Contact: Chief Exec’s Speech – 05 Annual Meeting
Chief Executive’s Speech – 2005 Annual Meeting
Thank you, Grant.
It’s a pleasure to be in Wellington for the Contact Annual Meeting.
As New Zealand’s second largest listed company, and the most widely held New Zealand share, we’ve made a point of taking our meetings to Auckland, Christchurch and Dunedin in the last three years so that shareholders around the country get the opportunity to hear directly from us.
However, Wellington is our headquarters and it’s where around half our 700 or so employees live and work. So it’s good to be holding the Annual Meeting on home turf.
Before I begin my formal presentation, I would like to take this opportunity to introduce you very briefly to my Senior Management Team [they stand]. They will all be present at the morning tea after the meeting this morning and I encourage you to seek them out with any questions you may have.
As is our usual practice, we have this morning advised the Stock Exchange of our results for the first three months of the current financial year, reporting $41.3 million in post-tax earnings to December 31, 2004 – a solid increase on the $27.5 million reported for the same period last year.
Earnings before tax, interest, depreciation and amortisation rose 20% to $118.7 million, compared with $98.9 million in December 2003.
The result reinforces the benefits of Contact’s integrated business model and the movement in electricity tariffs to reflect tightening demand, which is now stimulating new investment in generation capacity. The integration of generation with a significant retail customer base continues to allow Contact to deliver reasonable earnings growth to shareholders despite the volatility of wholesale electricity prices. Increased wholesale gas sales also assisted the result.
Revenue for the quarter ended 31 December 2004 was $324.2 million, an increase of 9% on the corresponding quarter in the previous financial year. Relatively high water flows and associated storage levels in the hydro lakes resulted in low wholesale electricity prices for the quarter. However, this was balanced by the lower cost of retail electricity purchases.
I would note that this quarter’s result was boosted by prior period adjustments to electricity purchase costs and the release of a provision related to the settlement of a dispute.
Contact continues to deliver prices to customers that reflect longer term price trends rather than short term wholesale market price fluctuations.
We continued to experience significant competition for retail customers in some areas, and have mounted new programmes focused on retaining existing and winning new customers, particularly in areas not previously served by Contact.
As of today, 99.5 per cent of homes and businesses in New Zealand – the King Country being the only remaining exception – can choose Contact Energy as their electricity supplier.
Contact gained a net 1000 new customers in the three months to December 2004 – the first such gain since a year ago – with total electricity customers numbering 509,000 at the end of calendar year 2004.
I am pleased to report that that trend remains intact into the early part of the current quarter.
In other words, retail competition is alive and well, and we look forward to more of it. 2004 was a big year for Contact.
As Grant has already outlined, we achieved a record tax-paid profit of $144 million, increased dividends to shareholders, and further enhanced the strength of our balance sheet.
In contrast to 2003, when a dry winter caused an upward spike in wholesale electricity prices, last year’s average wholesale prices were relatively low at $37 per Megawatt hour. That substantially reduced wholesale electricity revenue, but also reduced the cost to Contact of purchasing energy for our retail customers.
As a result, net retail revenues were strongly positive at $668 million, bolstered by tariff adjustments, coupled with a five per cent increase in total sales volumes.
As reported last year, the retail gas business suffered an eight per cent reduction in customers to a total of 90,000. While disappointing, this reflects differing views among competitors about the value of gas in the emerging post-Maui era.
We have taken the commercial decision that we should not offer gas at uneconomic prices solely in order to maintain customer numbers.
Behind these results was a year of major change and progress on strategic initiatives.
Twelve months ago, Edison Mission Energy had announced its intention to depart, but remained our majority shareholder.
After strong growth in customer numbers and the addition of generation capacity through the acquisition in early 2003 of the Taranaki Combined Cycle station at Stratford, our focus was on establishing a solid platform for the next phase of growth.
We were even more critical than we are today of how slowly new gas resources were coming to market, and were in the early stages of assessing the potential mix of post-Maui thermal fuel options.
We were also still pursuing creation of an integrated energy business across the Tasman.
And we were at crucial phases in our applications for new resource consents for our Clutha River hydro stations and the Wairakei geothermal power plant – these renewable energy assets representing half of Contact’s total generation portfolio.
Today, after five years as cornerstone shareholder, EME is no longer on the Contact Energy share register, replaced by our new majority owner, Origin Energy of Australia.
In passing, let me briefly echo Grant’s comments about the performance of Contact staff during this potentially unsettling period.
What I observed was a focused, professional staff, proud of their company, confident of its achievements and strategic direction, and simply too busy getting on with the job to spend time on speculation.
Meanwhile, on the thermal fuels front, we have over the last year committed to new gas contracts, plant upgrades and major maintenance contracts worth close to $1 billion. We have secured gas from the new Pohokura gasfield, and at last are certain about our remaining entitlements to Maui gas.
A year ago, we could not say with certainty how we would run our existing gas-fired power stations through to the end of this decade.
Today, as a result of these new gas commitments, we know with confidence that we have the gas we need to run our approximately 700MW of combined cycle gas turbine plants at Otahuhu-B and Stratford for the next five years or so. That is a huge step forward.
And, publicly to shareholders, I want to reflect that these achievements did not just happen – they reflected enormous hard work and diligence from your management and staff. It was a great effort.
These represent the most important contracts we have completed at Contact since I joined the company four years ago.
We have passed further milestones on the way to achieving workable resource consent frameworks for both the Clutha and Wairakei.
Particularly, Contact has been granted consents, subject to the appeals process, that allow operations for the full 35 and 20 year consent periods respectively sought for the Clutha and Wairakei assets – a major positive outcome after more than five years’ hard work by our site personnel, legal and environmental teams.
In fact, one might say that Contact has refuelled its entire generation fleet - both renewable and thermal - in the last 18 months, through the combination of major new gas contracts and positive progress on resource consents.
On top of that, we have established that the importation of Liquefied Natural Gas represents a viable backstop option in case local gas discoveries are too small or too late to give us certainty beyond the end of this decade.
To assist public debate on our future energy options, we also conducted a national advertising and public education campaign. This also represented an important investment in building a distinctive brand and identity for the company.
At the same time, it became clear to us that, with all these potential new investments, we should refocus on the New Zealand market, rather than pursue Australian opportunities.
We continue to face significant challenges in New Zealand, and we saw no value for shareholders in sinking cost into an Australian retail operation that would be competing directly with our majority shareholder.
The change in the dynamics of the New Zealand energy market is particularly important for understanding our view of the next few years.
The fact is that, although the big, long term questions of how best to meet growing energy demand after 2010 remain unanswered, the near term outlook is far more solid and encouraging than it was a year ago.
As energy supplies have tightened and the value of electricity and gas has risen, a wide range of new renewable and thermal generation investments have either been committed, accelerated, or become more viable.
Contact has identified a range of such projects, some already in train, which will increase output across our generation fleet by more than 100MW, mainly from renewable energy sources.
increasing geothermal production to full capacity at the Wairakei plant and plans to boost production from the Poihipi station under existing resource consents, giving approximately 35MW additional generation capacity; plans for new drilling to increase production from the Ohaaki geothermal station by 15 to 20MW. Like Poihipi, Ohaaki has never run at full capacity owing to steamfield deliverability issues; a 15MW binary plant upgrade to the Wairakei station, already under construction and due for commissioning in June this year; and plans for 8 to 16MW of new generation by installing turbines at the existing flow-control structure known as Hawea Gates, at the top of Contact’s Clutha hydro system; upgrades to the Otahuhu-B and Taranaki Combined Cycle gas-fired plant to yield approximately 24MW of new capacity at peak load, and improve fuel-burning efficiency.
These projects alone account for more than $130 million of new capital expenditure.
These and recent developments by other industry participants should buy New Zealand a couple of years’ breathing space in which to pursue the options for the medium and longer term, with greatly reduced risk of electricity shortages or savings campaigns caused by dry winters over the next three or four years.
It is important to recognise not only that many of these newly announced developments will draw on renewable energy sources, but also to acknowledge that renewable resources will be an important part of the mix of new generation.
There is an important role, too, for energy efficiency and conservation.
However, renewables and efficient energy use alone cannot meet future demand.
Thermal fuels, including domestic gas, coal and possibly LNG, will continue to play an important role too.
Indeed, our most significant future generation options are the new, large scale combined cycle gas turbine plants that we could build on our sites at Otahuhu and Stratford, and for which Contact already holds resource consents.
All we lack is the gas to run such new plant, each of which would be equivalent to between two and three years’ electricity demand growth.
If gas sources were identified and regulatory and transmission concerns allayed, Contact could realistically complete one of these options by the end of the decade.
It is this timeframe which is driving our interest in encouraging new gas exploration and investigating the backstop option of importing Liquefied Natural Gas, or LNG.
The reality is that, if new local sources of natural gas are not found in the next few years, LNG could become vital to keeping existing plant – let alone new gas-fired plant – running.
Importantly, LNG would fit our existing national infrastructure. Even though it comes ashore as a superchilled liquid, it is returned to exactly the same format as the domestic natural gas that has become a backbone energy source for New Zealand over the last three decades.
We need to keep that option open at the same time as pushing for accelerated local exploration, in the hope that LNG will not be needed.
While there will be no need to make a decision on whether to proceed with an LNG receiving facility for three to four years, we expect to make a preferred site choice this year to allow timely resource consent applications.
The front-running sites at present are Marsden Point and Port Taranaki. The pros and cons of each are finely balanced and, with our partners Genesis Energy, we will be taking time to consider which of the two we prefer over the next few months.
In the meantime, we will be continuing our efforts to demonstrate that Contact is a willing participant in solving New Zealand’s energy challenges across the full range of options available, a willing buyer of gas coming to market, and increasingly willing to become involved in domestic gas exploration and production, if necessary.
Creating Positive Energy
A key part of that commitment to finding solutions was last year’s Positive Energy campaign – a public education and company brand-building investment that showed Contact is a company that tells it as it is, that is committed to actions speaking louder than words, and is willing to take a leadership position in its industry, on behalf of its customers and shareholders.
We also recognised that energy issues are complex and, to many people, not especially interesting until there’s a threat of the lights going out. So we sought to communicate about these difficult, nationally important questions in a fresh and engaging way.
That’s why we chose to use the animated characters, Tui and Beatrice, to carry the core message of the campaign.
That message, at its simplest, was that all energy choices involve a trade-off between three key elements: price, environmental impact, and security of supply.
That’s why the campaign slogan was: “It’s just a question of balance”.
We were even-handed about all generation options, dismissed talk of crisis, and stressed that New Zealand has many options, including energy efficiency and conservation, and that a mix of those options can meet our energy, price and environmental requirements in a balanced way.
The campaign had major impacts.
Perhaps most importantly, it gave us confidence in our long-held belief that the overwhelming majority of people place greatest importance on security of energy supplies.
They care, as we do, about prices and the environmental impact of energy production, but they expect security of supply as a non-negotiable aspect of modern life. That fact cannot be ignored as we consider our future options.
People also appeared to appreciate us taking this approach. There were substantial positive impacts from the campaign on public opinion regarding Contact Energy.
Favourable impressions of Contact improved across a range of measures including concern for the country’s future, the environment, and willingness to engage our various publics in responsible debates about New Zealand’s future electricity supply considerations.
This was especially marked among our customers.
This is an important outcome as we seek strong connections that encourage loyalty and satisfaction with Contact in a competitive market.
A commitment to creating Positive Energy also saw Contact choose to back Bevan Docherty in his Olympic triathlon medal bid last year, and why we will be renewing our sponsorship to see Bevan through to the 2008 Olympics in Beijing.
Our experience with Positive Energy is also leading us to a new, more customer-focused campaign to help people get the most out of the energy they use, and to gain health and lifestyle benefits at the same time.
With energy demand rising and prices reflecting tightening supply, we became more aware that energy efficiency and conservation are and should be increasingly important for our customers, and to meet the nation’s energy needs. In short, conservation must be and is a part of the national portfolio to economise on the nation’s scarce energy supplies.
We expect public demand to increase for energy efficiency information and solutions.
We concluded that this could be an important focus for the next phase of our Positive Energy initiatives.
So we sought an opportunity to create Positive Energy on a national scale by forming partnerships that would align Contact’s business with activity in this clear area of demand from our customers.
And as we focused on new research showing direct correlations between housing standards, heating, and New Zealand’s very high rates of respiratory illnesses, such as asthma, we identified an opportunity to make energy efficiency even more relevant by linking it to health and lifestyle benefits.
The result is the Contact Energy Healthy Homes programme, which Grant King and I launched with the Minister of Energy, Trevor Mallard, at Parliament last night.
Healthy Homes is a unique partnership of interests, bringing together: one of the country’s largest energy companies, Contact; with the country’s main advocacy body on respiratory illness, the Asthma and Respiratory Foundation of New Zealand; world-leading research into connections between health, the home environment and energy use from the Wellington campus of the Otago University Medical School; two of the country’s largest home renovation and appliance chains – Mitre 10 and Noel Leeming – both of whom also happen to be our partners in the Fly Buys loyalty scheme – and the Government’s Energy Efficiency and Conservation Authority.
There is information on Healthy Homes in your shareholder packs. The campaign will launch nationally in Asthma Awareness Week, next month, and the familiar figures of Tui and Beatrice will again carry our messages in ways that have proven to be well-received by target audiences.
And to anyone who asks, “why would an energy company help people to use less energy?”, the answer is simple:
Firstly, we see ourselves as a responsible part of this community and economy. We deplore wasted resources in our own industry as much as any other sphere. We are putting our money where our mouth is to demonstrate that.
Secondly, there is an opportunity here for Contact to create Positive Energy, making a difference to the lives of New Zealanders, especially the large and growing numbers suffering respiratory illnesses.
And finally, if we can help our customers to get better value from the energy they already buy from us, we might reasonably expect that their loyalty and trust in Contact will be enhanced, and their ongoing custom more assured.
In other words, there is a strong commercial rationale for this programme.
Not only do we seek to secure loyalty and respect, but an efficient, reliable electricity system will provide the best long run opportunities for Contact.
We are laying the foundations for further initiatives in areas such as enhanced quality of service, product offerings and, as competition continues to thrive, new ways to attract, maintain and service our whole customer base.
These challenges are, in their own way, as important as the challenges we face to secure fuels and technologies for the future if Contact is to continue delivering on our over-riding objective: to deliver maximum value for shareholders – large and small.