentation.
Australia
While the $500 million purchase of the Stratford power station is a major initiative, we still see potential for further
growth in Contact’s business.
Our goal is to build an integrated energy business, with strong positions in both New Zealand and Australia.
Development of this platform is well underway in New Zealand, and we continue to look for avenues to strengthen it.
In Australia we start from a much smaller base. The challenge in that market is to identify opportunities that create
value, and fit with our longer term goal of creating an integrated business.
In both markets, our priority remains the creation of shareholder value. We will not pay more for assets than what we
believe they are worth. Indeed we have walked away from opportunities where we do not believe there is value. This is a
great complement to Steve Barrett and his team as there is always a risk of “deal fever” when looking to expand a
business.
Let me reiterate we will only proceed with expansion where we can clearly see shareholder wealth creation and clearly
manageable risks.
Dividend for 2002
(Slide: Graph showing dividend growth)
The Board declared total dividends for 2002 of 20.9 cents a share.
As you can see from the graph, this equates to a 10% growth in total dividend compared to the previous year.
(Slide: Share Price Movements)
I would note also that this has also been a year of strong capital growth. As of last Friday, it stood at $4.20, an
increase of 12 percent for the year.
Taking gross dividends and capital growth together, Contact shareholders have seen a return of over 20 percent in the
last year.
Looking at performance since listing in May 1999, every dollar that you invested at that time has delivered a return of
over 70 cents in gross terms.
Future shareholder returns
As you will be aware, Contact is committed to a policy of progressive dividend growth over time.
Early last year, the Board drew attention to the fact that Contact needed to make major new investments to underpin
earnings growth over the longer term.
The Board also emphasised that to accommodate significant investments, Contact might need to defer dividend growth in
the short term, to ensure that longer term earnings growth can be maintained.
The acquisition of the Stratford power station clearly fits the category of investment to which we were referring.
When the Board comes to determine the dividend for the 2003 year, it will carefully weigh all the relevant factors –
these include the capital outlay associated with the Stratford power station acquisition and further opportunities that
may arise, and Contact’s operating performance for the year. At this point, it is too early to predict how these
different influences will balance out.
(Slide: Contact logo)
Consents
Shareholders will be aware that Contact is working its way through the consenting process at both Wairakei and Clutha.
Steve will cover those issues in greater depth, but I do want to make a couple of broad points on the Resource
Management Act.
Contact prides itself as a good corporate citizen and takes seriously its obligation to operate in ways that
appropriately recognise our considerable impact on the environment and on local communities.
The RMA is good legislation, but it is not perfect legislation. And I would have to say that although there is much
focus on Maori participation, from our point of view, the problems of the Act do not lie in that area.
The issues that concern us are the cost and length of hearings, and the lack of any clear mechanism to ensure that
competing national and local interests are properly balanced in a timely way.
At a time of pressing need to develop new energy sources, it is imperative that our regulatory processes do not unduly
impede developments that are necessary if we are to be sure about keeping the lights on.
Governance
(Slide Eleven: Contact logo)
Turning now to governance issues, I confirmed at last year’s Annual Meeting that Contact would move to a quarterly
result cycle.
The change was not required of Contact. But it was consistent with our desire to provide timely and useful information
to shareholders. It also reflected the Board’s commitment to best practice corporate governance that will enhance the
company’s assets and benefit all shareholders.
Later in the meeting we will consider a special resolution that proposes altering the company’s constitution to
proactively adopt a number of the planned changes to the New Zealand Stock Exchange’s rules. The changes will also
enshrine governance principles that will codify existing practice and enhance the independence of the Contact board.
I will detail the proposed changes to the Constitution later in the meeting, when we come to consider the relevant
resolution.
As you will have noted in our Annual Report, we have already adopted a revised Board Audit Committee charter – which you
can read on the Contact website. It sets out the principles of the Committee, the role of the external auditor, and the
protocols surrounding the appointment and monitoring of the activities of external audit.
These measures are an important expression of the Board’s commitment to protecting and enhancing your investment – and
doing so in a manner that is transparent, independent and capable of withstanding critical scrutiny.
There is another matter which we will come to when considering today’s resolutions that I would like to discuss now –
because it relates to an undertaking I gave on behalf of the Board at last year’s meeting.
I said then that Contact would maintain separation between the delivery of auditing and consultancy services.
Exceptional circumstances created by the collapse of Contact’s former auditors, Andersen, meant that we were unable to
achieve a full separation between audit and advisory work in 2002.
As a result of the Andersen collapse, Andersen’s senior partners in New Zealand moved to Ernst & Young part way through 2002.
At the time, Ernst and Young was already engaged to advise Contact on possible investments in Australia.
In deciding how to fill the interim vacancy, the Board had to weigh the potential conflict that Ernst and Young might
face as auditor, versus the downside associated with a loss of audit continuity part way through a year.
Ultimately, we decided to appoint Ernst and Young to fill the short term vacancy, and we took the extra step of having
an independent review of Ernst and Young’s financial advice to deal with any perceived conflict.
I want to stress that this arrangement occurred due to the exceptional circumstances associated with the demise of
Andersen.
In late 2002 Contact undertook a tender process to select external auditors for 2003 and beyond. Three firms took part
in the process, and all were made aware of the Board’s requirement regarding separation of audit and consultancy
services going forward.
As a result of that process, the Board determined that Ernst and Young were best placed to fill the position of external
auditor going forward. Accordingly we will be putting a motion to the meeting to appoint Ernst and Young as our
auditors. Shareholders should note that they have agreed, as a condition of appointment, that they will be excluded from
undertaking any advisory work for Contact, as provided for under the Board Audit Committee Charter.
Conclusion
Security of supply will dominate policy and operational decisions right across the energy sector this year. We are
entering a new era in which the certainties of the last generation will no longer apply.
This will create an environment of uncertainty and change.
Contact’s pursuit of a balanced, integrated business model means the company is well positioned to maintain sustainable
growth in 2003.
That growth will require prudent management and oversight. The governance measures I have outlined, and which we will
discuss in more detail later in today’s meeting, have been developed to protect and enhance your interests as
shareholders.
2002 was a busy and demanding year for the Board, management and Contact staff. I would like to thank them all for their
efforts.
And I want to thank you for your continued support and commitment to this company.
I will now ask our Chief Executive Steve Barrett to present an overview of both last year’s result and our most recent
earnings performance.
CEO SPEECH:
CONTACT ENERGY ANNUAL MEETING Chairman’s Address 11 February 2003
Introduction
(Slide: Contact logo)
Ladies and gentlemen – welcome to Contact’s fourth Annual Meeting. It is a great pleasure to Chair Contact’s first AGM
on the Mainland. In opening the meeting I would like to acknowledge that we are guests of both the city of Christchurch
and of the tangata whenua of Te Wai Pounamu, Ngai Tahu.
There are present in person and by proxy or representative more than five shareholders holding shares carrying at least
5% of the voting rights entitled to be exercised. As Chairman of the meeting I hold 2,944 proxies carrying 49,477,034
votes. A quorum is present, and I declare the meeting to be open for business.
I want to begin by introducing the Board members. Seated from my left, they are the Chief Executive and Managing
Director, Mr Stephen Barrett, the Deputy Chairman Mr Bob Edgell, Mr John Milne, Mr Ray Vickers and Mr Tim Saunders.
Seated next to Mr Barrett is David MacKenzie, Contact’s legal adviser.
(Slide: Directors names)
Shortly I will provide an overview of Contact’s progress last year and our strategy for the challenges that lie ahead.
But first I will outline the agenda for today, and detail a few housekeeping matters.
Meeting Agenda and Protocol
(Slide: Meeting agenda)
Immediately after my presentation, our Chief Executive Steve Barrett will discuss last year’s results as well as an
overview of the first quarter of this financial year, which we announced yesterday.
We will then break for questions, before moving on to the four resolutions outlined in the Notice of Meeting. I will
introduce each resolution and give a brief statement about the Board’s position. The floor will then be opened for
discussion on each of the resolutions before a poll is taken.
In respect of the voting on the matters set out in the notice of meeting, I have determined that we will be using a poll
because of the number of people here today, the fact that many shareholders are represented by representative or proxy
and the fact that one of the proposed resolutions requires a 75% vote. You should all have a ballot paper like the one
up behind me on the screen. This deals with the resolutions on the agenda. Each of the resolutions will be put to the
meeting, and you will be asked to mark your ballot paper in accordance with your views. At the conclusion of the
meeting, I will ask you to submit your voting paper in the boxes provided at each exit.
(Slide: Contact logo)
The constitution requires that our auditors shall act as scrutineers and will oversee the counting of votes. Before the
meeting ends, we will discuss general business. You will again have the opportunity to raise any matters you wish to
have discussed.
There is a tradition at Contact meetings of robust debate – a tradition I believe it is important to preserve. This
being the first time we have held the Annual Meeting in the Mainland, we are expecting plenty of comment and questions.
Your Board and management will strive to respond fully to your queries and concerns. There are two microphones, situated
at the connecting points for the main aisles (point). When matters arise for discussion, shareholders who wish to speak
should queue behind these microphones and wait to be introduced by our attendants.
I will rotate the speaking rights around each of the microphones. I am conscious that a number of you may wish to speak.
I do not want to restrict you, but as a matter of courtesy to others who may also want to speak, please keep your
comments brief and to the point.
The meeting will conclude when the general business discussion concludes. We will announce the results of the
resolutions as soon as possible after the meeting both to the Stock Exchange and by placing public notices in major
metropolitan newspapers. When the meeting has formally ended, we will provide refreshments in the foyer. Please feel
free during this time to talk with Board or Contact senior management members – they will all be wearing name
identification badges.
I would like to record that no apologies have been received.
Turning now to the main events of 2002:
Financial results
(Slide: Bar Graph showing net surplus since 1997)
Contact produced a solid performance in 2002, in line with our strategy of building a company that balances its
wholesale and retail businesses to provide strong, secure earnings.
Our net surplus of $107 million confirmed that this is a company with a clear view about where it’s heading and how it
is going to get there. The 2002 result reflects a particularly strong contribution from our retail business, which has
achieved a 50% growth in sales volume over the last three years.
This, together with the rapidly tightening gas supply situation (which I will address in more detail later), introduces
on-going challenges to managing that strategy.
We will continue to carefully balance the needs of our retail and wholesale businesses to ensure that we do not lose
sight of the principal obligation to enhance shareholder wealth over time.
Now I would like to turn to an issue that will affect the future performance of Contact. Indeed, it has important
implications for the whole New Zealand economy.
Security of Supply: Maui and Demand Growth
(Slide: Maui platform)
The phrase “security of supply” is one that you, as shareholders and the nation as a whole, will be hearing a lot over
the coming year. New Zealand is entering a new energy era. The abundant low-cost energy sources that we have enjoyed
over the last generation will soon begin to run down.
When I first worked on gas issues as a callow youth in 1975 (it amazes me to think that is 28 years ago) none of us
could really imagine a time when we could no longer rely on Maui being there. In reality, however, the pressure on New
Zealand’s energy supplies has been building for a while. The Maui gas field has been such a huge, low cost energy source
that a false sense of security set in about the capacity to meet New Zealand’s future energy needs.
Under the Maui gas contracts, the Government took most of the risk associated with the development and performance of
the field – risks that in the end were borne by taxpayers. Those days are over. We face an energy future that is more
complex and demanding than we have experienced for the last 25 years.
As residents of an island blessed with abundant hydro resources, some of you might doubt the notion that the end of the
Maui era is of national importance. I would like to make a couple of observations.
As 2001 showed, Mother Nature can be fickle. It was the flexibility provided by Maui that filled the gap left by a
shortage of hydro resources across the entire country.
Second, more than any other single influence, it has been the presence of cheap Maui gas that secured New Zealand’s
position as having among the lowest priced electricity from the users perspective in the developed world. The benefits
of this have been felt , directly or indirectly, across the whole nation.
While it has been common knowledge since the 1970’s that the Maui field would run down by around 2009, that prediction
was heavily revised in 2001. There will be substantially less Maui gas available over the next seven years than was
previously expected. Indeed we can envisage circumstances where supply constraints will bite as early as the middle of
this decade, if not earlier in the event of extreme conditions such as we experienced in 2001.
In addition we must face the fact that as the field runs down the likelihood of short term supply interruptions will
increase.
What does that mean for energy users and for New Zealand’s economy?
Firstly, it is important to recognise that most of our thinking on future gas issues tends to be dominated by
consideration of the need to replace Maui to meet existing demand. However, there is another important factor at play,
and that is the inexorable growth in demand driven by the development of the economy as a whole.
This means we need new gas supplies – and that need is urgent. At present, there are only two major known gas reserves –
Kupe and Pohokura. It is Contact’s view that the Government and the gas industry must give much greater attention to the
commercial development of these fields.
Putting it bluntly, we see this as the nation’s number one energy priority.
The country’s future gas needs will have to be met by smaller gas fields – and not enough of them have been discovered
let alone developed to cover the shortfall left by Maui. There has, in our view, been too little urgency in developing
known gas reserves. And in our view the lack of a truly competitive market on the gas supply side has compounded this
problem.
There is no magic bullet solution to this issue. However, there are a number of clear areas where there is obviously a
requirement for swift action:
Firstly, the energy industry needs to know exactly where it stands following last week’s Maui redetermination. The
necessary negotiations must be efficient and focused. In particular, the parties need to swiftly resolve the usage
profile that will apply to remaining reserves; Secondly, we will be looking to the Crown to see that the so-called “use
it or lose it” provisions of the Crown Minerals Act are strictly enforced. Those with an ownership interest in known gas
reserves must either be encouraged to develop them now, or to get out of the way for others who will. This applies
particularly to the Pohokura and Kupe fields; Thirdly, as the Government has already recognised, there is urgent need
for a regime that guarantees open access to the gas transmission system. Without that, no investor will move willingly
to develop non-Maui resources; Fourthly, the industry needs to develop a gas balancing regime that can manage short term
fluctuations in gas availability. Indeed, I note that Contact is involved in a forum to progress this issue that is
already working on these issues of gas balancing and pipeline access.
This issue - security of supply and the steps needed to ensure it - together with the maintenance of internationally
competitive pricing to users, are essential underpinnings to the future development of the economy as a whole.
Let me be frank. There is no option here just to “muddle through”. Failure to act decisively on these issues not only
increases the likelihood of under-investment in new energy sources and generation, but also increases the likelihood of
pressure for a political solution.
It would be disastrous, for example, if the problems in the gas market were to be addressed by attempts at further
reform in the electricity market.
While I acknowledge that there is scepticism in some quarters about New Zealand’s electricity market arrangements, the
fact is that they are working well – giving clear signals to and prompting action by all parties on both the short and
long term trends in electricity supply and demand.
In other words, such problems as do exist are concentrated in the gas market. It is essential therefore that any
regulatory focus remains on gas sector issues and allows the electricity market to continue to function and mature.
(Slide: Shot of Otahuhu-B)
The recent Maui redetermination means the energy industry now has a much better understanding of where it stands.
The industry clearly needs fuel for existing power stations, for industrial gas users, and there is a need for new gas
discoveries if new, high efficiency gas-fired power stations are to be built.
It also means that New Zealand’s energy needs are likely to be met by a more diverse range of sources in the future. We
will probably see more use of renewables, geothermal and coal developments – and maybe even imported fuels such as
diesel and liquefied natural gas.
The sector will strive to maintain flexibility. But it will come at a greater cost. And that will flow through into
higher electricity prices in the home and in business Having said that, even after the necessary increases have worked
through, New Zealand is likely to continue to enjoy among the lowest electricity prices in the developed world.
Contact’s Business Strategy
(Slide: Collage shot)
Inevitably, the pressures created by the security of supply issue have significant implications for Contact and you as
shareholders.
Firstly, it has impacts on our objective of maintaining a balance between our retail and electricity generation
businesses. This remains the key to our capacity to continue delivering strong returns to shareholders.
Let me explain.
As our retail base has grown strongly in the last three years, so we have needed to seek new sources of generation. Our
conditional agreement to purchase the Stratford power station is designed to provide that generation, improve Contact’s
gas position and to allow further retail growth to occur.
Integration and balance – they are the key words in Contact’s business plan.
Secondly, it requires Contact to seek greater fuel reliability through efforts to obtain new gas, expand our generation
capability as new fuel sources are identified, and to pursue upgrades of existing plant.
While the development of options for renewable resources such as wind and solar energy may appear attractive, the fact
remains that the current technology for harnessing such sources is not yet cost-competitive and can often involve
difficult resource consent issues. For the time being, gas remains a highly cost-effective option for new generation.
Resource consent and location issues also complicate potential hydro developments. At the few remaining sites with real
potential, the community is clearly indicating opposition to such projects. Gaining resource consents would be likely to
take years. Not to mention that the best sites also tend to be in the South, whereas the strongest load growth is in the
top half of the North Island.
The bottom line is that we cannot wait that long and must act quickly to improve our fuel reliability. For proof of
that, look no further than last week’s outages at the Maui platform.
To that end, we are pleased to be able to announce today that we are undertaking an important new project to restore
dual-fuel capability at the New Plymouth power station.
Steve Barrett will have more to say about this in his presentation, but let me say that had we been able to run New
Plymouth on liquid fuels during last week’s outage, we would have done so, and stress on the system would have been
reduced accordingly.
Our decision to make New Plymouth capable of burning liquid fuels is a sign of the times and is only one of the many
actions needed by the industry to cover looming supply gaps.
This initiative is a key ingredient in our planning to deal with possible gas shortages over the next few years.
In the meantime, uncertainty about future gas supplies remains a key factor in Contact’s decision to put on hold the
development of a new combined cycle gas-fired plant at Otahuhu.
And finally, the increased cost of new fuels will inevitably mean that higher costs will be pushed through the whole
sector. In other words, energy prices will inevitably rise to reflect the rising cost of inputs.
Stratford power station
(Slide: Stratford power station)
Let me spend a moment on our planned acquisition of the Stratford power station in Taranaki, which we announced just
before Christmas.
At $500 million, it is the largest single transaction in Contact’s history and we are pleased to have received Commerce
Commission clearance last week for the purchase.
While the deal still requires approval by a majority of NGC’s shareholders, I want you to understand that this
acquisition is a key to delivering further strong earnings growth.
The addition of the Stratford power station to Contact’s assets will give us headroom for growth while preserving our
proven strategy of integration and balance. And we will be able to achieve that growth without committing to building a
new plant at a time when future gas supplies remain uncertain.
Steve will provide more detail about this new asset in his presentation.
Australia
While the $500 million purchase of the Stratford power station is a major initiative, we still see potential for further
growth in Contact’s business.
Our goal is to build an integrated energy business, with strong positions in both New Zealand and Australia.
Development of this platform is well underway in New Zealand, and we continue to look for avenues to strengthen it.
In Australia we start from a much smaller base. The challenge in that market is to identify opportunities that create
value, and fit with our longer term goal of creating an integrated business.
In both markets, our priority remains the creation of shareholder value. We will not pay more for assets than what we
believe they are worth. Indeed we have walked away from opportunities where we do not believe there is value. This is a
great complement to Steve Barrett and his team as there is always a risk of “deal fever” when looking to expand a
business.
Let me reiterate we will only proceed with expansion where we can clearly see shareholder wealth creation and clearly
manageable risks.
Dividend for 2002
(Slide: Graph showing dividend growth)
The Board declared total dividends for 2002 of 20.9 cents a share.
As you can see from the graph, this equates to a 10% growth in total dividend compared to the previous year.
(Slide: Share Price Movements)
I would note also that this has also been a year of strong capital growth. As of last Friday, it stood at $4.20, an
increase of 12 percent for the year.
Taking gross dividends and capital growth together, Contact shareholders have seen a return of over 20 percent in the
last year.
Looking at performance since listing in May 1999, every dollar that you invested at that time has delivered a return of
over 70 cents in gross terms.
Future shareholder returns
As you will be aware, Contact is committed to a policy of progressive dividend growth over time.
Early last year, the Board drew attention to the fact that Contact needed to make major new investments to underpin
earnings growth over the longer term.
The Board also emphasised that to accommodate significant investments, Contact might need to defer dividend growth in
the short term, to ensure that longer term earnings growth can be maintained.
The acquisition of the Stratford power station clearly fits the category of investment to which we were referring.
When the Board comes to determine the dividend for the 2003 year, it will carefully weigh all the relevant factors –
these include the capital outlay associated with the Stratford power station acquisition and further opportunities that
may arise, and Contact’s operating performance for the year. At this point, it is too early to predict how these
different influences will balance out.
(Slide: Contact logo)
Consents
Shareholders will be aware that Contact is working its way through the consenting process at both Wairakei and Clutha.
Steve will cover those issues in greater depth, but I do want to make a couple of broad points on the Resource
Management Act.
Contact prides itself as a good corporate citizen and takes seriously its obligation to operate in ways that
appropriately recognise our considerable impact on the environment and on local communities.
The RMA is good legislation, but it is not perfect legislation. And I would have to say that although there is much
focus on Maori participation, from our point of view, the problems of the Act do not lie in that area.
The issues that concern us are the cost and length of hearings, and the lack of any clear mechanism to ensure that
competing national and local interests are properly balanced in a timely way.
At a time of pressing need to develop new energy sources, it is imperative that our regulatory processes do not unduly
impede developments that are necessary if we are to be sure about keeping the lights on.
Governance
(Slide Eleven: Contact logo)
Turning now to governance issues, I confirmed at last year’s Annual Meeting that Contact would move to a quarterly
result cycle.
The change was not required of Contact. But it was consistent with our desire to provide timely and useful information
to shareholders. It also reflected the Board’s commitment to best practice corporate governance that will enhance the
company’s assets and benefit all shareholders.
Later in the meeting we will consider a special resolution that proposes altering the company’s constitution to
proactively adopt a number of the planned changes to the New Zealand Stock Exchange’s rules. The changes will also
enshrine governance principles that will codify existing practice and enhance the independence of the Contact board.
I will detail the proposed changes to the Constitution later in the meeting, when we come to consider the relevant
resolution.
As you will have noted in our Annual Report, we have already adopted a revised Board Audit Committee charter – which you
can read on the Contact website. It sets out the principles of the Committee, the role of the external auditor, and the
protocols surrounding the appointment and monitoring of the activities of external audit.
These measures are an important expression of the Board’s commitment to protecting and enhancing your investment – and
doing so in a manner that is transparent, independent and capable of withstanding critical scrutiny.
There is another matter which we will come to when considering today’s resolutions that I would like to discuss now –
because it relates to an undertaking I gave on behalf of the Board at last year’s meeting.
I said then that Contact would maintain separation between the delivery of auditing and consultancy services.
Exceptional circumstances created by the collapse of Contact’s former auditors, Andersen, meant that we were unable to
achieve a full separation between audit and advisory work in 2002.
As a result of the Andersen collapse, Andersen’s senior partners in New Zealand moved to Ernst & Young part way through 2002.
At the time, Ernst and Young was already engaged to advise Contact on possible investments in Australia.
In deciding how to fill the interim vacancy, the Board had to weigh the potential conflict that Ernst and Young might
face as auditor, versus the downside associated with a loss of audit continuity part way through a year.
Ultimately, we decided to appoint Ernst and Young to fill the short term vacancy, and we took the extra step of having
an independent review of Ernst and Young’s financial advice to deal with any perceived conflict.
I want to stress that this arrangement occurred due to the exceptional circumstances associated with the demise of
Andersen.
In late 2002 Contact undertook a tender process to select external auditors for 2003 and beyond. Three firms took part
in the process, and all were made aware of the Board’s requirement regarding separation of audit and consultancy
services going forward.
As a result of that process, the Board determined that Ernst and Young were best placed to fill the position of external
auditor going forward. Accordingly we will be putting a motion to the meeting to appoint Ernst and Young as our
auditors. Shareholders should note that they have agreed, as a condition of appointment, that they will be excluded from
undertaking any advisory work for Contact, as provided for under the Board Audit Committee Charter.
Conclusion
Security of supply will dominate policy and operational decisions right across the energy sector this year. We are
entering a new era in which the certainties of the last generation will no longer apply.
This will create an environment of uncertainty and change.
Contact’s pursuit of a balanced, integrated business model means the company is well positioned to maintain sustainable
growth in 2003.
That growth will require prudent management and oversight. The governance measures I have outlined, and which we will
discuss in more detail later in today’s meeting, have been developed to protect and enhance your interests as
shareholders.
2002 was a busy and demanding year for the Board, management and Contact staff. I would like to thank them all for their
efforts.
And I want to thank you for your continued support and commitment to this company.
I will now ask our Chief Executive Steve Barrett to present an overview of both last year’s result and our most recent
earnings performance.