Contact Energy Annual Report 2011

Plain-text annual report

2011 2011Contents 1 2 4 6 9 20 24 37 49 Summary Performance indicators Chairman’s review Chief Executive Oﬃ cer’s review Management discussion of ﬁ nancial results Company overview Governance Remuneration report Security holder information Financial contents 51 58 106 Financial statements Notes to the ﬁ nancial statements 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. _ uru ma _ Haua along the western coast of the Waikato region to Te Akau South. raki wind farm – a 504 MW wind farm – consented for construction • 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: annualreport@contactenergy.co.nz 2 Contact Energy Limited Annual Report 2011 Performance indicators Underlying earnings for the period Total operating revenue 231.3 230.4 158.7 149.8 150.9 2,757 1,998 2,220 2,164 2,231 3,000 2,500 n o i l l i m $ 2,000 1,500 1,000 500 2007A 2008A 2009A 2010A 2011A 2007 2008 2009 2010 2011 EBITDAF1 543.7 567.2 445.3 427.0 441.4 Operating cash ﬂ ow per share2 72.0 74.2 72.3 60.9 60.2 e r a h s r e p s t n e C 80 70 60 50 40 30 20 10 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 Underlying earnings per share2 Net debt/debt+equity 39.55 39.41 27.04 24.78 24.00 t n e c r e P 35 30 25 20 15 10 5 25 25 32 29 27 2007A 2008A 2009A 2010A 2011A 2007 2008 2009 2010 2011 Capital and investment expenditure Underlying return on total assets 492.1 468.7 529.5 5.0 4.8 t n e c r e P 6 5 4 3 2 1 285.2 150.7 3.2 2.9 2.7 2007 2008 2009 2010 2011 2007A 2008A 2009A 2010A 2011A n o i l l i m $ n o i l l i m $ e r a h s r e p s t n e C n o i l l i m $ 250 200 150 100 50 600 500 400 300 200 100 45 40 35 30 25 20 15 10 5 600 500 400 300 200 100 Contact Energy Limited Annual Report 2011 3 Generation by fuel source Wholesale electricity price 623 5,506 5,442 417 4,186 492 384 3,686 3,741 1,968 2,180 2,311 2,277 2,275 3,639 3,504 3,543 3,760 3,860 r u o h t t a w a g e m r e p $ 125 100 75 50 25 110.50 53.75 57.55 53.62 49.69 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 Hydro Geothermal Thermal Swaption Retail electricity sales Customer numbers (including LPG franchisees) s r u o h t t a w a g i G 14,000 12,000 10,000 8,000 6,000 4,000 2,000 10,000 s r u o h t t a w a g i G t n e c r e P e r a h s r e p s t n e C 6,000 4,000 2,000 10 8 6 4 2 30 25 20 15 10 5 8,000 7,650 7,877 7,703 7,674 8,254 49 75 51 75 54 67 58 64 513 520 479 477 59 60 447 ) s 0 0 0 ( ) s P C I ( s r e b m u n r e m o t s u C 700 600 500 400 300 200 100 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 Electricity Gas LPG Underlying return on shareholders’ equity Total assets 8.82 8.79 5.97 5.40 4.67 6,000 5,000 n o i l l i m $ 4,000 3,000 2,000 1,000 4,585 4,837 5,026 5,148 5,643 2007A 2008A 2009A 2010A 2011A 2007 2008 2009 2010 2011 Proﬁ t distribution and dividends per share Shareholders’ equity 27.0 28.0 28.0 25.0 23.0 2,621 2,621 2,660 2,777 3,236 n o i l l i m $ 3,500 3,000 2,500 2,000 1,500 1,000 500 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. As discussed in the Half Year Report, David Baldwin resigned as Managing Director and moved to the position of Chief Development Oﬃ cer at Origin Energy on 1 April. David remains a director of Contact and will continue to contribute to Contact’s generation development. I thank David for his valuable contribution over the last ﬁ ve years. Contact Energy Limited Annual Report 2011 5 In April we welcomed Dennis Barnes as the new Chief Executive of Contact. Dennis has a long association with Origin Energy, having started with the company in 1998. Most recently Dennis held the role of General Manager Energy Risk Management at Origin, based in Sydney. In addition to his experience at Origin, where he guided Origin’s signiﬁ cant and expanding operations in wholesale markets, Dennis has considerable skills and expertise gained through many years operating in international energy markets. We recognise that FY11 was diﬃ cult for New Zealand as it recovered from the impact of the global economic recession and the Christchurch earthquakes. Looking forward, we expect demand for electricity to grow. Contact is well positioned to help meet this demand. Grant King Chairman 6 Contact Energy Limited Annual Report 2011 Chief Executive Ofﬁ cer’s review Focus on ﬂ exibility, customers and future development Flexibility already delivering positive results Last year we reported that the 2011 ﬁ nancial year (FY11) would be one of substantial change, with full commercial operation commencing of two projects that are critical to Contact’s future. It is therefore pleasing to report that the Ahuroa gas storage facility and Stratford peakers were opened this year by the Prime Minister, Rt Hon. John Key, and we are already accruing beneﬁ ts from the restoration of generation portfolio ﬂ exibility. The ﬁ xed costs associated with Contact’s thermal generation reduced as a result of the new assets. These improvements are reﬂ ected in this year’s results. In the second half of the year, lower gas take-or-pay volumes and the ﬂ exibility provided by the Stratford peakers and Ahuroa gas storage facility allowed Contact to manage risk more eﬃ ciently during periods of generally low wholesale prices. This resulted in an increase in hedged generation EBITDAF of $52 million compared with the same period in 2010. Prior to the introduction of the Stratford peakers and the Ahuroa gas storage facility, two gas-ﬁ red combined-cycle gas turbine plants would have been required during winter demand periods to provide price and transmission risk coverage despite long periods of low wholesale spot prices. By utilising the Stratford peakers in combination with the combined-cycle gas turbine plants instead, we can now provide the same demand risk cover at a lower operating cost. Similarly, the Ahuroa gas storage facility enables gas to be stored and used as required, lowering Contact’s generation cost base. During the year, 5.8 petajoules (PJ) of gas were injected into Ahuroa, the equivalent of $45 million of gas costs which, during periods of wet hydrology and low wholesale prices, are not required. At the same time, Ahuroa’s ﬂ exibility gave Contact the conﬁ dence to not replace a major gas contract and lowered the volume of gas that must be purchased under take-or-pay arrangements. During high wholesale spot price periods, the Stratford peakers and Ahuroa gas storage facility enable higher generation volumes at attractive margins. Customers Heavy and frequent rainfall this year ensured that fuel was plentiful. However, demand has been stagnant due to a combination of a mild winter, the Christchurch earthquakes and subdued economic conditions. Despite these factors, Contact’s retail sales volumes increased, with new customer acquisitions in the Time of Use market key to this increase. In the residential retail market, Contact experienced an unprecedented level of customer churn in the last quarter of FY11. We are continuing to create new products and oﬀ ers to be competitive in a market that is constantly changing. Accordingly, in August 2011, Contact increased its existing prompt payment discount for residential customers who subscribe to Online OnTime and receive their bills online, from 12 per cent to 22 per cent. Contact also commenced oﬀ ering new wholesale risk management products to larger industrial consumers, to help them manage their energy purchase costs in this changing market. Strategy for growth Geothermal Contact believes that geothermal generation represents the best and most cost-eﬀ ective renewable generation option to meet New Zealand’s energy needs. Contact continued its leadership in geothermal generation with the commencement in 2011 of the $623 million Te Mihi project. Work on the Te Mihi project commenced on a site approximately 5 kilometres from the Wairakei geothermal power station and the Te Mihi power station is expected to be brought into operation in 2013. Once completed, 45 MW of the existing Wairakei station will be decommissioned, resulting in a net increase in output from the power stations on the Wairakei geothermal resource of 114 MW. Contact Energy Limited Annual Report 2011 7 In 2011, resource consent was also obtained for the construction of the 250 MW Tauhara 2 geothermal _ development to be sited on the Tauhara geothermal ﬁ eld, to the north-east of Taupo development will be dependent on market conditions. . Timing of the Tauhara 2 Investigation of the potential for development of the Taheke geothermal ﬁ eld is ongoing in partnership with the Taheke 8c and Adjoining Block Incorporation. This work has been progressing since the owners selected Contact to be their partners in the development of the resource in FY10. Wind hydro and gas developments Contact continues to investigate wind, hydro and gas-ﬁ red developments to help meet New Zealand’s long-term demand needs. In 2011 Contact was granted consents for two wind farm developments, the 156 MW Waitahora wind farm consented for construction along the Puketoi Range near Dannevirke in southern Hawke’s Bay, and the _ 504 MW Haua raki wind farm consented for construction on the west coast of the Waikato region. _ uru ma Contact has the most advantageous gas-ﬁ red power station development sites in New Zealand, and consultation is ongoing with the Stratford community and iwi on the development of a second set of gas-ﬁ red peakers at the Stratford power station. Successful Entitlement Oﬀ er To strengthen its balance sheet for investment in growth opportunities, Contact launched a successful one-for-nine renounceable Entitlement Oﬀ er in June 2011. Approximately 65.7 million new shares, representing 94.5 per cent of shares oﬀ ered in respect of entitlements, were purchased under the Oﬀ er. Only 5.5 per cent of the new shares in respect of entitlements were unclaimed and a shortfall book build was conducted to sell these shares. The Oﬀ er and shortfall book build were successful and raised a total of $351.2 million which will allow Contact to invest in growth opportunities, the ﬁ rst of which is the Te Mihi project. Our people Safety The Total Recordable Injury Frequency Rate is the total number of recordable injuries for employees per million hours worked. Contact’s rate this year was 5.9, a signiﬁ cant improvement from the previous year’s 6.6. An improvement of 11 per cent for employees and 28 per cent for contractor incidents represents real progress toward our goal of zero harm. Enterprise Transformation programme Contact’s three-wave Enterprise Transformation (ET) programme reached key milestones this year. ET involves implementing SAP software and accompanying new processes across the company to support the business’s ﬁ nancial, generation asset management, and retail functions. Wave 1, addressing Contact’s ﬁ nance systems, was completed in October 2010. Wave 2, focusing on generation operations, was completed in July 2011. Both were on schedule and on budget. This brings the company another step closer to achieving its vision of becoming the region’s reference generation organisation through the improved management of site safety, better information to support site management and new maintenance processes to increase plant reliability and availability. Contact will be rolling out the ﬁ nal wave of ET in its retail business in 2012. 8 Contact Energy Limited Annual Report 2011 Our communities In 2011 Contact continued to build on the relationships established with the communities in which we operate _ through sponsorship of events and community activities in Taupo , Central Otago and Taranaki, such as the Lake _ Taupo Cycle Challenge and the Contact Alexandra Blossom Festival. _ The opening of the Stratford peakers and the Ahuroa gas storage facility involved South Taranaki iwi, Nga and this successful event has opened the doors for a strong and enduring relationship to be developed. ti Ruanui, We continue to build our relationships with tangata whenua as we work to develop projects such as Te Mihi and Tauhara and look to the future of Ohaaki. And we are earning and building on the trust placed in Contact by the Taheke 8C Incorporation. Looking forward In the coming ﬁ nancial year Contact’s immediate focus will be on delivery, realising value from the newly commissioned assets to raise base earnings, and continuing to meet the needs of our customers. The Te Mihi project will gather momentum and we will work to ensure Te Mihi is delivered on time and within budget. With portfolio ﬂ exibility greatly enhanced and consequent expected improvement in base earnings, we are continuing a period of bold growth. I would like to thank the Board and everyone at Contact for their contribution to our successes this year; there is much we can be proud of. Dennis Barnes Chief Executive Oﬃ cer Contact Energy Limited Annual Report 2011 9 Management discussion of ﬁ nancial results for the 12-month period ended 30 June 2011 Financial results to 30 June 2011 Key ﬁ nancial information Operating revenue Operating expenses1 EBITDAF Depreciation and amortisation Equity accounted earnings of associates Change in fair value of ﬁ nancial instruments Removal of New Plymouth asbestos and related costs Retail transaction processing outsourcing costs Earnings before net interest expense and income tax Net interest expense Income tax expense Proﬁ t for the year Underlying earnings after tax2 Underlying earnings per share (cents) 12 months ended 30 June 2011 $ million 12 months ended 30 June 2010 $ million 2,230.9 (1,789.5) 441.4 (166.3) 3.9 (5.9) – – 273.1 (62.4) (60.4) 150.3 150.9 24.00 2,164.4 (1,737.4) 427.0 (161.9) 3.3 4.5 (5.6) (3.3) 264.0 (56.0) (53.3) 154.7 149.8 24.78 Shareholders’ equity 3,235.6 2,776.8 1 2 Includes electricity purchases. Underlying earnings after tax removes signiﬁ cant one-oﬀ items and the non-cash change in fair value of ﬁ nancial instruments. Variance $ million 66.5 (52.1) 14.4 (4.4) 0.6 % 3% (3%) 3% (3%) 18% (10.4) (231%) 5.6 3.3 9.1 (6.4) (7.1) (4.4) 1.1 (0.78) 458.8 100% 100% 3% (11%) (13%) (3%) 1% (3%) 17% EBITDAF In FY11 Contact’s EBITDAF was $441 million, $14 million (3 per cent) higher than the prior corresponding period (FY10). Following the ﬂ at EBITDAF in the ﬁ rst half of FY11 compared with the ﬁ rst half of FY10, second-half EBITDAF increased 7 per cent to $216 million. EBITDAF contribution in the same period from Contact’s core electricity business increased 8 per cent on the second half of FY10 due to the improvement in ﬂ exibility with the Ahuroa gas storage facility and Stratford peakers commissioned and gas contract levels falling 23 per cent. The availability of the Ahuroa gas storage facility and lower gas take-or-pay obligations enabled generation from Contact’s combined-cycle gas turbine plants and the swaption to be reduced in the second half of FY11 in response to low wholesale electricity prices. This was most evident in June with the full commercial operation of the Stratford peakers at the start of the month. The availability of the Ahuroa gas storage facility and the Stratford peakers place Contact in an improved position to increase earnings, even with continuing wet conditions in FY12. Weak wholesale spot prices and load re-balancing related to the state-owned enterprise asset transfers have increased the level of retail competition. In response to the competitive market, Contact has continued to target markets and channels that made economic sense. Time of Use sales increased 31 per cent to 3,920 gigawatt hours (GWh) and further incentives have been oﬀ ered to customers on Contact’s lower-cost online billing and payment option. 10 Contact Energy Limited Annual Report 2011 FY11 revenue was up 3 per cent to $2,231 million due to increased retail volumes and prices. While national electricity demand remained static, Contact’s retail sales volume increased by 8 per cent to 8,254 GWh, predominantly due to the 31 per cent increase in Time of Use sales. Time of Use customers oﬀ er the beneﬁ t of a ﬂ atter demand proﬁ le, allowing better utilisation of generation capacity and lower costs of supply. The increase in Time of Use sales allowed Contact to reduce its exposure to electricity spot sales in a period of weak wholesale prices. Average retail prices increased 4 per cent on FY10. Generation volumes increased 45 GWh from FY10 to 10,260 GWh. The average wholesale price for generation was down $4 per megawatt hour (MWh) to $50 per MWh in FY11. Contact sold 1,233 GWh into the exposed channel compared with 1,244 GWh in FY10. FY11 operating expenses increased 3 per cent to $1,790 million, predominantly due to the introduction of the Emissions Trading Scheme from 1 July 2010 and higher third-party network costs. Contact incurs carbon emission costs associated with gas used in generation and sold to customers, LPG purchases and geothermal generation. For FY11, this represented a total cost of $30 million. Network costs were $32 million (6 per cent) higher than FY10 driven by increased Time of Use sales and a $5 per MWh increase in unit network charges for mass market customers. The total cost of gas used in generation was up $14 million. The cost of gas used in generation in the second half of FY11 was $21 million lower than the comparable period in FY10. Depreciation The depreciation expense increased by $4 million or 3 per cent. The increase largely reﬂ ected the commissioning of the Ahuroa gas storage facility, Stratford peakers and the Finance and Generation streams of Enterprise Transformation going live during the year. Change in fair value of ﬁ nancial instruments The reported proﬁ t for the year included an unfavourable non-cash pre-tax movement of $6 million in the value of ﬁ nancial instruments. The movement was predominantly driven by an unfavourable movement in various interest rate and currency derivatives. This compared with a favourable pre-tax movement of $5 million in FY10. Interest expense The net interest expense increased by $6 million or 11 per cent to $62 million in FY11. The increase in the net interest expense was primarily attributable to a decrease in interest income due to lower levels of cash held during the year, combined with a decrease in capitalised interest as major capital projects were completed. This was partially oﬀ set by a lower average cost of funding. Interest of $42 million was capitalised in the year compared with $48 million in FY10. Income tax expense The income tax expense for the period was $60 million (2010: $53 million). This represents an eﬀ ective tax rate of 28.7 per cent. The diﬀ erence between this and the current corporate rate of 30 per cent is principally due to the ﬁ nal adjustment to restate deferred tax to the new corporate tax rate of 28 per cent eﬀ ective for FY12 and various incidental prior period adjustments. Contact Energy Limited Annual Report 2011 11 Reported proﬁ t EBITDAF Depreciation and amortisation Change in fair value of ﬁ nancial instruments Equity accounted earnings of associates Removal of New Plymouth asbestos and related costs Retail transaction processing outsourcing costs Net interest expense Income tax expense Proﬁ t for the year 12 months ended 30 June 2011 $ million 12 months ended 30 June 2010 $ million 441.4 (166.3) (5.9) 3.9 – – (62.4) (60.4) 150.3 427.0 (161.9) 4.5 3.3 (5.6) (3.3) (56.0) (53.3) 154.7 Variance $ million 14.4 (4.4) % 3% (3%) (10.4) (231%) 0.6 5.6 3.3 (6.4) (7.1) (4.4) 18% 100% 100% (11%) (13%) (3%) Net proﬁ t for the year was $150 million, down $4 million (3 per cent) compared with the prior year, primarily due to the increase in EBITDAF of $14 million and the absence of other signiﬁ cant one-oﬀ items in FY11. This was more than oﬀ set by an unfavourable non-cash pre-tax movement in ﬁ nancial instruments, and an increase in interest expense and tax. Underlying earnings after tax Underlying earnings after tax adjusts reported proﬁ t for signiﬁ cant one-oﬀ items and the non-cash change in the fair value of ﬁ nancial instruments. In FY11, underlying earnings after tax were $151 million, up $1 million from FY10. Notable adjustments included a re-estimate of the impact of the change in the corporate income tax rate announced in the Government’s May 2010 Budget and fair value movements in ﬁ nancial instruments. 12 months ended 30 June 2011 $ million 12 months ended 30 June 2010 $ million Variance $ million Proﬁ t for the year Removal of New Plymouth asbestos and related costs (after tax) Retail transaction processing outsourcing costs (after tax) Change in fair value of ﬁ nancial instruments (after tax) Impact of change in corporate income tax rate Removal of tax depreciation on buildings Underlying earnings after tax 150.3 – – 4.1 (3.5) – 150.9 154.7 3.9 2.3 (3.2) (42.7) 34.8 149.8 (4.4) (3.9) (2.3) 7.3 39.2 (34.8) 1.1 % (3%) (100%) (100%) 231% 92% (100%) 1% Distributions to shareholders The Contact Board of Directors resolved that the ﬁ nal distribution to shareholders would be 12 cents per share. In combination with the 11 cents per share interim distribution, the full-year distribution is 23 cents per share, a reduction of 2 cents from the prior ﬁ nancial year. The distribution represents a payout ratio of 100 per cent of Contact’s underlying earnings after tax for the period. The distribution will be made via a tax-free bonus issue under Contact’s Proﬁ t Distribution Plan (PDP). 12 Contact Energy Limited Annual Report 2011 Financial position and liquidity Net debt as at 30 June 2011 was $1,195 million, compared with $1,347 million as at 30 June 2010. Balance sheet gearing improved from 32 per cent as at 30 June 2010 to 27 per cent as at 30 June 2011. The decrease in debt is predominantly due to the one-for-nine renounceable Entitlement Oﬀ er carried out in June 2011. Existing term debt comprises US$330 million (NZ$587 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. Outlook FY11 was marked by signiﬁ cant achievements, with the completion of the Ahuroa gas storage facility, commissioning of the Stratford peakers and commencement of the Te Mihi geothermal development. Costs have continued to increase with the introduction of the Emissions Trading Scheme in FY11 and the expected increase in network charges as the national grid upgrades are completed. FY12 will be focused on delivery, in terms of utilising the newly commissioned assets to raise base earnings even if wet hydrology continues, proﬁ tably growing retail demand and ensuring Te Mihi is delivered on time and within budget. Overview of performance for the period Electricity market conditions The average wholesale spot price for FY11 was $50 per MWh compared with $54 per MWh for FY10. In general, hydrological conditions in FY11 were wetter than in FY10, with 64 per cent of the year having storage levels in the upper quartile of historical ranges. High hydrology resulted in relatively low wholesale spot prices on average, except for a temporary increase in prices in December 2010 as storage returned to mean levels and in March 2011 due to a series of transmission constraints and HVDC bi-pole outages. 500 400 300 200 100 * ) h W M / $ ( e c i r P 1H 2H Storage levels started and remained high over the ﬁ rst six months Price increase as hydro storage levels started to decline Transmisssion constraints including 26 March 5,000 4,000 ) h W G ( e g a r o t S 3,000 2,000 1,000 0 1 l u J 0 1 g u A 0 1 p e S 0 1 t c O 0 1 v o N 0 1 c e D 1 1 n a J 1 1 b e F 1 1 r a M 1 1 r p A 1 1 y a M 1 1 n u J National average FY11 National average FY10 National mean HAY prices FY11 HAY prices FY10 * Prices are based on the revised draft remedial pricing schedule relating to the 26 March Undesirable Trading Situation. The Undesirable Trading Situation decision, and the prices relating to it, are currently under appeal. Contact Energy Limited Annual Report 2011 13 Strongly correlated to electricity demand, New Zealand’s gross domestic product and business conﬁ dence have remained at relatively low levels since emerging from ﬁ ve quarters of recession at the start of 2009. While gross domestic product increased slightly in FY11, the combined impact of the Christchurch earthquakes and warm temperatures resulted in national demand (excluding the Tiwai Aluminium Smelter) decreasing 0.2 per cent compared with FY10. Historical national demand h W G 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 FY06 FY07 FY08 FY09 FY10 FY11 National demand (excluding Tiwai) National demand (excluding Tiwai and Christchurch) Segment results The operational performance data for FY11 (FY10 in parentheses) is provided in the chart below, and in the table on the following page. Thermal 4,125 GWh (4,179) (including swaption) Exposed generation EBITDAF: $30m (37) Exposed volume: 1,233 GWh (1,244) Unit generation operating cost: $38.6/MWh (34.2) Average wholesale price: $62.9/MWh (63.7) , ) 5 1 2 0 1 ( h W G 0 6 2 0 1 , Hydro 3,860 GWh (3,760) : n o i t a r e n e G Geothermal 2,275 GWh (2,277) CfD volume: 356 GWh (845) Hedged generation EBITDAF: $347m (295) Retail volume: 8,671 GWh (8,126) Energy transfer price: $88/MWh (81) Expected line losses: 475 GWh (488) GWAP – Haywards diﬀ erential: $2/MWh (4) Unit generation operating cost: $51.1/MWh (48.1) (including LTMA costs: $54.0/MWh (51.5)) TOU volume 3,920 GWh (2,999) Retail EBITDAF: $28m (50) Residential/SME volume: 4,333 GWh (4,675) Energy purchase price: $88/MWh (81) Actual line losses: 4.5% (3.2) LWAP – Haywards diﬀ erential: $5/MWh (2) Location factor (LWAP/GWAP): 115% (113) Network costs: $60/MWh (61) Time of Use network costs: $29/MWh (26) Mass market network costs: $86/MWh (81) Cost to serve: $15/MWh (15) Average sales price: $169/MWh (163) Retail margin: 2% (4) Total sales volume: 8,254 GWh (7,674) e h t o t n i d l o s y g r e n E t e k r a m e l a s e l o h w s r e m o t s u c o t d l o s y g r e n E Note: Line losses in hedged generation are based on an expected annual level of line losses; actual line losses are reﬂ ected in retail. 14 Contact Energy Limited Annual Report 2011 Electricity segment Wholesale electricity revenue Retail electricity revenue Steam revenue Total electricity revenue Electricity purchases Electricity transmission, distribution and levies Gas purchases and transmission Carbon emissions Meter lease internal charge1 Labour costs and other operating expenses Total operating expenses EBITDAF Depreciation and amortisation Segment result Average wholesale electricity price ($ per MWh)2 Cost of exposed generation ($ per MWh) Cost of hedged generation ($ per MWh) Hedged generation margin ($ per MWh) Gas used in internal generation (PJ) Swaption generation – hedged (GWh) Swaption generation – exposed (GWh) Thermal generation – hedged (GWh) Thermal generation – exposed (GWh) Geothermal generation (GWh) Hydro generation (GWh) Embedded generation (GWh) Total generation including swaption (GWh) Average electricity purchase price ($ per MWh)2 Retail electricity purchases (GWh) Generation – exposed (GWh) CfD sales (GWh) Retail electricity sales (GWh) Electricity customer numbers 12 months ended 30 June 2011 $ million 12 months ended 30 June 2010 $ million Variance $ million 505.7 1,443.6 19.7 1,969.0 (476.7) (541.3) (279.3) (25.1) (29.2) (212.3) (1,563.9) 405.1 (156.5) 248.6 $49.69 ($38.61) ($51.05) $38.43 30.1 – 384 2,858 850 2,275 3,860 33 10,260 ($55.14) 8,635 1,234 356 8,254 539.4 1,301.9 17.9 1,859.2 (480.4) (509.7) (265.3) – (29.0) (193.2) (1,477.6) 381.6 (153.3) 228.3 $53.62 ($34.20) ($48.06) $32.84 29.5 2 490 2,900 754 2,277 3,760 32 10,215 ($58.77) 7,925 1,244 845 7,674 (33.7) 141.7 1.8 109.8 3.7 (31.6) (14.0) (25.1) (0.2) (19.1) (86.3) 23.5 (3.2) 20.3 ($3.93) ($4.41) ($2.99) $5.59 0.6 (2) (106) (42) 96 (2) 100 1 45 $3.63 710 (10) (490) 580 447,000 477,000 (30,000) % (6%) 11% 10% 6% 1% (6%) (5%) – (1%) (10%) (6%) 6% (2%) 9% (7%) (13%) (6%) 17% 2% (100%) (22%) (1%) 13% – 3% 3% – 6% 9% (1%) (58%) 8% (6%) 1 2 Inter-segment meter lease internal charge is eliminated upon consolidation of the two segments. This price excludes Contracts for Diﬀ erences. Contact Energy Limited Annual Report 2011 15 Generation Contact’s thermal generation in FY11 was 4,092 GWh, 54 GWh lower than in FY10. This was largely due to the swaption volume being down 108 GWh as wholesale electricity prices were lower and the Stratford peakers were utilised to provide risk cover in June. Contact’s geothermal generation was down 2 GWh to 2,275 GWh in FY11 with the outage at Wairakei for statutory maintenance and lower output from Ohaaki oﬀ set by generation from the new Te Huka power station. Contact’s hydro generation at 3,860 GWh was 3 per cent or 100 GWh more than in FY10 as high storage levels and tributary ﬂ ows were utilised. In FY11 the volumes used by hedged customers (retail and Contracts for Diﬀ erences) increased 56 GWh to 9,027 GWh. This increase was largely due to a 31 per cent increase in Time of Use sales allowing Contact to increase hedge levels. The average operating cost of hedged generation was $51 per MWh, up 6 per cent on FY10 due to increased gas costs and the introduction of carbon costs. Overall, margins from hedged generation increased $6 per MWh, increasing the contribution from the hedged generation by $52 million. Exposed generation volumes and prices were similar to FY10 with volumes decreasing by 11 GWh to 1,233 GWh and the average price down 1 per cent. The introduction of the Emissions Trading Scheme saw costs increase $7 million for exposed generation. Revenues and other costs were similar to those in FY10. Gas costs The completion of the Ahuroa gas storage facility and a reduction in contracted gas levels from 52 PJ per annum to 40 PJ improved Contact’s cost position in the second half of FY11 as generation was reduced in reaction to low wholesale electricity prices. This was most evident in June, with the full commercial operation of the Stratford peakers at the start of the month enabling improved pricing and transmission risk management. Management of take-or-pay gas volumes in FY10 and FY11 Gas take-or-pay volumes reduced from 52 PJ to 40 PJ Jan 2011 Peakers commissioned June 2011 ) h W G ( d n a m e d d n a n o i t a r e n e G 1100 1000 900 800 700 600 500 ) h W M / $ ( e c i r P 600 500 400 300 200 100 0 l u J g u A p e S t c O v o N c e D n a J b e F r a M r p A y a M n u J Demand FY10 Generation FY10 HAY prices FY10 Demand FY11 Generation FY11 HAY prices FY11 16 Contact Energy Limited Annual Report 2011 Reduced combined-cycle gas turbine generation and lower wholesale gas sales in the second half of 2011 resulted in total gas used in FY11 being 4.1 PJ lower than in FY10 at 47.9 PJ. Hydrological conditions and consequential periods of low wholesale prices during the year resulted in gas length of 11.8 PJ, up from 10.2 PJ in the prior period. 5.8 PJ of the 11.8 PJ were injected into the Ahuroa gas storage facility, resulting in 6 PJ of gas that were either sold at a net loss or paid for and not taken. Gas that was sold at a net loss or not taken resulted in the eﬀ ective cost of gas used in generation being $0.79 per gigajoule (GJ) higher than the average contracted cost of gas, which is equivalent to $24 million of additional costs during FY11, down $1 million from FY10. The unit cost of gas used in generation before take-or-pay related costs increased $0.27 per GJ in FY11 due to a signiﬁ cant increase in gas price from 1 January 2010 under one of Contact’s main gas contracts, partially oﬀ set by contracted reductions across other contracts. The graph below shows the gas that was attributed to generation. Gas paid and not taken and the loss on distressed sales are both attributed to hedged generation as the contracts and their obligations are in place primarily to provide generation to ensure Contact’s retail demand is met. Gas used in generation $9.00 $9.27 2 3 29 4 2 30 ) J P ( e m u l o V 40 30 20 10 0 FY10 FY11 Financial year Gas used in generation Gas paid and not taken Loss-making industrial sales 10 8 6 4 0 ) n o i s s i m s n a r t g n i d u l c n i ( J G / $ As at 30 June 2011, Ahuroa gas storage held 16.3 PJ of natural gas and 0.6 PJ of LPG, of which 10.6 PJ of natural gas are working volume. The successful commissioning of the extraction phase of gas storage occurred in February 2011. Carbon costs The Emissions Trading Scheme was introduced on 1 July 2010. The electricity segment incurs carbon costs based on the amount of gas used in generation and the amount of steam extracted by geothermal power stations. In FY11 this cost totalled $25 million for the electricity segment. Contact Energy Limited Annual Report 2011 17 Retail The contribution from retail electricity was $22 million lower than in FY10 at $28 million due to increases in revenue being more than oﬀ set by increasing costs. Retail electricity revenue increased 11 per cent to $1,444 million due to: • retail electricity sales increasing 8 per cent to 8,254 GWh with Time of Use volume up 31 per cent to 3,920 GWh and mass market volume down 7 per cent to 4,333 GWh • the average sales price for retail up 4 per cent or $6 per MWh. The chart below illustrates the growth in demand during FY11. Overall North Island demand grew 25 per cent, with Time of Use volume increasing 49 per cent and mass market up 4 per cent. North Island demand was 67 per cent of total demand in FY11 compared with 57 per cent in FY10. Load split by customer type and island (sales) h W G 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 7,674 2,348 43% 33% 923 2,327 2,076 FY10 57% 67% 8,254 1,911 837 2,422 3,084 FY11 NI Time of Use SI Time of Use NI mass market SI mass market The majority of the reduction in South Island demand came from mass market customers as Contact reduced its exposure to South Island transmission risk and other retailers competed aggressively for mass market customers. Despite the increase in sales volumes and price, the overall contribution from retail was down due to increasing costs. The key cost movements were: • • • • • an increase in the internal energy purchase cost from $81 per MWh to $88 per MWh third-party network costs up $27 million due to mass market network unit costs up $5 per MWh and increased Time of Use volume line losses up 1.3 per cent to 4.5 per cent resulting in a cost of $10 million in additional purchases an increase in location costs from $2.15 per MWh to $4.81 per MWh. This represents the increase in the price diﬀ erential between the generation injection node and purchase node or grid exit point (LWAP). Location costs are allocated to retail electricity based on the diﬀ erence between the LWAP and the Haywards price node other retail costs up by $6 million, reﬂ ecting the contribution to the Christchurch earthquake-related costs and the increased cost to acquire, retain and serve mass market customers oﬀ set by a reduction in bad debt write-oﬀ s. 18 Contact Energy Limited Annual Report 2011 Other segment The Other segment comprises Contact’s retail and wholesale gas, LPG and meters. 12 months ended 30 June 2011 $ million 12 months ended 30 June 2010 $ million Variance $ million Wholesale gas revenue Retail gas revenue LPG revenue Meter leases revenue Meter leases revenue – internal1 Other revenue Total Other segment revenue Gas purchases and transmission LPG purchases Meter lease costs Carbon emissions Market levies Labour costs and other operating expenses Total operating expenses EBITDAF Depreciation Segment result Gas sales wholesale customers (PJ) Gas sales retail customers (PJ) Gas sales LPG customers (tonnes) Gas customer numbers LPG customer numbers (including franchisees) 50.9 72.4 117.0 12.7 29.2 8.9 291.1 (101.8) (85.4) (22.0) (5.2) (1.0) (39.4) (254.8) 36.3 (9.8) 26.5 7.1 2.8 65,201 60,000 59,300 75.4 78.0 130.3 11.8 29.0 9.7 334.2 (131.4) (99.2) (21.0) – (1.7) (35.5) (288.8) 45.4 (8.6) 36.8 10.7 3.2 70,327 64,000 58,000 (24.5) (5.6) (13.3) 0.9 0.2 (0.8) (43.1) 29.6 13.8 (1.0) (5.2) 0.7 (3.9) 34.0 (9.1) (1.2) (10.3) (3.6) (0.4) (5,126) (4,000) 1,300 % (32%) (7%) (10%) 8% 1% (8%) (13%) 23% 14% (5%) – 41% (11%) 12% (20%) (14%) (28%) (34%) (13%) (7%) (6%) 2% 1 Inter-segment internal meter leases revenue is eliminated upon consolidation of the two segments. Contact Energy Limited Annual Report 2011 19 Other segment EBITDAF decreased $9.1 million to $36.3 million due to decreasing volumes and carbon costs. Other segment contribution Wholesale gas Retail gas LPG Meters Other Other segment EBITDAF 12 months ended 30 June 2011 $ million 12 months ended 30 June 2010 $ million Variance $ million (3.2) 6.4 7.2 17.0 8.9 36.3 (1.8) 8.9 10.5 18.2 9.6 45.4 (1.4) (2.5) (3.3) (1.2) (0.7) (9.1) % (78%) (28%) (31%) (7%) (7%) (20%) The wholesale gas contribution decreased $1.4 million due to lower sales volumes and decreasing margins. Sales volumes decreased from 9.2 PJ in FY10 to 3.1 PJ in FY11 due to the expiry of a long-term contract. Contractual increases in gas purchase costs and pressure on prices due to over-supply resulted in decreasing margins in FY11. A further 4 PJ of distressed gas sales were made in FY11, an increase of 2.5 PJ on FY10. Distressed gas sales are short-term sales made at a discount to the purchase price of gas in order to monetise gas that Contact could not inject into gas storage, sell to retail or wholesale customers, or use in generation. In the Other segment this sale is reﬂ ected as a sale at nil contribution, with the loss on sale allocated to the Electricity segment. The retail gas contribution decreased $2.5 million with volumes down 0.4 PJ to 2.8 PJ and carbon costs of $1.1 million. As at 30 June 2011, Contact had 60,000 gas customers compared with 62,000 as at 31 December 2010 and 64,000 as at 30 June 2010. The LPG contribution was down $3.3 million or 31 per cent. LPG sales were down 5,126 tonnes in FY11 primarily due to a decrease in service station demand and lower reticulated demand following the Christchurch earthquakes. Despite continued pricing pressure, a reduction in purchase costs saw the net sales price improve by $39 per tonne. This beneﬁ t was largely oﬀ set by the introduction of carbon costs of $30 per tonne or $2 million. Other operating expenses increased $1.8 million due to LPG support of the Christchurch community in the aftermath of the February earthquake. With support from Rinnai, Contact provided mobile hot water shower units, oﬀ ered free 9 kilogram bottle ﬁ lls through the branch and service station channel and ensured security of supply to essential services such as hospitals and rest homes. FY11 expenses also include provisions for anticipated reticulated network repair and re-commissioning costs. 20 Contact Energy Limited Annual Report 2011 Company overview Contact is one of New Zealand’s leading publicly listed companies, with around 79,000 shareholders, a national staﬀ of about 1,050 and the ability to supply electricity and gas products across New Zealand. Retail Contact has approximately: • 447,000 retail electricity customers • 60,000 reticulated natural gas customers • 59,500 LPG customers. Generation • Contact owns and operates 10 power stations across the North and South Islands. • • • • • In FY11, these power stations provided around 25 per cent of New Zealand’s total electricity 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 recently commenced operation of New Zealand’s ﬁ rst underground natural gas storage facility near Stratford and the 200 MW gas-ﬁ red peakers plant located at the Stratford power station. _ Construction recently began near Taupo eventually partially replace the Wairakei geothermal power station opened in 1958. on the 166 MW Te Mihi geothermal power station, which will Contact continues to advance development options across a range of fuel options, including thermal, geothermal, wind and hydro. Otahuhu B – combined-cycle gas turbine, 400 MW Commissioned in 1999, the Otahuhu B power station is a high-eﬃ ciency combined-cycle gas-ﬁ red 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-ﬁ red power station provides reactive power, which supports the stable operation of the electricity transmission system. Te Rapa – cogeneration, 44 MW Commissioned in 1999, the Te Rapa cogeneration plant is eﬃ cient, 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 MW (currently operating at 40 MW) Commissioned in 1989, the Ohaaki geothermal power station is currently producing around 40 MW of electricity. Wairakei – geothermal, 157 MW plus 15 MW binary plant Commissioned in 1958 as the ﬁ rst geothermal plant of its kind anywhere in the world, Wairakei has become an iconic symbol of New Zealand’s electricity generation system. Poihipi Road – geothermal, 55 MW Purchased by Contact in 2000, the Poihipi Road power station draws its steam from the Wairakei steamﬁ eld. Contact Energy Limited Annual Report 2011 21 Te Huka – geothermal, 23 MW Commissioned in 2010, Te Huka draws its steam from the Tauhara steamﬁ eld. Stratford – combined-cycle gas turbine and gas-ﬁ red peaking plant, 577 MW Commissioned in 1998 and upgraded during 2008, the combined-cycle gas turbine is a high-eﬃ ciency, gas-ﬁ red plant. Commissioned in 2011, the peakers plant comprises two 100 MW General Electric LMS100 gas turbines, and will add to New Zealand’s security of supply during periods of peak demand. Clyde – hydro, 432 MW 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 MW Commissioned in 1956, the Roxburgh dam was the ﬁ rst large-scale hydro dam on the Clutha River. Oakey – distillate/gas-ﬁ red peaking station, 282 MW Contact owns 25 per cent of this peaking power station, based in Queensland, Australia, which was commissioned in February 2000. Contact is also the operator of this station. Whirinaki – distillate-ﬁ red peaking station, 155 MW 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. 22 Contact Energy Limited Annual Report 2011 National overview Contact is one of New Zealand’s largest publicly act is one of New Zealand’s largest publicly d companies, with the ability to supply listed companies, with the ability to supply ricity and gas products across the country. electricity and gas products across the country. ave reticulated natural gas customers across We have reticulated natural gas customers across h of the North Island, reticulated LPG customers much of the North Island, reticulated LPG customers ristchurch, Queenstown and Wanaka, and we in Christchurch, Queenstown and Wanaka, and we ly bottled and automotive LPG nationwide. supply bottled and automotive LPG nationwide. Ötähuhu A reactive power Ötähuhu B combined-cycle gas turbine 400 MW Auckland Sales Team Ohaaki geothermal 105 MW (currently operating at 40 MW) Te Rapa cogeneration 44 MW Wairakei geothermal 157 MW and 15 MW binary plant Site of decommissioned New Plymouth power station Poihipi geothermal 55 MW Stratford power station 577 MW – combined-cycle gas turbine 377 MW – peaker gas turbine 200 MW Ahuroa gas storage facility Te Huka geothermal 23 MW Levin Call Centre Lower Hutt/Petone Retail Services Centre Wellington Contact Head Oﬃ ce Queenstown/Wanaka LPG Sales and Distribution Reticulated LPG networks Christchurch LPG Sales and Distribution Reticulated LPG networks Clyde Clutha River hydro 432 MW Roxburgh Clutha River hydro 320 MW Dunedin Call Centre LPG Sales and Distribution Existing power stations Oﬃ ces Invercargill LPG Sales and Distribution Contact Energy Limited Annual Report 2011 23 Hauäuru mä raki wind farm 504 MW (consented) Te Mihi geothermal 166 MW (in construction) New Plymouth site (available for redevelopment) Additional Stratford combined-cycle gas turbine 500 MW (consented) Ahuroa gas storage facility (possible expansion) Ötähuhu C site combined-cycle gas turbine 400 MW (consented) Taheke 8C and Adjoining Blocks Inc. geothermal joint venture (exploration) Tauhara geothermal up to 250 MW (consented) Waitahora wind farm 156 MW (consented) Hawea gates hydro 17 MW (in development) Upper/Lower Clutha River hydro 200–400 MW (in development) Strategic initiatives – projects in development and other potential options 24 Contact Energy Limited Annual Report 2011 Governance Contact is a limited liability company incorporated under the New Zealand Companies Act 1993. Contact’s company number is 660760. The company is listed on, and its shares are quoted on, the main board equity security market (NZSX) operated by NZ Exchange Limited (NZX) and has retail bonds listed on the debt security market (NZDX) operated by NZX. The company’s listing is under the trading code ‘CEN’. Contact’s Constitution is available on the company’s website (www.contactenergy.co.nz) and the New Zealand Companies Oﬃ ce website (www.companies.govt.nz). Compliance with NZX Best Practice Code and other guidelines Contact follows the principles set out in the NZX Corporate Governance Best Practice Code. Contact also follows 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 eﬀ ectively. Contact considers that it satisﬁ es this requirement for a number of reasons, including that: • • • • the members of its Board hold substantial and diverse business, governance 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 guidelines recommend that the chairman be an independent director. Contact’s Chairman, Grant King, is not an independent director. However, for the reasons set out above, Contact is satisﬁ ed that it satisﬁ es the intent of 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. 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 the ﬁ nancial performance of the company, including approval of half year and annual ﬁ nancial statements; appointing and reviewing the performance of the Chief Executive Oﬃ cer; ensuring the appropriate risk management systems are established and risks monitored; and ensuring the integrity of corporate governance and overseeing Contact’s commitment to its values, sustainable development, the environment and the health and safety of employees, contractors, customers and the community. The Board has delegated certain of its powers to committees of the Board, and the day-to-day management of the company to the Chief Executive Oﬃ cer. The ambit of these delegations is documented in the Board committee charters and the company’s Delegated Authorities Policy and by relevant minuted resolutions of the Board. The Board has a statutory obligation to reserve to itself responsibility for certain matters, such as the payment of distributions and the issue of shares. It also reserves responsibility for signiﬁ cant matters, including those described above, such as the approval of business plans and budgets and the incurring of signiﬁ cant 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. Contact Energy Limited Annual Report 2011 25 Operation of the Board The Board meets regularly on a formal scheduled basis and otherwise as required. The Chairman and the Chief Executive Oﬃ cer establish the agenda for each Board meeting. Each month, as a standing item, the Chief Executive Oﬃ cer prepares a report to the Board that includes disclosure of performance against key health and safety benchmarks and a summary of the company’s operations, together with ﬁ nancial and other reports. In addition, the Board receives regular brieﬁ ngs 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 Chief Executive Oﬃ cer and leadership team on the key strategic and operational business issues facing Contact. Board composition The composition of the Board did not change during FY11. On 31 March 2011 David Baldwin ceased to be Managing Director of Contact and was appointed to the Board as a non-executive director to ﬁ ll a casual vacancy. Accordingly, from 1 July 2010 to 30 June 2011 the Board comprised seven members as follows: Grant King Phillip Pryke David Baldwin Bruce Beeren Chairman and Origin Energy associate Deputy Chairman and independent director Managing Director and Origin Energy associate until 31 March 2011, thereafter Origin Energy associate Origin Energy associate Whaimutu Dewes Independent director Karen Moses Sue Sheldon Origin Energy associate Independent director Biographies of the directors are set out on the company’s website. Board committees The Board has four standing committees – the Board Audit Committee (BAC), the Health, Safety and Environment (HSE) 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), Sue Sheldon and Whaimutu Dewes meets to evaluate and approve various related party transactions with Origin Energy. In FY11, these included the Ahuroa gas storage project and workstreams related to Contact’s business systems transformation project, comprising an agreement for the provision and hosting by Origin Energy of hardware and other services to allow Contact to beneﬁ t from Origin Energy’s experience, resources and common deliverables in this area, and the Secondment Agreement appointing Dennis Barnes to the position of Chief Executive Oﬃ cer. The Independent Directors Committee Charter is available on the company’s website. Board Audit Committee During the ﬁ nancial year, the BAC comprised Sue Sheldon (Chair), Bruce Beeren and Whaimutu Dewes. NZSX Listing Rule 3.6.2 requires that the BAC comprises solely of directors, has a minimum of three members, has at least one member with an accounting or ﬁ nancial background and has a majority of independent directors. Sue Sheldon is a Fellow Chartered Accountant and a former President of the Institute of Chartered Accountants of New Zealand. Bruce Beeren is a Fellow of CPA Australia and the Australian Institute of Company Directors. Sue Sheldon and Whaimutu Dewes are both independent directors. 26 Contact Energy Limited Annual Report 2011 The BAC’s purpose is to assist the Board to discharge its responsibility to exercise due care, diligence and skill and make recommendations to the Board in relation to external ﬁ nancial reporting and related risks, audit, treasury, related party transactions and tax. The BAC is responsible for setting the principles and standards with respect to accounting policies and practice, internal controls, internal and external audit, treasury and ﬁ nancing functions and related party transactions. The BAC is also responsible for providing oversight over the integrity and compliance of ﬁ nancial statement preparation, monitoring risk with respect to external ﬁ nancial reporting and monitoring the independence and performance of the external auditors and business assurance. The Chief Executive Oﬃ cer and the Chief Financial Oﬃ cer attend each 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 Business Assurance, Contact’s external auditors and the Chief Financial Oﬃ cer, without any other members of management being present. The BAC Charter is available on the company’s website. Health, Safety and Environment Committee During the ﬁ nancial year, the HSE Committee comprised Karen Moses (Chair), Phillip Pryke and Whaimutu Dewes. The HSE Committee meets at least three times per year, and its role is to assist the Board to fulﬁ l its responsibilities in relation to HSE matters arising out of the activities of Contact and its related companies. These matters relate to those activities that aﬀ ect employees, contractors, communities and the environment in which the company operates. The HSE Committee is responsible, among other matters, for periodically reviewing the company’s HSE Policy, monitoring the company’s compliance with this policy, 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 and the HSE Policy are available on the company’s website. Nominations Committee During FY11 the Nominations Committee comprised Grant King (Chair), Phillip Pryke and Sue Sheldon. The Nominations Committee’s primary purpose is to ensure that the Board comprises 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 appointments. The Nominations Committee’s recommendations are provided to the Board. In FY11 the Nominations Committee considered the assessment of David Baldwin’s, Grant King’s and Sue Sheldon’s performance as directors ahead of their standing for election/re-election at the October 2011 Annual Meeting, and considered Board composition and succession issues. The Nominations Committee Charter is available on the company’s website. Remuneration Committee During the ﬁ nancial year the Remuneration Committee comprised Phillip Pryke (Chair), Grant King and Bruce Beeren. The Remuneration Committee’s primary purpose is to review directors’ fees, the Chief Executive Oﬃ cer’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 four times during the ﬁ nancial year and has met a further time since the end of the ﬁ nancial year to assess and make recommendations to the Board about a variety of remuneration issues that relate to directors, the Chief Executive Oﬃ cer and Contact employees, including the level of directors’ fees, employee short-term incentives and the Long-Term Incentive (LTI) Scheme for senior executives and high-potential and critical 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 available on the company’s website. Contact Energy Limited Annual Report 2011 27 Attendance at meetings In FY11 the Board met 12 times. The table below sets out attendance at meetings for all directors. Director Grant King Phillip Pryke David Baldwin* Bruce Beeren Whaimutu Dewes Karen Moses Sue Sheldon Board attendance (scheduled and special purpose) 12 12 12 12 11 12 12 Committee attendance BAC N/A 1** 3 4 4 2*** 4 HSE N/A 3 3 N/A 3 3 N/A Remuneration Nominations Independent directors 4 4 4 4 N/A N/A N/A 1 1 N/A N/A N/A N/A 1 N/A 1 N/A N/A 1 N/A 1 David Baldwin attended all committee meetings as an observer. Notes: * ** Phillip Pryke attended one BAC meeting as an observer. *** Karen Moses attended two BAC meetings as an observer. 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 at the next Annual Meeting every year. In accordance with this practice, in July 2011: • • Contact undertook a formal assessment of the Board and the Board committees the Board reviewed the performance of Grant King, Sue Sheldon and David Baldwin, being those directors required to retire and stand for re-election, or to stand for election, at the 2011 Annual Meeting. The Board recommended that shareholders vote in favour of the election of David Baldwin and re-election of Grant King and Sue Sheldon. Directors Election and re-election of directors The NZSX Listing Rules and Contact’s Constitution require that directors who have been appointed to ﬁ ll casual vacancies during a ﬁ nancial year must stand for election at the next Annual Meeting. Accordingly, David Baldwin will stand for election at the 2011 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 ﬁ ll casual vacancies) to retire at each Annual Meeting and, if appropriate, stand for re-election. The directors required to resign are those who have been in oﬃ ce longest since their last election. Accordingly, Grant King and Sue Sheldon will retire and stand for re-election at the 2011 Annual Meeting. 28 Contact Energy Limited Annual Report 2011 Residence of directors The NZSX Listing Rules and Contact’s Constitution require at least two directors to be ordinarily resident in New Zealand. Whaimutu Dewes and Sue Sheldon satisfy this requirement. 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 oﬃ cer 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 ﬁ nancial 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 resolved that, at the end of the ﬁ nancial year, Phillip Pryke, Whaimutu Dewes and Sue Sheldon each held (and still hold) no ‘Disqualifying Relationship’ in relation to Contact and are therefore each independent directors. Grant King, Bruce Beeren and Karen Moses are not considered to be independent directors by virtue of being directors of, and hence associated persons of, substantial security holder Origin Energy. David Baldwin is not considered to be an independent director because he is employed by, and hence is an associated person of, substantial security holder Origin Energy. Grant King, Bruce Beeren, Karen Moses and David Baldwin were therefore not independent directors as at 30 June 2011. Contact Energy Limited Annual Report 2011 29 Entries recorded in the interest register The following interest register entries were recorded for the company and its subsidiaries in FY11: Security dealings of directors Contact directors disclosed the following transactions in Contact securities in FY11. Note that all dealings are in ordinary shares unless otherwise speciﬁ ed. Director Grant King Phillip Pryke Date of transaction Consideration per security* Number of securities acquired (disposed of) Nature of relevant interest 23/08/10 06/10/10 25/02/11 05/04/11 27/09/10 31/03/11 27/09/10 31/03/11 28/09/10 28/09/10 31/03/11 31/03/11 23/08/10 06/10/10 25/02/11 05/04/11 23/08/10 23/08/10 01/10/10 01/10/10 25/02/11 25/02/11 05/04/11 05/04/11 27/09/10 31/03/11 27/09/10 31/03/11 28/09/10 28/09/10 31/03/11 31/03/11 09/06/11 $5.78 $5.77 $6.23 $5.82 $5.71 $5.84 $5.71 $5.84 NIL (NCBO) NIL (NCBO) NIL (NCBO) NIL (NCBO) $5.78 $5.77 $6.23 $5.82 NIL (NCBO) NIL (NCBO) NIL (NCBO) NIL (NCBO) NIL (NCBO) NIL (NCBO) NIL (NCBO) NIL (NCBO) $5.71 $5.84 $5.71 $5.84 NIL (NCBO) NIL (NCBO) NIL (NCBO) NIL (NCBO) $5.05 2,890 2,889 2,681 2,864 11 18 Shares acquired by New Zealand Permanent Trustees Limited (NZPT) on trust under the Contact GA King Director Remuneration Share Trust Acquisition of bonus issue shares under the Proﬁ t Distribution Plan (PDP) by Fabco Investments Pty Limited 457 456 Acquisition of bonus issue shares under the PDP by Contact GA King Director Remuneration Share Trust (457) 457 (456) 456 1,445 1,805 1,675 1,790 (1,201) 1,201 (1,195) 1,195 (1,473) 1,473 (1,329) 1,329 1,325 1,116 1,206 942 (1,206) 1,206 (942) 942 6,959 Transfer of bonus issue shares acquired under the PDP from Contact GA King Director Remuneration Share Trust to Fabco Investments Pty Limited Shares acquired by NZPT on trust under the Contact PJ Pryke Director Remuneration Share Trust Transfer of shares from Contact PJ Pryke Director Remuneration Share Trust to Pryke Pty Limited Acquisition of bonus issue shares under the PDP by Pryke Pty Limited Acquisition of bonus issue shares under the PDP by Contact PJ Pryke Director Remuneration Share Trust Transfer of bonus issue shares acquired under the PDP from Contact PJ Pryke Director Remuneration Share Trust to Pryke Pty Limited Acquisition of shares under the Entitlement Oﬀ er by Pryke Pty Limited 09/06/11 $5.05 13/06/11 13/06/11 NIL (NCBO) NIL (NCBO) 5,605 Acquisition of shares under the Entitlement Oﬀ er by Contact PJ Pryke Director Remuneration Share Trust (5,605) 5,605 Transfer of shares acquired under the Entitlement Oﬀ er from Contact PJ Pryke Director Remuneration Share Trust to Pryke Pty Limited * NIL (NCBO) means no change in beneﬁ cial ownership. 30 Contact Energy Limited Annual Report 2011 Director Date of transaction Consideration per security* Number of securities acquired (disposed of) Nature of relevant interest David Baldwin 17/11/10 Provision of services under employment 575,601 options to acquire ordinary shares Options to acquire ordinary shares under Contact’s Employee LTI Scheme Bruce Beeren Whaimutu Dewes 23/08/10 06/10/10 25/02/11 05/04/11 23/08/10 23/08/10 01/10/10 01/10/10 25/02/11 25/02/11 05/04/11 05/04/11 27/09/10 31/03/11 27/09/10 31/03/11 28/09/10 28/09/10 31/03/11 31/03/11 09/06/11 $5.78 $5.77 $6.23 $5.82 NIL (NCBO) NIL (NCBO) NIL (NCBO) NIL (NCBO) NIL (NCBO) NIL (NCBO) NIL (NCBO) NIL (NCBO) $5.71 $5.84 $5.71 $5.84 NIL (NCBO) NIL (NCBO) NIL (NCBO) NIL (NCBO) $5.05 09/06/11 $5.05 13/06/11 13/06/11 NIL (NCBO) NIL (NCBO) 23/08/10 06/10/10 25/02/11 05/04/11 27/09/10 31/03/11 31/03/11 27/09/10 31/03/11 28/09/10 28/09/10 31/03/11 31/03/11 09/06/11 09/06/11 $5.78 $5.77 $6.23 $5.82 $5.71 $5.84 $5.84 $5.71 $5.84 NIL (NCBO) NIL (NCBO) NIL (NCBO) NIL (NCBO) $5.05 $5.05 09/06/11 $5.05 13/06/11 13/06/11 NIL (NCBO) NIL (NCBO) 1,734 1,589 1,474 1,575 (802) 802 (797) 797 (980) 980 (886) 886 192 191 370 309 (370) 370 (309) 309 1,281 1,896 Shares acquired by NZPT on trust under the Contact BG Beeren Director Remuneration Share Trust Transfer of shares from Contact BG Beeren Director Remuneration Share Trust to BG Beeren Acquisition of bonus issue shares under the PDP by BG Beeren Acquisition of bonus issue shares under the PDP by Contact BG Beeren Director Remuneration Share Trust Transfer of bonus issue shares acquired under the PDP from Contact BG Beeren Director Remuneration Share Trust to BG Beeren Acquisition of shares under the Entitlement Oﬀ er by BG Beeren Acquisition of shares under the Entitlement Oﬀ er by Contact BG Beeren Director Remuneration Share Trust (1,896) 1,896 Transfer of shares acquired under the Entitlement Oﬀ er from Contact BG Beeren Director Remuneration Share Trust to BG Beeren 1,642 1,589 1,473 1,575 261 211 22 54 99 (54) 54 (99) 99 1221 182 756 Shares acquired by NZPT on trust under the Contact WK Dewes Director Remuneration Share Trust Acquisition of bonus issue shares under the PDP by: 1 WK Dewes, and 2 WK Dewes, JA Baillie and GW David Acquisition of bonus issue shares under the PDP by Contact WK Dewes Director Remuneration Share Trust Transfer of bonus issue shares acquired under the PDP from Contact WK Dewes Director Remuneration Share Trust to WK Dewes, JA Baillie and GW David Acquisition of shares under the Entitlement Oﬀ er by: 1 WK Dewes, and 2 WK Dewes, JA Baillie and GW David Acquisition of shares under the Entitlement Oﬀ er by Contact WK Dewes Director Remuneration Share Trust (756) 756 Transfer of shares acquired under the Entitlement Oﬀ er from Contact WK Dewes Director Remuneration Share Trust to WK Dewes, JA Baillie and GW David * NIL (NCBO) means no change in beneﬁ cial ownership. Contact Energy Limited Annual Report 2011 31 Director Karen Moses Sue Sheldon Date of transaction Consideration per security* Number of securities acquired (disposed of) Nature of relevant interest 23/08/10 06/10/10 25/02/11 05/04/11 27/09/10 31/03/11 27/09/10 31/03/11 28/09/10 28/09/10 31/03/11 31/03/11 23/08/10 06/10/10 25/02/11 05/04/11 27/09/10 27/09/10 31/03/11 31/03/11 27/09/10 31/03/11 28/09/10 28/09/10 31/03/11 31/03/11 09/06/11 09/06/11 $5.78 $5.77 $6.23 $5.82 $5.71 $5.84 $5.71 $5.84 NIL (NCBO) NIL (NCBO) NIL (NCBO) NIL (NCBO) $5.78 $5.77 $6.23 $5.82 $5.71 $5.71 $5.84 $5.84 $5.71 $5.84 NIL (NCBO) NIL (NCBO) NIL (NCBO) NIL (NCBO) $5.05 $5.05 09/06/11 $5.05 13/06/11 13/06/11 NIL (NCBO) NIL (NCBO) Shares acquired by NZPT on trust under the Contact KA Moses Director Remuneration Share Trust 1,734 1,589 1,474 1,575 6 9 Acquisition of bonus issue shares under the PDP by KA Moses 236 239 Acquisition of bonus issue shares under the PDP by Contact KA Moses Director Remuneration Share Trust Transfer of bonus issue shares acquired under the PDP from Contact KA Moses Director Remuneration Share Trust to KA Moses Shares acquired by NZPT on trust under the Contact SJ Sheldon Director Remuneration Share Trust Acquisition of bonus issue shares under the PDP by: 1 SJ Sheldon, PJ Sheldon and MJ Walker, and 2 Private Nominees Limited (236) 236 (239) 239 1,733 1,589 1,473 1,575 31 142 61 112 177 194 Acquisition of bonus issue shares under the PDP by Contact SJ Sheldon Director Remuneration Share Trust (177) 177 (194) 194 551 642 Transfer of bonus issue shares acquired under the PDP from Contact SJ Sheldon Director Remuneration Share Trust to SJ Sheldon, PJ Sheldon and MJ Walker Acquisition of shares under the Entitlement Oﬀ er by: 1 SJ Sheldon, PJ Sheldon and MJ Walker, and 2 Private Nominees Limited 1,316 Acquisition of shares under the Entitlement Oﬀ er by Contact SJ Sheldon Director Remuneration Share Trust (1,316) 1,316 Transfer of shares acquired under the Entitlement Oﬀ er from Contact SJ Sheldon Director Remuneration Share Trust to SJ Sheldon, MJ Sheldon and MJ Walker John Milne** 23/08/10 $5.78 867 + 866 23/08/10 23/08/10 26/08/10 26/08/10 27/09/10 NIL (NCBO) NIL (NCBO) NIL (NCBO) NIL (NCBO) (400 + 401) 400 + 401 (15,822 + 15,820) 15,822 + 15,820 $5.71 1,480 + 992 Shares acquired by NZPT on trust under the Contact JHG Milne Director Remuneration Share Trust Transfer of shares from Contact JHG Milne Director Remuneration Share Trust to John Milne Trust and Maureen Milne Trust Acquisition of bonus issue shares under the PDP by John Milne Trust and Maureen Milne Trust * ** NIL (NCBO) means no change in beneﬁ cial ownership. John Milne retired from his directorship with eﬀ ect from 30 June 2010. 32 Contact Energy Limited Annual Report 2011 Securities of the company in which each director has a relevant interest as at 30 June 2011 Director Grant King Phillip Pryke David Baldwin Bruce Beeren Whaimutu Dewes Karen Moses Sue Sheldon Number of ordinary shares1 Number of bonds Number of restricted ordinary shares2 Number of options 28,438 125,632 Nil 31,762 8,949 14,947 14,345 Nil Nil Nil Nil Nil Nil 10,000 N/A N/A 133,070 N/A N/A N/A N/A N/A N/A 1,354,757 N/A N/A N/A N/A 1 2 Including shares held under the Directors’ Share Scheme. David Baldwin participated in the LTI Scheme during his secondment to Contact. David Baldwin retains these securities subject to exercise hurdles and vesting requirements. Directors’ interests in transactions General disclosures As at 30 June 2011 the following directors had made the following general disclosures in the interest register of the company. Notices given or adjusted in FY11 are marked with an asterisk (*). Each such director will be regarded as interested in all transactions between Contact and the disclosed entity. Grant King Origin Energy Limited and Group companies Australian Petroleum Production and Exploration Association Phillip Pryke Co-Investor Capital Partners Pty Limited Digital Performance Group Limited Frog Hollow Limited GMT Bond Issuer Limited GMT Wholesale Bond Issuer Limited* (appointed October 2010) Goodman (NZ) Limited Goodman Property Aggregated Limited Pauatahanui Projects Limited Pryke Pty Limited Tru-Test Corporation Limited Tru-Test Pty Limited David Baldwin Origin Energy Limited Gas Industry Company Limited* (resigned 20 April 2011) Bruce Beeren Origin Energy Limited and Group companies Coal & Allied Industries Limited Equipsuper Pty Limited ConnectEast Group Managing Director/Shareholder/Employee Councillor Director/Shareholder Chairman Director/Shareholder Director/Shareholder Director Director Director Director/Shareholder Director/Shareholder Director Director Employee/Shareholder Director Director/Shareholder and former Employee/Executive Director Director Director Director Contact Energy Limited Annual Report 2011 33 Whaimutu Dewes Ngati Porou Forests Limited Ngati Porou Whanui Forests Limited Ngati Porou Fisheries Limited Ngati Porou Seafoods Limited Real Fresh Limited Iwi Rakau Limited Whainiho Developments Limited Advisory Board to Kalyx Rugby World Cup Authority* (appointed December 2010) Advisory Group on Green Growth* (appointed February 2011) Housing New Zealand Board* (appointed June 2011) Director Chairman/Shareholder Chairman Director Director Director Managing Director/Shareholder Member Member Member Member Karen Moses Origin Energy Limited and Group companies Australian Energy Market Operator Limited CSIRO, Energy and Transport Sector Advisory Council UNSW, Australian School of Business Advisory Council Energy and Water Ombudsman (Victoria) Limited* (resigned November 2010) Director/Employee/Shareholder Director Committee Member Director Director Sue Sheldon Paymark Limited FibreTech New Zealand Limited Freightways Limited Reserve Bank of New Zealand Sue Sheldon Advisory Limited Smiths City Group Limited and subsidiaries* (ceased Directorship 31 December 2010) Telecom Corporation of New Zealand Limited Wool Industry Network Limited* (ceased directorship September 2010) Wool Grower Holdings Limited* (ceased directorship September 2010) Director Chairman Chairman Director Director Director Director Chairman Director Speciﬁ c disclosures There were no speciﬁ c disclosures made during the year of any interests in transactions entered into by Contact or any of its subsidiaries. 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. Directors’ and employees’ indemnity and insurance Contact has agreed to indemnify Contact’s employees and directors, including directors of subsidiary and associated companies, against potential liabilities or costs incurred in any proceeding, excluding actions for gross negligence, criminal liability, breach of ﬁ duciary duty or breach of directors’ duties. Contact has paid premiums and taken out comprehensive insurance cover, including insurance policies that indemnify employees and directors, against various potential legal liabilities. In March 2011 Contact’s Board authorised a three-month-extension and in June 2011 the renewal of the Directors and Oﬃ cers and Statutory Liability Insurance covers for 12 months. These policies were certiﬁ ed, in terms of section 162 of the Companies Act 1993, that this cover is fair to the company. 34 Contact Energy Limited Annual Report 2011 Corporate policies Conﬂ icts of interest In accordance with Contact’s Conﬂ ict of Interests Policy and Guidelines, where any Contact director has a conﬂ ict of interest or is otherwise interested in any transaction, that director is generally required to disclose his or her conﬂ ict of interest to the company, and thereafter will normally not be able to participate in the discussion, or vote in relation to the relevant matter. The company maintains a register of interests. Ethics Contact’s Code of Conduct sets out the ethical and behavioural standards expected of the company’s directors, oﬃ cers, employees and contractors. Contact has established internal procedures to monitor compliance with the Code of Conduct. Every six months, a report is provided to the BAC highlighting any matters raised by staﬀ in relation to the Code of Conduct. In FY11 there were no material issues reported in relation to the Code of Conduct. Contact’s Code of Conduct is available on the company’s website. Health, safety and environment Improving HSE performance is a top priority at Contact and measuring individuals and business units against key performance indicators (KPIs) is an integral part of assessing management’s achievement of annual goals. Contact’s HSE Policy is available on the company’s website. Whistleblowing Policy Contact’s Whistleblowing Policy 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. Deloitte operates an independent ‘open line’ service on behalf of Contact for employees, contractors and suppliers to use to report serious concerns. The Whistleblowing Policy is consistent with and facilitates the Protected Disclosures Act 2000. Contact’s Whistleblowing Policy is available on the company’s website. Securities Trading Policy Contact’s Securities Trading Policy applies to all directors, oﬃ cers, 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) • directors and speciﬁ ed employees must adhere to additional obligations prior to any trade of Contact securities. Contact’s Securities Trading Policy is available on the company’s website. Financial reporting Contact undertakes twice-yearly ﬁ nancial reporting and also provides a suite of operational data on a monthly basis through the NZX. Contact’s Annual and Half Year Reports are available on Contact’s website. The annual ﬁ nancial statements are 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 is 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 Chief Executive Oﬃ cer and Chief Financial Oﬃ cer have provided the Board with written conﬁ rmation that Contact’s ﬁ nancial statements for FY11 have been prepared in accordance with New Zealand Generally Accepted Contact Energy Limited Annual Report 2011 35 Accounting Practice and that they comply with New Zealand Equivalents to International Financial Reporting Standards and other appropriate ﬁ nancial reporting standards, as appropriate for proﬁ t-oriented entities. Auditor independence The BAC is responsible for considering and making recommendations to the Board regarding any issues relating to the appointment or termination of the external and internal auditors. The External Audit Independence Policy prohibits the external auditor from undertaking any work that compromises, or is seen to compromise, independence and objectivity. The BAC requires the external auditor to conﬁ rm on a six-monthly basis that it has: • • remained independent of the Group at all times complied with the provisions of all applicable laws and relevant professional guidance in respect of independence, integrity and objectivity • adopted a ‘best practice’ approach in relation to matters of ﬁ nancial independence and business relationships. The BAC is responsible for pre-approving all other assurance and other services provided by the external auditor. The Chief Financial Oﬃ cer 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 the provision of timely and accurate information and full access to company records. Auditor fees The amount payable by Contact and its subsidiaries to KPMG as audit fees in respect of FY11 was $598,000. KPMG also provided assurance services in relation to the prospectus for the Entitlement Oﬀ er ($46,914) and IT security assurance services in relation to Contact’s ET project ($36,174). Risk management Contact has an Enterprise Risk Management System, which is aligned to the International Standard ISO 31000 Risk Management – Principles and Guidelines. The implementation of this system demonstrates that Contact is committed to the eﬀ ective management of risk, which is central to the continued growth and proﬁ tability of the company. A Risk Management Policy deﬁ nes the framework for identifying, assessing and managing risks that could have a material impact on the objectives of the company. Contact’s Policy outlines the accountabilities of individuals for the governance of the Risk Management System, the identiﬁ cation, assessment and management of risks, and ensuring there is eﬀ ective oversight of risks. The Board and its committees are accountable for monitoring the company’s key risks. Regular reporting on risks and their mitigation is provided to the Board, the Board and management committees, and business units. The Enterprise Risk Management team and its champions in business units ensure risk management practices are applied consistently across the business and are integrated within core processes, including strategic planning, budgeting and forecasting, project delivery, contract management and capital expenditure. Contact’s Risk Management Policy is available on the company’s website. Assurance Contact has an independent in-house business assurance function that provides objective assurance of the eﬀ ectiveness of the internal control framework. The Business Assurance team assists Contact to accomplish its objectives by bringing a disciplined approach to evaluating and improving the eﬀ ectiveness of risk management, internal controls and governance processes. The Business Assurance team adopts a risk-based assurance approach driven from the company’s Risk Management System. 36 Contact Energy Limited Annual Report 2011 The Business Assurance team also assists external audit by reporting ﬁ ndings from the internal assurance programme so the external auditors may independently assess the degree of reliance it is able to place on the control environment when providing their opinion on the ﬁ nancial statements. On a day-to-day basis the Business Assurance team reports to the Chief Risk Oﬃ cer. The Business Assurance team has the autonomy to report signiﬁ cant issues directly to the Chief Executive Oﬃ cer and the BAC or, if considered necessary, the Chairman of the Board. The BAC oversees the assurance programme and provides the Business Assurance team with the mandate to perform the agreed assurance programme. The Business Assurance team 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. 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 underlying earnings after tax. Proﬁ t Distribution Plan Contact implemented a PDP in February 2009. Under the PDP, instead of distributing proﬁ ts 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 a choice between retaining bonus shares or receiving cash, or a combination of both. More detail about the PDP, including a full description of its terms and conditions, is available on Contact’s website. 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 11 August 2011 is available on Contact’s website. This summary will remain on Contact’s website for at least 12 months following the 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 FY11. Credit rating As at 11 August 2011, Standard & Poor’s long-term credit rating for Contact was BBB Stable. Fitch’s long-term credit rating for Contact was BBB Stable. As at 11 August 2011, the $550 million unsubordinated, unsecured ﬁ xed rate bonds issued by Contact in March 2009 were rated BBB by Standard & Poor’s. Donations In FY11 Contact made donations amounting to $26,445. No subsidiaries made any donations during FY11. In addition, Contact has pledged $4 million in response to the Christchurch earthquakes. This includes donations to the Red Cross Relief Fund, free LPG reﬁ lls and hardship support through fee waivers and grants for electricity and gas customers. 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 in FY11. Contact Energy Limited Annual Report 2011 37 Remuneration report Directors’ remuneration Directors’ fees The current total directors’ fee pool approved by shareholders in 2008 is $1,500,000 per annum. The Board passed resolutions and signed accompanying certiﬁ cates to conﬁ rm the distributions for FY11 among directors of $1,008,307 as detailed below. Remuneration details of directors Details of the total remuneration and the value of other beneﬁ ts received by each Contact director for FY11 are as follows: Director Position Board fees Committee fees Special fees Total remuneration Grant King Phillip Pryke David Baldwin Bruce Beeren Whaimutu Dewes Karen Moses Sue Sheldon Total Chairman Deputy Chairman Director Director Director Director Director Cash $133,333 $83,333 $27,5001 $73,333 $73,333 $73,333 $73,333 Shares $66,667 $41,667 – $36,667 $36,667 $36,667 $36,667 Cash – $35,000 – $37,000 $37,000 $20,000 $54,307 Cash – – – – – – $32,5002 $200,000 $160,000 $27,500 $147,000 $147,000 $130,000 $196,807 $537,498 $255,0023 $183,307 $32,500 $1,008,307 1. As Managing Director (up to and including 31 March 2011), David Baldwin did not receive any fees in his capacity as a director nor was he a participant in the Directors’ Share Scheme. Fees received have been in David Baldwin’s capacity as director subsequent to 31 March 2011. 2. Sue Sheldon received special fees in relation to due diligence for the review of the Contact LTI Scheme and the Entitlement Oﬀ er. 3. Owing to trading period restrictions under Contact’s Securities Trading Policy, purchases of shares valued at $63,853.76 of this total amount occurred on 23 August 2011. Directors’ fees exclude GST, where appropriate. In addition, Board members are entitled to be reimbursed for costs directly associated with carrying out their duties, including travel costs. Directors’ share scheme Contact operates a directors’ 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 held by a trustee for a period of three years or until a director ceases to hold oﬃ ce. Directors are not otherwise entitled to any payment in connection with their retirement or cessation of oﬃ ce. The directors participating in the Directors’ Share Scheme during the ﬁ nancial year were Grant King, Phillip Pryke, Whaimutu Dewes, Bruce Beeren, Karen Moses and Sue Sheldon. 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 speciﬁ ed 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 oﬃ ce. 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. 38 Contact Energy Limited Annual Report 2011 In FY11 Contact provided ﬁ nancial assistance in connection with the ongoing operation of the Scheme. A disclosure document relating to the ﬁ nancial assistance to be provided in the next 12 months was sent to shareholders in September 2011 and is available on the company’s website. The table below details the shares of each of Contact’s directors that were transferred out of the Directors’ Share Scheme trust in FY11. Director Phillip Pryke Bruce Beeren Date of acquisition Date of transfer Number of shares Original acquisition price 29 August 2007 5 October 2007 25 February 2008 4 April 2008 29 August 2007 5 October 2007 25 February 2008 4 April 2008 23 August 2010 1 October 2010 25 February 2011 5 April 2011 23 August 2010 1 October 2010 25 February 2011 5 April 2011 1,201 1,195 1,473 1,329 802 797 980 886 $9.40 $9.42 $7.69 $8.47 $9.40 $9.42 $7.69 $8.47 In addition, on 23 August 2010 and 26 August 2010, 801 and 31,642 shares respectively held in the Directors’ Share Scheme on behalf of John Milne were transferred to Mr Milne’s family trusts following his retirement from the Contact Board on 30 June 2010. Managing Director and Chief Executive Oﬃ cer remuneration Employment arrangements Dennis Barnes was appointed as Chief Executive Oﬃ cer of Contact with eﬀ ect on 1 April 2011 and is seconded to the role by his employer, Origin Energy. David Baldwin, Managing Director of Contact until 31 March 2011, was seconded to the role by his employer, Origin Energy. David Baldwin did not receive any director fees while he was in the role of Managing Director. During the term of their respective secondments, remuneration paid by Contact to Dennis Barnes for the performance of his role as Chief Executive Oﬃ cer, and to David Baldwin for the performance of his role as Managing Director, is processed by Contact reimbursing Origin Energy for the cost of this remuneration. An exception exists for performance share rights and restricted shares, and share options awarded under Contact’s LTI Scheme, which are provided directly by Contact. Remuneration Remuneration paid by Contact to the Managing Director and now the Chief Executive Oﬃ cer reﬂ ects the breadth and complexity of the role; references market remuneration data benchmarks; is linked to the achievement of performance goals; and aligns with the creation of sustainable shareholder value in the long-term. The remuneration packages paid to both David Baldwin and Dennis Barnes include a ﬁ xed remuneration component comprising cash salary and other employment beneﬁ ts, and at-risk/variable remuneration comprising short-term incentives (cash) and long-term incentives (share options, performance share rights or restricted shares). Approximately two-thirds of both David Baldwin’s and Dennis Barnes’s potential annual remuneration from Contact was/is at-risk/variable remuneration and one-third was/is paid as ﬁ xed remuneration. The amount of short-term incentive paid and the level of long-term incentive allocated to both David Baldwin and Dennis Barnes was/is dependent on the degree to which company ﬁ nancial; HSE; and other strategic goals are met, which is determined after the end of the relevant ﬁ nancial year and paid in the subsequent ﬁ nancial year. Dennis Barnes’s annual remuneration to 30 June 2011 also reﬂ ected his appointment date of 1 April 2011, towards the end of the ﬁ nancial year. Contact Energy Limited Annual Report 2011 39 The following tables detail the nature and amount of the remuneration paid to both David Baldwin in relation to his role as Managing Director and Dennis Barnes in relation to his role as Chief Executive Oﬃ cer during FY11. Cash remuneration paid Fixed cash remuneration $ Variable cash remuneration1 $ Total cash remuneration paid $ $718,412 $838,856 $340,229 $364,000 $1,058,641 $1,202,856 David Baldwin Managing Director (1 July 2010 to 31 March 2011) Year ended 30 June 2011 Year ended 30 June 2010 Dennis Barnes Chief Executive Oﬃ cer (1 April 2011 to 30 June 2011) Year ended 30 June 2011 $196,250 $150,000 $346,250 1 Short-term incentive remuneration is determined following the end of the ﬁ nancial year and is based on the achievement of performance goals and criteria set by the Board. Equity rights issued (options, performance share rights and restricted shares)2 Number of options issued during year Number of performance share rights issued during year Number of restricted shares issued during year Value of equity rights issued and amortising during year3 $ Value of equity rights issued in past years and amortising during year3 $ Total equity rights vested during year $ David Baldwin1 Managing Director (1 July 2010 to 31 March 2011) Year ended 30 June 2011 Year ended 30 June 2010 Dennis Barnes Chief Executive Oﬃ cer (1 April 2011 to 30 June 2011) 470,946 253,609 104,655 – $174,250 $405,962 – 44,728 $139,037 $379,234 Year ended 30 June 2011 106,082 23,574 – $39,250 – – – – 1 2 3 David Baldwin has participated in Contact’s LTI Scheme since its inception in 2006. Following the completion of his secondment to the role of Managing Director on 31 March 2011, David Baldwin will not be issued with any further securities under the Contact Energy LTI Scheme but will retain existing securities subject to exercise hurdles and vesting requirements (this is permitted under the Restricted Share Plan Rules and Share Option Scheme Rules). Contact relied 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 ﬁ nancial assistance under the LTI Scheme, which was amended on 22 August 2011). The full version of the waiver can be found on the company’s website. Although share options, performance share rights and restricted shares are granted with eﬀ ect from October each year under Contact’s LTI Scheme, they pertain to the at-risk component of the prior ﬁ nancial year’s remuneration. Dennis Barnes was issued with share options and performance share rights upon his appointment to the role of Chief Executive Oﬃ cer. The allocation of long-term incentives is determined at the end of each ﬁ nancial year. Each allocation has a total performance period of ﬁ ve years from the grant date with exercise hurdles tested on the third, fourth and ﬁ fth anniversaries of the grant date. Whether any options and performance share rights vest and become exercisable, and any restricted shares vest and transfer as unrestricted shares, by or to David Baldwin or Dennis Barnes, is subject to the achievement of speciﬁ ed exercise hurdles as described on page 46. To comply with ﬁ nancial reporting requirements, the fair value of the options, performance share rights and restricted shares is calculated at the grant date using a combination of Monte-Carlo simulation and binomial option pricing model, and subsequently amortised over a period of three years (the period from grant date to the ﬁ rst test date). The value of long-term incentive disclosed above is the portion of the fair value of options, performance share rights and restricted shares allocated to the relevant reporting period. None of the options, performance share rights or restricted shares allocated to David Baldwin and Dennis Barnes vested in the 2010 and 2011 ﬁ nancial years. 40 Contact Energy Limited Annual Report 2011 Movements during FY11 in the number of options over ordinary shares, performance share rights and restricted shares held in Contact are set out in the following tables. Restricted shares Held as at 1 July 2010 Granted as compensation Vested during year Held at 30 June 2011 David Baldwin Managing Director (1 July 2010 to 31 March 2011) Dennis Barnes Chief Executive Oﬃ cer (1 April 2011 to 30 June 2011) Options David Baldwin Managing Director (1 July 2010 to 31 March 2011) Dennis Barnes Chief Executive Oﬃ cer (1 April 2011 to 30 June 2011) Performance share rights David Baldwin Managing Director (1 July 2010 to 31 March 2011) Dennis Barnes Chief Executive Oﬃ cer (1 April 2011 to 30 June 2011) 133,070 – – – – – 133,070 – Held as at 1 July 2010 Granted as compensation Exercised Held at 30 June 2011 Vested during year Vested and exercisable at 30 June 2011 779,156 470,946 – 106,082 – – 1,250,102 106,082 – – – – Held as at 1 July 2010 Granted as compensation Exercised Held at 30 June 2011 Vested during year Vested and exercisable at 30 June 2011 – – 104,655 23,574 – – 104,655 23,574 – – – – Employee remuneration There are two components to employee remuneration – ﬁ xed and at-risk/variable remuneration. The determination of ﬁ xed remuneration is based on responsibilities, individual performance and experience, and available market remuneration data. At-risk/variable remuneration comprises short-term incentives and, for senior executives, employees with high potential to advance to key leadership roles, and senior employees who hold critical skills essential for Contact’s success, long-term incentives. Short-Term Incentive (STI) Scheme Contact’s variable remuneration recognises and rewards high-performing individuals whose contributions support business goals and objectives, whilst meeting the goals set for the individual. Contact’s short-term incentives (STI) comprise cash payments based on performance measured against KPI. In FY11 diﬀ erent levels of incentives were determined reﬂ ecting the nature of roles in the company. KPI generally comprise company, team and individual Contact Energy Limited Annual Report 2011 41 targets. These targets are designed to create goals that will support an achievement and performance-oriented culture. The STI programme is designed to diﬀ erentiate and reward exceptional, outstanding and good performance. The Board reserves the right to adjust STI awards if HSE targets are not met. Employee Long-Term Incentive (LTI) Scheme Contact oﬀ ers a combination of share options and performance share rights under the current Contact LTI Scheme to ensure incentives align participating employees’ performance with shareholders’ interests, in both favourable and unfavourable share market conditions. Following a review of Contact’s LTI Scheme in 2010, no further restricted shares have been issued since the 1 October 2009 grant date. Performance share rights (issued under the Share Option Scheme) replaced restricted shares from October 2010. The Restricted Share Plan is now grand-parented but restricted shares issued prior to October 2010 are still held by participants and remain subject to exercise hurdles and vesting criteria. Contact’s LTI Scheme for participating employees now consists of a Share Option Scheme under which both share options and performance share rights are issued. Details of the Scheme are set out below (along with historical details of restricted shares that remain on issue under the now grand-parented Restricted Share Plan). Long-term incentives are awarded to reward and retain key talent, align participants’ interests with that of Contact’s shareholders, and encourage and reward longer-term decision-making. Under the Scheme, for FY11, the Board allocated long-term incentive awards that are, by value, 50 per cent share options and 50 per cent performance share rights. Under the Scheme, the share options and performance share rights will only become exercisable to the extent that the relevant exercise hurdles are satisﬁ ed. The exercise hurdles for the share options and performance share rights in relation to FY11 are set out on page 46. The number of share options and performance share rights awarded is 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 performance share rights. At 30 June 2011 there were 79 participants in Contact’s LTI Scheme. In June 2011, Contact’s Board approved the following adjustments to unvested securities under Contact’s LTI Scheme to compensate participants for any loss in value as a result of the Entitlement Oﬀ er: • • An adjustment to the exercise price for options issued under the Share Option Scheme in accordance with the formula set out in NZX Listing Rule 8.1.7(b). The issue of further performance share rights in respect of performance share rights already issued under the Share Option Scheme and restricted shares issued under the Restricted Share Plan. Any additional securities issued remain subject to normal exercise hurdles and vesting periods. These actions are permitted under the Restricted Share Plan Rules and the Share Option Scheme Rules. A total of 18,002 additional performance share rights were issued in August 2011, following NZX approval under Listing Rule 8.1.4. The adjustments made to the exercise price for options are detailed in the footnote of the table on page 42. Share Option Scheme Under the Share Option Scheme, the Board issues share options to participants to acquire ordinary shares in Contact at the market price determined at the eﬀ ective grant date. For share options granted in FY11, the market price was the weighted average market price of Contact’s ordinary shares traded on the NZSX in the ﬁ ve business days prior to the eﬀ ective grant date. Under the Share Option Scheme, the Board also issues performance share rights to participants to acquire ordinary shares in Contact at zero cost. As noted above, the options are exercisable subject to exercise hurdles as determined by the Board. The exercise hurdles for share options and performance share rights issued in FY11 are described on page 46. There is a vesting period of approximately three years from the eﬀ ective grant date before share options may be exercised. Following the end of that period, the exercise hurdles are measured on three annual test dates. There is a two-year, two- month exercise period following the ﬁ rst test date during which share options and performance share rights may be exercised, again to the extent that the exercise hurdles are met. 42 Contact Energy Limited Annual Report 2011 The share options and performance share rights may also be exercised if, between the eﬀ ective grant date and the exercise date, a change of control of Contact occurs. In addition, the Board may, at its discretion, permit share options and performance share rights 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. The share options and performance share rights will lapse: • • • • if the exercise hurdles are not met by the ﬁ nal measurement date if the share options or performance share rights are not exercised by the lapse date on the date on which the participant ceases to be employed by the company or, in certain circumstances, the ultimate parent 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 and performance share rights). In the event of redundancy, the Share Option Scheme will continue, except that the number of share options and performance share rights will be recalculated on a proportionate basis. The share options and performance share rights 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 Scheme with eﬀ ective grant dates of 1 July 2006 and 20 November 2006. NZX Regulation also made 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 Scheme. The full version of the waiver and NZX decision can be found on the company’s website. The number of options currently on issue and their exercise status as at 30 June 2011 are set out in the table below. Number of options issued Eﬀ ective grant date Exercise price per option First exercise date Number lapsed Final lapse date Vested Number exercisable 365,322 1 July 2006 13,413 15 January 2007 490,326 1 October 2007 22,706 1 February 2008 881,769 1 October 2008 1,701,718 1 October 2009 3,982,607 1 October 2010 $7.35 $8.28 $9.15 $7.63 $8.60 $5.75 $5.71 1 October 2009 81,2451 30 November 2011 1 October 2009 13,4132 30 November 2011 1 October 2010 227,7793 30 November 2012 1 October 2010 7,6984 30 November 2012 1 October 2011 326,0315 30 November 2013 1 October 2012 229,4396 30 November 2014 1 October 2013 56,7577 30 November 2015 No No No No No No No Nil Nil Nil Nil Nil Nil Nil 1 2 3 4 5 Owing to the cessation of employment of participants, options from this tranche lapsed pursuant to the Share Option Scheme 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). Of the 13,413 options granted with an eﬀ ective date of 15 January 2007, 7,927 vested during FY10 and became exercisable, however no options were exercised. All 13,413 options lapsed eﬀ ective from 6 July 2010 due to the cessation of employment of the participant eﬀ ective 30 June 2010. Owing to the cessation of employment of participants, options from this tranche lapsed pursuant to the Share Option Scheme 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), 31 July 2009 (50,455 options), 6 July 2010 (44,848 options) and 13 August 2010 (6,636 options). Owing to the cessation of employment of participants, 7,698 options from this tranche lapsed pursuant to the Share Option Scheme Rules on 24 December 2008. Owing to the cessation of employment of participants, options from this tranche lapsed pursuant to the Share Option Scheme Rules on the following dates: 24 December 2008 (19,871 options), 31 December 2008 (57,065 options), 31 July 2009 (133,914 options), 6 July 2010 (59,348 options), 13 August 2010 (10,181 options) and 5 November 2010 (45,652 options). Contact Energy Limited Annual Report 2011 43 6 7 Owing to the cessation of employment of participants, options from this tranche lapsed pursuant to the Share Option Scheme Rules on the following dates: 9 April 2010 (8,788 options), 25 June 2010 (36,727 options), 6 July 2010 (80,413 options), 13 August 2010 (12,071 options), 17 September 2010 (4,508 options), 5 November 2010 (62,630 options), 31 December 2010 (18,437 options) and 31 May 2011 (5,865 options). A further 3,539 options lapsed on 1 July 2011 due to the cessation of employment of participants. Owing to the cessation of employment of a participant, 56,757 options from this tranche lapsed pursuant to the Share Option Scheme Rules on 24 February 2011. A further 23,157 and 32,789 options lapsed on 1 July 2011 and 12 August 2011 due to the cessation of employment of participants. As a result of the one-for-nine Entitlement Oﬀ er and in accordance with both the Share Option Scheme Rules and the formula set out in NZX Listing Rule 8.1.7(b), the following adjustments have been made to the exercise price for options issued under the Share Option Scheme: Eﬀ ective grant date 1 July 2006 1 October 2007 1 February 2008 1 October 2008 1 October 2009 1 October 2010 Old exercise price of options New exercise price of options $7.35 $7.27 $9.15 $9.07 $7.63 $7.55 $8.60 $8.53 $5.75 $5.67 $5.71 $5.63 The number of performance share rights issued and their exercise status as at 30 June 2011 are set out in the table below. Number of performance share rights issued Eﬀ ective grant date First exercise date Number lapsed Final lapse date Vested Number exercisable 885,056 1 October 2010 1 October 2013 12,6131 30 November 2015 No Nil 1 A further 5,146 and 7,287 performance share rights lapsed on 1 July 2011 and 12 August 2011 due to the cessation of employment of participants. A total of 18,002 additional performance share rights will be issued in August 2011 as a result of the Entitlement Oﬀ er to compensate participants for any loss in value to their LTI. This is permitted under the Restricted Share Plan Rules and the Share Option Scheme Rules. Restricted Share Plan Under the now grand-parented Restricted Share Plan, the Board issued restricted shares to the participants at the market price determined at the eﬀ ective grant date. Although participants have beneﬁ cial 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 the trustee will not exercise any voting rights attaching to the restricted shares and has forgone the right to distributions. Legal title to the restricted shares cannot be transferred to a 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 in (including any security, or legal or equitable interest), a restricted share until it becomes unrestricted. No restricted shares were issued during FY11. If the exercise hurdles are met, the restricted shares will be released from the trust to a participant following the relevant test date. There is a vesting period of approximately three years from the eﬀ ective 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. 44 Contact Energy Limited Annual Report 2011 For restricted shares to which a participant becomes entitled, 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 participant must transfer to the trustee their rights to any restricted shares that have not been released to the participant by the ﬁ nal 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 participant 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 exercise hurdles are not met by the ﬁ nal test date, on the date on which the participant ceases to be employed by the company, or in certain circumstances, the ultimate parent 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 or used for security. 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 eﬀ ective 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 ﬁ nal transfer date, but are instead purchased by the trustee then reallocated to the 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 30 June 2011 are set out in the table below. Number of restricted shares issued Number reallocated from unallocated pool (see following) Eﬀ ective grant date Allocation price per date First test date Final test date Number transferred to unallocated pool (see following) Number vesting during the year 70,890 3,581 2,504 83,242 3,091 104,712 241,940 Nil Nil Nil 1 July 2006 $7.35 1 October 2009 1 October 2011 15,765 20 November 2006 $7.55 1 October 2009 1 October 2011 15 January 2007 $8.28 1 October 2009 1 October 2011 2,737 1 October 2007 $9.15 1 October 2010 1 October 2012 1,156 1 February 2008 $7.63 1 October 2010 1 October 2012 19,247 1 October 2008 $8.60 1 October 2011 1 October 2013 3,581 1,024 39,941 1,440 45,833 58,200 1 October 2009 $5.75 1 October 2012 1 October 2014 40,4671 Nil N/A Nil Nil Nil Nil Nil 1 A further 624 restricted shares were transferred to the unallocated pool on 1 July 2011 due to the cessation of employment of the participant. Contact Energy Limited Annual Report 2011 45 Pursuant to the Restricted Share Plan Rules, where a participant ceases employment, the beneﬁ cial 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 30 June 2011, there were 66,711 restricted shares held by the trustee in the unallocated pool. The following table sets out the movements of the unallocated pool to 30 June 2011. Original issue date 21 June 2007 31 October 2007 25 February 2008 11 November 2008 7 December 2009 Number of restricted shares transferred to unallocated pool 2,737 3,980 2,679 3,581 6,369 1,024 1,156 3,180 3,507 5,901 8,322 8,847 7,864 1,164 1,440 2,794 8,022 18,825 8,343 1,431 6,418 1,550 6,478 14,182 2,129 795 11,046 3,252 1,035 Date of transfer to unallocated pool1 7 September 2007 30 June 2008 2 July 2008 31 December 2008 31 July 2009 6 July 2010 3 December 2007 2 April 2008 30 June 2008 2 July 2008 31 December 2008 31 July 2009 6 July 2010 13 August 2010 24 December 2008 24 December 2008 31 December 2008 31 July 2009 6 July 2010 13 August 2010 5 November 2010 9 April 2010 25 June 2010 6 July 2010 13 August 2010 17 September 2010 5 November 2010 31 December 2010 31 May 2011 Number of shares reallocated to a participant Date of reallocation to participant 2,737 3,980 2,679 3,581 6,369 Nil 1,156 3,180 3,507 5,901 8,322 8,847 Nil Nil 1,440 2,794 8,022 18,825 Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil 31 October 2007 11 November 2008 11 November 2008 7 December 2009 7 December 2009 N/A 25 February 2008 11 November 2008 11 November 2008 11 November 2008 7 December 2009 7 December 2009 N/A N/A 7 December 2009 7 December 2009 7 December 2009 7 December 2009 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 1 An additional 624 restricted shares were transferred to the unallocated pool on 1 July 2011 due to the cessation of employment of a participant, bringing the total number of restricted shares in the unallocated pool to 67,335. 46 Contact Energy Limited Annual Report 2011 Exercise hurdles Broadly, the number of unrestricted ordinary shares to which a participant is entitled under the LTI Scheme is determined by the achievement of a predetermined exercise hurdle or hurdles. For the restricted shares, performance share rights and share options, the hurdle is a comparison of Contact’s total shareholder return (TSR) against the TSR of a reference group comprising the NZX50 index in the relevant period, commencing on the eﬀ ective grant date. For the performance share rights and share options issued in FY11, participants’ vesting entitlements will be calculated on three test dates, being 1 October 2013, 1 October 2014 and 1 October 2015. Contact’s TSR will be determined as follows: • • The volume weighted average market price of Contact ordinary shares for the three months prior to the eﬀ ective grant date is subtracted from the price of the shares as determined by measuring the volume weighted average market price of the shares in the three-month period prior to the relevant test date. Adjusting the calculation in (a) above to reﬂ ect the assumed reinvestment of distributions (excluding imputation credits) in the period from the eﬀ ective grant date to the relevant test date. A participant’s vesting entitlements will be based on a predetermined formula relative to the achievement of the predetermined hurdle or hurdles. For the restricted shares and share options issued in FY11, these are: • • • Zero per cent vesting if Contact’s TSR over the performance period does not exceed the 50th percentile of the TSRs of those companies that are in the NZX50 at grant date and remain listed at the relevant test dates. 50–100 per cent vesting (on a sliding scale, that is 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 TSRs is ranked between the 50th percentile and the 75th percentile of those companies that are in the NZX50 at the grant date and remain listed at the relevant test date. 100 per cent vesting if Contact’s TSR is at or above the 75th percentile of the TSRs of those companies that are in the NZX50 at the grant date and remain listed at the relevant test date. Contact Energy Limited Annual Report 2011 47 Employee remuneration The table at right shows the number of employees and former employees of Contact who, in their capacity as employees, received remuneration and other beneﬁ ts (including redundancy payments and the fair value of any options, performance share rights and restricted shares allocated to the relevant reporting period) during FY11 of at least $100,000 in brackets of $10,000. As at 30 June 2011, no Contact subsidiary had any employees. The remuneration ﬁ gures analysed include all monetary payments actually paid during the course of FY11, including the short-term variable remuneration relating to FY10. The ﬁ gures do not include amounts paid post 30 June 2011 that related to the period ended 30 June 2011. The value of remuneration beneﬁ ts analysed includes ﬁ xed, short-term and long-term at risk/variable components of remuneration, and redundancy and other payments made on termination of employment. The value of the equity-based incentives included in the remuneration band analysis represents the portion of the grant-date fair value of the equity instruments allocated to the reporting period ended 30 June 2011. The remuneration (and any other beneﬁ ts) of the previous Managing Director, David Baldwin, and Chief Executive Oﬃ cer, Dennis Barnes, is disclosed in the Managing Director and Chief Executive Oﬃ cer remuneration section on page 38. Remuneration bands $100,001–$110,000 $110,001–$120,000 $120,001–$130,000 $130,001–$140,000 $140,001–$150,000 $150,001–$160,000 $160,001–$170,000 $170,001–$180,000 $180,001–$190,000 $190,001–$200,000 $200,001–$210,000 $210,001–$220,000 $220,001–$230,000 $230,001–$240,000 $240,001–$250,000 $250,001–$260,000 $260,001–$270,000 $270,001–$280,000 $280,001–$290,000 $290,001–$300,000 $300,001–$310,000 $310,001–$320,000 $320,001–$330,000 $340,001–$350,000 $350,001–$360,000 $360,001–$370,000 $370,001–$380,000 $390,001–$400,000 $410,001–$420,000 $450,001–$460,000 $480,001–$490,000 $490,001–$500,000 $590,001–$600,000 $620,001–$630,000 $630,001–$640,000 $760,001–$770,000 $840,001–$850,000 Total Number of employees Parent 56 61 58 27 19 32 10 11 7 7 5 5 6 6 3 2 3 5 3 3 1 1 2 1 1 1 1 1 1 1 1 2 1 1 1 1 1 348 48 Contact Energy Limited Annual Report 2011 Contact subsidiaries – directors and remuneration Other than Paul Smith, who received the Australian dollar equivalent of $45,716 in FY11 in his capacity as a consultant to Contact Australia Pty Limited and Contact Operations Australia Pty Limited, no director of any of Contact’s subsidiaries received additional remuneration or beneﬁ ts in respect of their directorships. The table below lists the directors of Contact subsidiary companies as at 30 June 2011. Contact subsidiary Contact Aria Limited Contact Australia Pty Limited Contact Operations Australia Pty Limited Contact Wind Limited Empower Limited Rockgas Limited Directors Dennis Barnes Elizabeth Kelly* Dennis Barnes Elizabeth Kelly* Paul Smith Dennis Barnes Elizabeth Kelly* Paul Smith Dennis Barnes Graham Cockroft Alistair Yates Dennis Barnes Ruth Bound Dennis Barnes Graham Cockroft Chris Brown * Paul Ridley-Smith replaced Elizabeth Kelly as a director of Contact Aria Limited, Contact Australia Pty Limited and Contact Operations Australia Pty Limited on 20 July 2011. Contact Energy Limited Annual Report 2011 49 Security holder information 20 largest registered holders of Quoted Equity Securities (ordinary shares) as at 11 August 2011 (including holdings within New Zealand Central Securities Depository Limited) Origin Energy Paciﬁ c Holdings Limited National Nominees New Zealand Limited HSBC Nominees (New Zealand) Limited A/C State Street Accident Compensation Corporation New Zealand Superannuation Fund Nominees Limited Citibank Nominees (New Zealand) Limited HSBC Nominees (New Zealand) Limited Premier Nominees Ltd – Onepath Wholesale Australasian Share Fund NZGT Nominees Limited – AIF Equity Fund AMP Investments Strategic Equity Growth Fund Custodial Services Limited FNZ Custodians Limited Origin Energy Universal Holdings Limited Tea Custodians Limited Westpac NZ Shares 2002 Wholesale Trust Custody and Investment Nominees Limited Asteron Life Limited Custodial Services Limited Masfen Securities Limited Private Nominees Limited Total top 20 holders (excluding Treasury Stock) Total other ordinary shares Total issued ordinary shares 359,962,548 24,108,168 22,604,576 16,823,025 15,555,267 11,449,684 8,369,259 7,016,383 6,696,152 6,472,537 6,412,240 5,758,924 4,452,385 4,279,383 3,381,212 3,304,455 3,180,118 2,766,636 2,724,882 2,554,889 517,872,723 177,195,565 695,068,288 Distribution of Quoted Security Holders and security holdings as at 11 August 2011 Ordinary shares: NZX code CEN Size of holding 1 to 499 500 to 999 1,000 to 4,999 5,000 to 9,999 10,000 to 49,999 50,000 to 99,999 100,000 to 499,999 500,000 and above Total Number of holders % of holders Number of shares % of shares 12,495 27,672 33,151 3,152 1,578 83 51 43 78,225 15.97 35.37 42.38 4.03 2.02 0.11 0.07 0.05 4,536,619 22,355,904 56,960,779 21,341,372 27,783,481 5,471,709 9,309,528 547,308,896 0.65 3.22 8.19 3.07 4.00 0.79 1.34 78.74 100.00 695,068,288 100.00 50 Contact Energy Limited Annual Report 2011 Retail bonds Size of holding 1 to 4,999 5,000 to 9,999 10,000 to 49,999 50,000 to 99,999 100,000 to 499,999 500,000 and above Total Number of holders % of holders Number of bonds % of bonds 1 1,178 6,083 1,326 733 80 9,401 0.01 12.53 64.71 14.1 7.8 0.85 3,000 6,661,000 119,839,000 72,911,000 107,920,000 242,666,000 0 1.21 21.79 13.26 19.62 44.12 100.00 550,000,000 100.00 Substantial security holders According to notices given under the Securities Markets Act 1988, the following persons were substantial security holders in the company as at 11 August 2011. Substantial security holder Number and class of listed voting securities Percentage Origin Energy New Zealand Limited and its subsidiaries 365,348,258 52.568 The total number of shares of Contact as at 11 August 2010 was 695,576,768, consisting of 695,068,288 listed ordinary shares and 508,480 restricted ordinary shares issued pursuant to Contact’s LTI Scheme (the 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. Accordingly, the total number of listed voting securities of Contact as at 11 August 2010 was 695,068,288. Directors’ statement This Annual Report is dated 6 September 2011 and is signed on behalf of the Board by Grant King Chairman Phillip Pryke Deputy Chairman Contact Energy Limited Annual Report 2010 51 Financial Statements for the year ended 30 June 2011 Income Statement Statement of Comprehensive Income Statement of Changes in Equity Statement of Financial Position Statement of Cash Flows Notes to the ﬁ nancial statements 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 Statement of accounting policies Segment reporting Revenue Operating expenses Other signiﬁ cant items Net interest expense Income tax Distributions Earnings and net tangible assets per share Share capital Share-based payments Cash and cash equivalents Receivables and prepayments Inventories Property, plant and equipment Intangible assets Gas storage – cushion gas Investment in jointly controlled entity Investment in subsidiaries Investment in associates Available-for-sale ﬁ nancial assets Borrowings Derivative ﬁ nancial instruments Payables and accruals Provisions Deferred tax Commitments Resource consents Related party transactions Key management personnel Whirinaki generation plant Contingent liabilities Subsequent events Independent Auditor’s Report 52 Contact Energy Limited Annual Report 2011 Contact Energy Limited and Subsidiaries Income Statement for the year ended 30 June 2011 Revenue Other income Operating expenses Earnings before net interest expense, income tax, depreciation, amortisation, change in fair value of ﬁ nancial instruments and other signiﬁ cant items (EBITDAF) Depreciation and amortisation Change in fair value of ﬁ nancial instruments Other signiﬁ cant items Equity accounted earnings of associates Net interest expense Proﬁ t before income tax Income tax expense Proﬁ t for the year Basic and diluted earnings per share (cents) Group 30 June 2011 $000 Group 30 June 2010 $000 Parent 30 June 2011 $000 Parent 30 June 2010 $000 2,209,290 21,564 (1,789,439) 2,143,017 21,391 (1,737,426) 1,958,128 42,625 (1,597,378) 1,848,978 45,401 (1,512,693) 441,415 426,982 403,375 381,686 (166,322) (5,940) – 3,862 (62,338) 210,677 (60,383) (161,903) 4,531 (8,894) 3,272 (55,980) 208,008 (53,340) (162,413) (5,939) – – (62,346) 172,677 (49,416) (158,610) 4,531 39,180 – (55,845) 210,942 (39,793) 150,294 154,668 123,261 171,149 23.89 25.58 Note 3 4 15, 16 23 5 20 6 7 9 Non-statutory measure: underlying earnings Underlying earnings after tax is presented to allow stakeholders to make an assessment and comparison of underlying earnings after adjusting for signiﬁ cant one-oﬀ items and the non-cash change in fair value of ﬁ nancial instruments. Proﬁ t for the year Underlying adjustments Change in fair value of ﬁ nancial instruments Other signiﬁ cant items: Retail transaction processing outsourcing costs Removal of New Plymouth asbestos and related costs Adjustments before income tax Income tax expense Impact of change in corporate income tax rate Removal of tax depreciation on buildings Adjustments after income tax Underlying earnings after tax Underlying earnings per share (cents) Group 30 June 2011 $000 Group 30 June 2010 $000 Note 150,294 154,668 23 5,940 (4,531) 5 5 7 7 – – 5,940 (1,782) (3,503) – 3,330 5,564 4,363 (1,309) (42,650) 34,765 655 (4,831) 150,949 149,837 9 24.00 24.78 The accompanying notes form an integral part of these ﬁ nancial statements. Contact Energy Limited and Subsidiaries Contact Energy Limited Annual Report 2011 53 Statement of Comprehensive Income for the year ended 30 June 2011 Group 30 June 2011 $000 Group 30 June 2010 $000 Parent 30 June 2011 $000 Parent 30 June 2010 $000 Note 150,294 154,668 123,261 171,149 415 (122) 293 (3,888) (1,192) (4,787) (221) 8,298 8,077 (2,209) 555 6,423 – (82) (82) (3,765) (1,192) (5,039) – 8,206 8,206 (2,248) 555 6,513 145,507 161,091 118,222 177,662 Proﬁ t for the year Other comprehensive income: Change in foreign currency translation reserve Change in cash ﬂ ow hedge reserve Total other comprehensive income before tax Deferred tax relating to components of other comprehensive income Impact of change in corporate income tax rate 26 26 Total other comprehensive income after tax Total comprehensive income for the year The accompanying notes form an integral part of these ﬁ nancial statements. 54 Contact Energy Limited Annual Report 2011 Contact Energy Limited and Subsidiaries Statement of Changes in Equity for the year ended 30 June 2011 Group Opening balance as at 1 July 2009 Total comprehensive income for the year Restricted shares and options lapsed during the year Transactions with owners recorded directly in equity: Change in share capital Change in share-based payment reserve Restricted shares vested during the year Distributions declared Total transactions with owners recorded directly in equity Closing balance as at 30 June 2010 Opening balance as at 1 July 2010 Total comprehensive income for the year Transactions with owners recorded directly in equity: Change in share capital Change in share-based payment reserve Distributions declared Total transactions with owners recorded directly in equity Foreign currency translation reserve $000 Cash ﬂ ow hedge reserve $000 Share- based payment reserve $000 Retained earnings $000 Total shareholders’ equity $000 310 (182) – (38,660) 6,605 – 1,752 – (36) 1,867,587 154,668 36 2,659,602 161,091 – – – – – – – – – – – – 1,148 (10) – – – – (165,437) 120,374 1,148 – (165,437) 1,138 (165,437) (43,915) Share capital $000 828,613 – – 120,374 – 10 – 120,384 948,997 128 (32,055) 2,854 1,856,854 2,776,778 948,997 – 463,863 – – 463,863 128 292 (32,055) (5,079) 2,854 – 1,856,854 150,294 2,776,778 145,507 – – – – – – – – – 2,510 – – – (153,048) 463,863 2,510 (153,048) 2,510 (153,048) 313,325 Note 10 11 11 8 10 11 8 Closing balance as at 30 June 2011 1,412,860 420 (37,134) 5,364 1,854,100 3,235,610 Parent Opening balance as at 1 July 2009 Total comprehensive income for the year Restricted shares and options lapsed during the year Transactions with owners recorded directly in equity: Change in share capital Change in share-based payment reserve Restricted shares vested during the year Distributions declared Total transactions with owners recorded directly in equity Closing balance as at 30 June 2010 Opening balance as at 1 July 2010 Total comprehensive income for the year Transactions with owners recorded directly in equity: Change in share capital Change in share-based payment reserve Distributions declared Total transactions with owners recorded directly in equity Note 10 11 11 8 10 11 8 Share capital $000 828,613 – – 120,374 – 10 – 120,384 948,997 948,997 – 463,863 – – 463,863 Foreign currency translation reserve $000 – – – – – – – – – – – – – – – Cash ﬂ ow hedge reserve $000 (38,608) 6,513 – Share- based payment reserve $000 Retained earnings $000 Total shareholders’ equity $000 1,752 – (36) 1,787,900 171,149 36 2,579,657 177,662 – – – – – – 1,148 (10) – – – – (165,437) 120,374 1,148 – (165,437) – 1,138 (165,437) (43,915) (32,095) 2,854 1,793,648 2,713,404 (32,095) (5,039) 2,854 – 1,793,648 123,261 2,713,404 118,222 – – – – – 2,510 – – – (153,048) 463,863 2,510 (153,048) 2,510 (153,048) 313,325 Closing balance as at 30 June 2011 1,412,860 – (37,134) 5,364 1,763,861 3,144,951 The accompanying notes form an integral part of these ﬁ nancial statements. Contact Energy Limited and Subsidiaries Statement of Financial Position as at 30 June 2011 Contact Energy Limited Annual Report 2011 55 Shareholders’ equity Represented by: Current assets Cash and short-term deposits Receivables and prepayments Inventories Carbon emission units Derivative ﬁ nancial instruments Tax receivable Total current assets Non-current assets Property, plant and equipment Intangible assets Gas storage – cushion gas Investment in subsidiaries Investment in associates Available-for-sale ﬁ nancial assets Derivative ﬁ nancial instruments Other non-current assets Total non-current assets Total assets Current liabilities Borrowings Derivative ﬁ nancial instruments Payables and accruals Provisions Total current liabilities Non-current liabilities Borrowings Derivative ﬁ nancial instruments Provisions Deferred tax Other non-current liabilities Total non-current liabilities Total liabilities Net assets Group 30 June 2011 $000 Group 30 June 2010 $000 Parent 30 June 2011 $000 Parent 30 June 2010 $000 Note 3,235,610 2,776,778 3,144,951 2,713,404 12 13 14 23 15 16 17 19 20 21 23 22 23 24 25 22 23 25 26 47,267 243,521 111,512 9,552 1,669 778 921 219,148 58,366 – 4,955 54 47,191 247,534 104,170 9,552 1,669 778 – 210,415 53,452 – 4,914 57 414,299 283,444 410,894 268,838 4,813,619 342,324 51,512 – 11,603 2,935 357 6,850 4,511,314 284,201 49,022 – 8,809 2,935 787 7,305 4,715,116 283,690 51,512 132,788 1,579 – 357 6,850 4,421,033 225,567 49,022 132,788 1,587 – 787 7,305 5,229,200 4,864,373 5,191,892 4,838,089 5,643,499 5,147,817 5,602,786 5,106,927 3,012 46,142 354,693 6,351 3,180 31,895 262,430 13,146 2,806 46,142 414,404 6,127 3,453 31,895 291,328 12,907 410,198 310,651 469,479 339,583 1,082,110 180,349 54,534 680,204 494 1,279,233 98,811 43,429 638,190 725 1,082,106 180,349 52,325 673,084 492 1,279,216 98,811 41,808 633,380 725 1,997,691 2,060,388 1,988,356 2,053,940 2,407,889 2,371,039 2,457,835 2,393,523 3,235,610 2,776,778 3,144,951 2,713,404 The Directors of Contact Energy Limited authorised these ﬁ nancial statements for issue. On behalf of the Board Grant King Chairman, 19 August 2011 Phillip Pryke Deputy Chairman, 19 August 2011 The accompanying notes form an integral part of these ﬁ nancial statements. 56 Contact Energy Limited Annual Report 2011 Contact Energy Limited and Subsidiaries Statement of Cash Flows for the year ended 30 June 2011 Cash ﬂ ows from operating activities Cash provided from: Receipts from customers Dividends received Cash applied to: Payments to suppliers and employees Supplementary dividend paid to shareholders Tax paid Group 30 June 2011 $000 Group 30 June 2010 $000 Parent 30 June 2011 $000 Parent 30 June 2010 $000 Note 2,198,125 1,864 2,185,718 3,862 1,955,128 1,480 1,893,401 2,936 2,199,989 2,189,580 1,956,608 1,896,337 (1,797,284) (1,184) (22,990) (1,780,762) (1,293) (39,166) (1,565,815) (1,184) (22,990) (1,506,382) (1,293) (39,166) 8 7 (1,821,458) (1,821,221) (1,589,989) (1,546,841) Net cash inﬂ ow from operating activities 378,531 368,359 366,619 349,496 Cash ﬂ ows from investing activities Cash provided from: Interest received Cash applied to: Purchase of property, plant and equipment Purchase of intangible assets Removal of New Plymouth asbestos and related costs Purchase of investment in Energyhedge Limited Purchase of cushion gas Repayment of loan to associate 1,078 1,078 4,848 4,848 995 995 4,768 4,768 20 17 (379,372) (57,821) (144) – – – (411,279) (29,557) (2,922) (8) (1,490) (1,886) (364,749) (59,139) (144) – – – (394,029) (29,557) (2,922) (8) (1,490) – (437,337) (447,142) (424,032) (428,006) Net cash (outﬂ ow) to investing activities (436,259) (442,294) (423,037) (423,238) Cash ﬂ ows from ﬁ nancing activities Cash provided from: Proceeds from borrowings Proceeds from other loans Proceeds from Entitlement Oﬀ er Cash applied to: Interest paid Distributions paid to shareholders Financing costs Proﬁ t distribution-related costs Entitlement Oﬀ er-related costs Repayment of borrowings Repayment of other loans and ﬁ nance lease liabilities 10 10 – 356,518 351,169 100,000 250,258 – – 356,518 351,169 100,000 250,258 – 707,687 350,258 707,687 350,258 (100,067) (34,351) (687) – (4,649) – (463,919) (103,324) (44,904) (923) (311) – (160,228) (145,296) (100,067) (34,351) (687) – (4,649) – (463,898) (103,109) (44,904) (923) (311) – (160,228) (145,263) (603,673) (454,986) (603,652) (454,738) Net cash inﬂ ow from/(outﬂ ow to) ﬁ nancing activities 104,014 (104,728) 104,035 (104,480) Net increase/(decrease) in cash and cash equivalents Add: cash and cash equivalents at the start of the year 46,286 (1,118) (178,663) 177,545 47,617 (2,333) (178,222) 175,889 Cash and cash equivalents at the end of the year 45,168 (1,118) 45,284 (2,333) Cash and cash equivalents comprise: Bank overdraft Cash and short-term deposits 12, 22 12 (2,099) 47,267 (2,039) 921 (1,907) 47,191 (2,333) – 12 45,168 (1,118) 45,284 (2,333) The accompanying notes form an integral part of these ﬁ nancial statements. Contact Energy Limited and Subsidiaries Contact Energy Limited Annual Report 2011 57 Statement of Cash Flows for the year ended 30 June 2011 (continued) Reconciliation of proﬁ t for the year to cash ﬂ ows from operating activities Proﬁ t for the year Items classiﬁ ed as investing/ﬁ nancing Net interest expense Non-cash items Write-oﬀ of receivables Movement in provisions Share-based payments Depreciation and amortisation Equity accounted (earnings) of associates net of dividends received Change in fair value of ﬁ nancial instruments Increase in deferred tax Write-oﬀ of advance to subsidiary Write-back of subsidiary advance Other non-cash items Movement in working capital (Increase)/decrease in receivables and prepayments (Increase) in inventories Increase/(decrease) in payables and accruals (Increase)/decrease in tax receivable (Increase) in other assets Group 30 June 2011 $000 Group 30 June 2010 $000 Parent 30 June 2011 $000 Parent 30 June 2010 $000 Note 150,294 154,668 123,261 171,149 6 4 11 15, 16 20 23 7 5 5 62,338 62,338 55,980 55,980 62,346 62,346 55,845 55,845 12,095 1,311 2,928 166,322 (2,382) 5,940 36,934 – – 538 15,046 8,023 1,596 161,903 (261) (4,531) 10,250 – – (1,225) 10,663 1,311 2,928 162,413 – 5,939 34,747 – – 1,185 11,988 8,114 1,596 158,610 – (4,531) 8,255 26 (48,100) – 223,686 190,801 219,186 135,958 (35,962) (53,630) 42,831 (724) (10,302) 19,936 (42,460) (11,876) 2,628 (1,318) (47,398) (51,202) 71,449 (721) (10,302) 2,587 (46,852) 30,252 1,875 (1,318) (57,787) (33,090) (38,174) (13,456) Net cash inﬂ ow from operating activities 378,531 368,359 366,619 349,496 The accompanying notes form an integral part of these ﬁ nancial statements. 58 Contact Energy Limited Annual Report 2011 Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 Notes to the ﬁ nancial statements for the year ended 30 June 2011 1 Statement of accounting policies Reporting entity Contact Energy Limited (the Parent) is a proﬁ t-oriented company domiciled in New Zealand, registered under the Companies Act 1993 and listed on the New Zealand Stock Exchange (NZSX). It also has bonds listed on the New Zealand Debt Exchange (NZDX). The Parent is an issuer in terms of the Financial Reporting Act 1993. The ﬁ nancial statements of Contact Energy Limited (the ﬁ nancial statements) as at, and for the year ended, 30 June 2011 comprise the Parent and its subsidiaries, interests in associates and jointly controlled entities (together referred to as Contact or the Group). Contact is a diversiﬁ ed and integrated energy group focusing on the generation and retailing of electricity. Other activities include the sale of natural gas and liqueﬁ ed petroleum gas (LPG) to retail and wholesale customers throughout New Zealand. Basis of preparation The functional and reporting currency used in the preparation of the ﬁ nancial statements is New Zealand dollars, rounded to the nearest thousand ($000). The ﬁ nancial statements have been prepared in accordance with New Zealand Generally Accepted Accounting Practice (NZ GAAP). They comply with the New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS), and other applicable Financial Reporting Standards, as appropriate for proﬁ t-oriented entities. The ﬁ nancial statements comply with International Financial Reporting Standards (IFRS). The ﬁ nancial statements were approved by the Board of Directors (the Board) on 19 August 2011. The measurement basis adopted in the preparation of these ﬁ nancial statements is historical cost except for: • • • derivative ﬁ nancial instruments, which are stated at their fair value as identiﬁ ed in the accounting policies below, recognised assets and liabilities that are hedged in a fair value hedging relationship, which are stated at fair value in respect of the risk that is hedged, and generation plant and equipment purchased prior to 1 October 2004, which is stated at deemed historical cost as identiﬁ ed in the accounting policies below. Changes in accounting policies The accounting policies set out below have been applied consistently to all years presented in these ﬁ nancial statements. As a result of the introduction of the Emissions Trading Scheme, Contact has adopted a new accounting policy on emissions trading from 1 July 2010 as identiﬁ ed in the accounting policies below. There have been no other changes in accounting policies in the year. Adoption status of relevant new ﬁ nancial reporting standards and interpretations The following relevant new standards and amendments to standards are mandatory for the ﬁ nancial year beginning 1 July 2010 and have been adopted by Contact in the preparation of these ﬁ nancial statements. The adoption of these amendments has had no material impact on the ﬁ nancial statements. • • • NZ IAS 7 Statement of Cash Flows (amendment) – the amendment clariﬁ es that only expenditure that results in a recognised asset can be classiﬁ ed as a cash ﬂ ow from investing activities. NZ IAS 32 Financial Instruments (amendment) – the amendment clariﬁ es that share rights, warrants or options may be classiﬁ ed as equity instruments subject to certain criteria being satisﬁ ed. NZ IAS 36 Impairment of Assets (amendment) – the amendment clariﬁ es that the largest cash-generating unit (or group of units) to which goodwill should be allocated for the purposes of impairment testing is an operating segment as deﬁ ned in NZ IFRS 8. Contact has elected not to early adopt the following standards, considered relevant to these ﬁ nancial statements, which have been issued but are not yet eﬀ ective: • • • NZ IAS 24 Related Party Disclosures (revised 2009) – amendment approved November 2009 and eﬀ ective for annual reporting periods beginning on or after 1 January 2011. Improvements to NZ IFRS 2010 – these improvements include various amendments eﬀ ective for periods beginning on or after 1 July 2011. FRS 44 New Zealand Additional Disclosures – approved April 2011 and eﬀ ective for annual reporting periods beginning on or after 1 July 2011. Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 Contact Energy Limited Annual Report 2011 59 • • • • NZ IFRS 9 Financial Instruments – approved November 2009 and eﬀ ective for annual reporting periods beginning on or after 1 January 2013. NZ IFRS 10 Consolidated Financial Statements – approved June 2011 and eﬀ ective for annual reporting periods beginning on or after 1 January 2013. NZ IFRS 11 Joint Arrangements – approved June 2011 and eﬀ ective for annual reporting periods beginning on or after 1 January 2013. NZ IFRS 12 Disclosure of Interests in Other Entities – approved June 2011 and eﬀ ective for annual reporting periods beginning on or after 1 January 2013. • NZ IFRS 13 Fair Value Measurement Statements – approved June 2011 and eﬀ ective for annual reporting periods beginning on or after 1 January 2013. Contact does not currently intend to early adopt any of these standards or amendments before their eﬀ ective dates. With the exception of NZ IFRS 9 Financial Instruments, the Directors anticipate that the above standards and amendments will have no material impact on the ﬁ nancial statements in the period of initial application other than increased disclosure. It is likely that the changes arising from NZ IFRS 9 will aﬀ ect the classiﬁ cation and measurement of ﬁ nancial assets and liabilities as well as the rules around derecognition. A detailed review is underway to determine the eﬀ ect on the ﬁ nancial statements. Accounting estimates and judgements Contact’s signiﬁ cant areas of estimation and critical judgements in these ﬁ nancial statements are as follows: Derivative ﬁ nancial instruments Note 23 contains information about the assumptions and the risk factors relating to derivative ﬁ nancial instruments and their valuation. The base future settlement price path for electricity derivatives is derived from the Australian Securities Exchange New Zealand Electricity Futures and Options price path overlaid with Contact’s ﬁ nancial model for future electricity prices. Intangible assets – gas storage rights Contact has exercised judgement in determining the useful life of the gas storage rights. The useful life is based on the current assumption of the period over which future economic beneﬁ ts are expected to be derived. The useful life is reviewed annually. Refer to note 16. 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 the end of the reporting period. 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 ﬂ ows of the cash-generating units. The major inputs and assumptions that are used in the model that require management judgement include customer numbers and customer churn, price inﬂ ation, terminal growth rates, cost of product (e.g. gas costs, wholesale electricity price path, LPG purchase costs), operating costs, and the weighted average cost of capital. Refer to note 16. Inventory gas Inventory gas is held at the lower of cost and net realisable value. Contact has exercised judgement in determining the net realisable value of the gas, which is the recoverable amount of the gas based on its intended use. Property, plant and equipment and ﬁ nite life intangible assets Contact has exercised judgement in determining whether expenditure is in relation to bringing an asset to the location and condition necessary for its intended use and is therefore appropriate for capitalisation as part of the cost of the asset. In assessing the recoverable amount of capital work in progress, Contact has exercised judgement in determining the likely future use or development of the asset. Contact has also exercised judgement in determining the useful lives of property, plant and equipment and ﬁ nite life intangible assets. Useful lives are reviewed annually and, where appropriate, adjusted at the end of each reporting period. Provision – restoration and environmental rehabilitation Liabilities are estimated for the abandonment and site restoration of areas from which natural resources are extracted and for the removal of asbestos at generation properties. Such estimates are valued at the net present value of the expenditure expected to settle the obligation. Key assumptions have been made as to the expected amount and timing of expenditure to remediate based on the expected life of the assets employed on the sites and the period over which asbestos is expected to be removed. Refer to note 25. 60 Contact Energy Limited Annual Report 2011 Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 Retail revenue Contact has exercised judgement in determining estimated retail sales for unread gas and electricity meters at the end of the reporting period. Speciﬁ cally, this involves an estimate of consumption for each unread meter based on the customer’s past consumption history. 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. Identiﬁ able 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 identiﬁ able 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 diﬀ erence is recognised directly in the Income Statement. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. Associates Associates are entities in which Contact has signiﬁ cant inﬂ uence, but not control, over the operating and/or ﬁ nancial policies. Associates are reﬂ ected in the ﬁ nancial statements by applying the equity accounting method. The equity accounting method recognises Contact’s share of the current year retained surpluses or deﬁ cits in the Group Income Statement and its share of post acquisition increases or decreases in net assets in the Group Statement of Financial Position. 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 assets or entities and is consequently entitled to a share of the future economic beneﬁ ts through its share of the jointly controlled assets or entities. Contact’s share of the assets, liabilities, outputs (revenues) and expenses of jointly controlled assets or entities is incorporated into the ﬁ nancial statements on a proportionate line-by-line basis. Transactions and balances eliminated on consolidation The eﬀ ects of intra-group transactions and balances are eliminated in preparing the Group ﬁ nancial 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 ﬁ nancial instruments and hedging. Discounts, premiums, prepaid interest and ﬁ nancing 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 diﬀ erence between the cost and redemption value is recognised in the Income Statement over the period of the borrowing on an eﬀ ective interest basis. All borrowing costs are recognised in the Income Statement using the eﬀ ective 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. Bank overdrafts are shown within borrowings in current liabilities in the Statement of Financial Position. Derivative ﬁ nancial instruments and hedging Derivative ﬁ nancial 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 ﬁ nancial instrument is designated as a hedging instrument and, if so, the nature of the item being hedged. Contact designates certain derivative ﬁ nancial instruments as either: • • hedges of the fair value of recognised assets or liabilities or a ﬁ rm commitment (fair value hedge), or hedges of highly probable forecast transactions (cash ﬂ ow hedge). Fair value hedge Changes in the fair value of derivative ﬁ nancial 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. Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 Contact Energy Limited Annual Report 2011 61 Cash ﬂ ow hedge The eﬀ ective portion of changes in the fair value of derivative ﬁ nancial instruments that are designated and qualify as cash ﬂ ow hedges is recognised in the Statement of Comprehensive Income. The gain or loss relating to the ineﬀ ective portion is recognised immediately in the Income Statement. Amounts accumulated in other comprehensive income are recycled to the Income Statement in the year when the hedged item will aﬀ ect the Income Statement. However, when the forecast transaction that is hedged results in the recognition of a non- ﬁ nancial asset (for example, inventory) or a liability, the gains and losses previously deferred in other comprehensive income are transferred from other comprehensive income 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 ﬁ nancial instrument no longer qualiﬁ es for hedge accounting, but the hedged forecast transaction is still expected to occur, the cumulative gain or loss at that point remains in other comprehensive income 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 other comprehensive income is recognised immediately in the Income Statement. Derivative ﬁ nancial instruments that do not qualify for hedge accounting Certain derivative ﬁ nancial instruments do not qualify for hedge accounting. Changes in the fair value of any derivative ﬁ nancial instruments that do not qualify for hedge accounting are recognised immediately in the Income Statement. Emissions trading Carbon emission units purchased for compliance purposes are recognised at initial cost (purchase price) less any accumulated impairment losses. For the purpose of impairment testing, carbon emission units are allocated to the individual cash-generating units to which they relate. Carbon emission units are surrendered on a ﬁ rst-in ﬁ rst-out basis according to the liquidity of the units. Although carbon emission units can be banked, they will generally be surrendered within one year and are therefore recognised as current intangible assets and not amortised. Any purchased forward contracts of carbon emission units for compliance purposes are measured at cost on the dates Contact acquires the units. For all forward contracts, Contact determines whether the contracts meet the deﬁ nition of a ﬁ nancial instrument during the period between when the forward contracts are entered into and when the units are received. Where forward contracts for carbon emission units are entered into and continue to be held in accordance with Contact’s own usage expectation, Contact makes use of the ‘own use’ exemption. This allows forward contracts on those units not to be accounted for as ﬁ nancial instruments. Where the ‘own use’ exemption does not apply, forward contracts for the purchase of carbon emission units are measured at fair value from the date of inception until the receipt of the units. Gains and losses arising from changes in the fair value are recognised in the Income Statement. Contact recognises a liability in respect of its obligation to deliver carbon emission units as the obligation arises. The liability is measured at the cost of the purchased units less accumulated impairment losses on a ﬁ rst-in ﬁ rst-out basis to the level of units or forward contracts held, with the balance recognised at fair value at the end of the reporting period. Any change in the liability is recognised within operating expenses in the Income Statement. Employee beneﬁ ts Annual, long service and retirement leave beneﬁ ts estimated to be payable to employees are accounted for on the basis of statutory and contractual requirements. Long-term service beneﬁ ts Contact’s net obligation in respect of long-term service beneﬁ ts, other than pension plans, is the amount of future beneﬁ ts that employees have earned in return for their service in the current and prior years. The obligation is calculated using an actuarial technique. Share-based payments Share-based payments are provided to participating employees via a Share Option Scheme and a Restricted Share Plan. The fair value of the employee services received in exchange for the grant of the options, performance share rights and restricted shares is recognised as an expense, with a corresponding increase in equity over the vesting period. 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, performance share rights and restricted shares that are expected to become exercisable or vest. At the end of each reporting period, Contact revises the amount to be recognised as an expense to reﬂ ect the number of options, performance share rights and restricted shares that are expected to become exercisable or vest. 62 Contact Energy Limited Annual Report 2011 Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 Exploration and evaluation expenditure Exploration and evaluation expenditure in relation to geothermal sites 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 eﬀ orts 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 cost of drilling exploration wells is initially capitalised as development capital work in progress pending the determination of the success of the area. Exploration and evaluation expenditure is partially or fully capitalised where either: • • the expenditure is expected to be recouped through the 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 end of each reporting period, reached a stage that permits a reasonable assessment of the existence or otherwise of economically recoverable reserves, and active and signiﬁ cant operations in, or in relation to, the area of interest are continuing. Exploration and evaluation expenditure is impaired in the Income Statement under the successful eﬀ orts 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 eﬀ ect at the dates of the transactions. Monetary assets and monetary liabilities denominated in foreign currencies are translated at the rates of exchange ruling at the end of each reporting period. Non-monetary assets and non-monetary liabilities denominated in foreign currencies 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 accounted for as cash ﬂ ow hedges are translated at the hedged rate, with the underlying hedge contract being separately recorded in the Statement of Financial Position at fair value. Group entities The results and ﬁ nancial positions of all Group entities (none of which have a currency of a hyperinﬂ ationary economy) that have functional currencies diﬀ erent from the reporting currency are translated into the reporting currency as follows: • • • income and expenses are translated at average exchange rates, assets and liabilities are translated at the closing exchange rate at the end of each reporting period, all resulting exchange diﬀ erences are recognised in other comprehensive income. On consolidation, exchange diﬀ erences arising from the translation of the net investment in foreign entities are taken to the foreign currency translation reserve in other comprehensive income. When a foreign operation is sold, such exchange diﬀ erences are recognised in the Income Statement as part of the gain or loss on sale. Gas entitlements Where Contact has take-or-pay gas purchase contracts, such pay obligations 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 the 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 the end of each reporting period 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. Refer to the inventory accounting policy. Generation and other research and development expenditure Expenditure on research activities undertaken with the prospect of gaining new scientiﬁ c 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 beneﬁ ts are probable and Contact intends to and has suﬃ cient 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. Revenue earned in the period until the asset is operating in the manner intended by management is deducted from the cost of the asset. Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 Contact Energy Limited Annual Report 2011 63 Capitalised work in progress is reviewed at the end of each reporting period to determine whether further work is planned to support the continued carrying value of the capitalised costs. Assets are transferred from capital work in progress when they are operating in the manner intended by management and depreciated over the period of their expected economic beneﬁ t. 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 Statement of Financial Position are stated exclusive 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 the end of each reporting period 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. The recoverable amount of receivables is calculated as the present value of expected future cash ﬂ ows. For retail receivables that are not signiﬁ cant on an individual basis, collective impairment is assessed on a portfolio basis, based on historical 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 ﬂ ows are discounted to their net present value using a discount rate that reﬂ ects current market assessments of the time value of money and the risks speciﬁ c to the asset. For an asset that does not generate largely independent cash inﬂ ows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Intangible assets Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of Contact’s share of the net identiﬁ able 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 the investment 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 that generate cash inﬂ ows largely independent from each other. Other intangible assets Other intangible assets with ﬁ nite 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. The amortisation rates are as follows: Type of asset Computer software Gas storage rights Patents Amortisation rate 10–33% 3% 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 intangible asset 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 speciﬁ cally 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 speciﬁ c borrowings) that were outstanding during the period. Costs cease to be capitalised as soon as the intangible asset is operating in the manner intended by management or production is temporarily suspended, and do not include any ineﬃ ciency costs. Inventories Consumables, spare parts and LPG Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. The cost of materials, consumable supplies and maintenance spares is determined on a weighted average basis. 64 Contact Energy Limited Annual Report 2011 Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 Inventory gas Gas reserves in excess of the levels required for cushion gas are treated as inventory. Inventory gas is stated at the lower of cost or net realisable value. The cost of inventory gas is determined on a weighted average basis and includes expenditure incurred in bringing the fuel stocks to their present location and condition. Net realisable value is the estimated recoverable amount of the gas based on its intended use. Inventory gas is classiﬁ ed as a current asset as it is expected to be realised in Contact’s normal operating cycle, which could extend beyond one year. Investments – ﬁ nancial instruments Contact classiﬁ es its investments in the following categories: • • • ﬁ nancial assets at fair value through proﬁ t or loss, held-to-maturity ﬁ nancial assets, or available-for-sale ﬁ nancial assets. The classiﬁ cation depends on the purpose for which the investments were acquired. Management determines the classiﬁ cation of its investments at initial recognition and re-evaluates this designation at the end of each reporting period. Purchases and sales of ﬁ nancial assets are recognised on the trade date. When ﬁ nancial assets are initially recognised, they are measured at fair value plus, in the case of ﬁ nancial assets not at fair value through proﬁ t or loss, directly attributable transaction costs. Financial assets at fair value through proﬁ t or loss A ﬁ nancial asset is classiﬁ ed as a ﬁ nancial asset at fair value through proﬁ t or loss 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 proﬁ t or loss unless they are designated as hedges. Assets in this category are classiﬁ ed as current assets if the cash ﬂ ows associated with the assets are expected to be realised within 12 months of the end of the reporting period. Subsequent to initial recognition, ﬁ nancial assets at fair value through proﬁ t or loss are measured at fair value, with changes in fair value recognised immediately in the Income Statement. Held-to-maturity ﬁ nancial assets Held-to-maturity ﬁ nancial assets are stated at amortised cost less impairment losses. Available-for-sale ﬁ nancial assets Investments in unlisted shares are classiﬁ ed as being available-for-sale and are stated at fair value, with any resultant gain or loss being recognised directly in other comprehensive income, 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 other comprehensive income is recognised in the Income Statement. Operating leases Contact leases certain plant, equipment, land and buildings. Leases in which a signiﬁ cant portion of the risks and rewards of ownership are retained by the lessor are classiﬁ ed as operating leases. Operating lease receipts and payments are representative of the pattern of beneﬁ ts derived from the leased assets and, accordingly, are recognised in the Income Statement on a straight-line basis. 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 eﬀ ective interest rate method. Payables Payables are stated at cost. Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 Contact Energy Limited Annual Report 2011 65 Property, plant and equipment Contact’s generation plant and equipment purchased prior to 1 October 2004 is stated at deemed historical cost less accumulated depreciation and accumulated impairment losses. All other property, plant and equipment is 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 use. The cost of assets constructed by Contact, including capital work in progress, includes the cost of all materials used in construction, direct labour costs speciﬁ cally associated with construction, resource management consent costs and an appropriate proportion of directly attributable variable and ﬁ xed overheads. It also includes a reduction to cost in respect of any revenue earned by the asset in the period until it is operating in the manner intended by management. 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 speciﬁ cally 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 speciﬁ c borrowings) that were outstanding during the period. Costs cease to be capitalised when the asset is operating as intended by management or the development is suspended, and do not include any ineﬃ ciency costs. Where an item of property, plant and equipment comprises major components having diﬀ erent useful lives, the components 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 that the future economic beneﬁ ts embodied in the item of property, plant and equipment will ﬂ ow to the entity and can be reliably measured. All other expenditure is recognised in the Income Statement as an expense as incurred. Leased assets Leases in which Contact assumes substantially all the risks and rewards of ownership are classiﬁ ed as ﬁ nance leases. Any asset acquired by way of a ﬁ nance lease is stated at an amount equal to the lower of its fair value or the net present value of the future minimum lease payments at the inception of the lease. Depreciation With the exception of certain generation plant and equipment assets, depreciation is charged to the Income Statement on a straight-line basis so as to allocate the cost of the assets, less any estimated residual value, over their expected remaining useful lives. Generation plant and equipment assets where the asset’s future economic beneﬁ ts are expected to be consumed on a usage basis, are depreciated on an equivalent hours of use basis. The range of annual depreciation rates for each class of asset is as follows: Type of asset Land Generation plant and equipment (including buildings) Other buildings Other plant and equipment Generation plant and equipment assets on an equivalent hours of use basis Depreciation rate Not depreciated 1–33% 1–18% 1–33% 25,000–100,000 equivalent hours of use Asset residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. Receivables Receivables are recognised initially at fair value and are subsequently measured at amortised cost using the eﬀ ective interest method, less any 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 diﬀ erence between the asset’s carrying amount and the present value of estimated future cash ﬂ ows, discounted at the eﬀ ective interest rate. The amount of the impairment loss is recognised in the Income Statement. 66 Contact Energy Limited Annual Report 2011 Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 Restoration and environmental rehabilitation Liabilities are estimated for the abandonment and site restoration of areas from which natural resources are extracted and for the removal of asbestos at generation sites. Such estimates are valued at the present value of the expenditure expected to be required to settle the obligation. Estimations are also made for the expected cost of environmental rehabilitation of commercial sites. A liability is immediately recognised when exposure is identiﬁ ed and rehabilitation costs can be reasonably estimated. Revenue Revenue comprises the amounts received and receivable at the end of the reporting period 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 signiﬁ cant risks and rewards of ownership of the goods have passed from Contact to the customer or when services have been rendered to the customer and collection is reasonably assured. Share capital Ordinary shares are classiﬁ ed 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 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, is included in equity. Statement of Cash Flows The following are the deﬁ nitions used in the Statement of Cash Flows: • • • operating activities include all transactions and other events that are not investing or ﬁ nancing activities, investing activities are those activities relating to the acquisition, holding and disposal of property, plant and equipment, intangible assets and investments, ﬁ nancing activities are those activities that result in changes in the size and composition of the capital structure of Contact. Dividends and interest paid in relation to the capital structure are included in ﬁ nancing activities. Cash ﬂ ows arising from the following operating, investing or ﬁ nancing activities may be reported on a net basis: • cash receipts and payments on behalf of customers where the cash ﬂ ows reﬂ ect the activities of the customers rather than those of Contact, or • cash receipts and payments for ﬁ nancing activities where the maturities are short. Tax Income tax on the proﬁ t 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 other comprehensive income, in which case the income tax is recognised in other comprehensive income. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the end of the reporting period, together with any adjustment to tax payable in respect of previous years. Deferred tax is calculated using the balance sheet liability method, providing for temporary diﬀ erences between the carrying amounts of assets and liabilities for ﬁ nancial reporting purposes and the amounts used for taxation purposes. The following temporary diﬀ erences are not provided for: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that aﬀ ect neither accounting nor taxable proﬁ t, and diﬀ erences 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 end of the reporting period. A deferred tax asset is recognised only to the extent that it is probable that future taxable proﬁ ts 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 beneﬁ ts will be realised. Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 2 Segment reporting Contact Energy Limited Annual Report 2011 67 Identiﬁ cation of reportable segments Contact has identiﬁ ed its operating segments based on the internal reports that are reviewed and used by the Chief Executive Oﬃ cer in assessing performance and in determining the allocation of resources. The Chief Executive Oﬃ cer is Contact’s ‘chief operating decision-maker’ within the meaning of NZ IFRS 8. Contact has identiﬁ ed two operating segments: Electricity and Other. Products and services from which reportable segments derive their revenues Electricity The ‘Electricity’ business is a generator and retailer of electricity throughout New Zealand. Electricity is generated by means of hydro, geothermal and thermal sources/power stations. Electricity generated is required to be sold to the national grid and then purchased from the relevant node to be retailed to commercial and residential customers. Other The ‘Other’ business is a combination of other services oﬀ ered by Contact. These include the sale of gas to retail and wholesale customers and the sale of LPG to commercial and residential customers in New Zealand. Individual services within the ‘Other’ segment do not exceed 10 per cent of revenue, proﬁ t or total assets and are therefore not separately disclosed. Accounting policies and inter-segment transactions The accounting policies used by Contact in reporting segments internally are the same as those contained in note 1 to the ﬁ nancial statements except as detailed below: Inter-segment revenue The inter-segment revenue is a charge for electricity meters between the ‘Electricity’ and ‘Other’ segments. The inter-segment charge aims to have the ‘Electricity’ segment pay the ‘Other’ segment an equivalent cost for Contact-owned meters as it would for third party owned meters. The following items are not allocated to operating segments as they are not reported to the chief operating decision-maker at a segmental level: • • • • • • • • change in fair value of ﬁ nancial instruments, other signiﬁ cant items, equity accounted earnings of associates, net interest expense, income tax expense, assets, liabilities, capital expenditure. Presentational changes Presentational changes have been made to the allocation of certain costs between segments. These changes, which have been applied retrospectively, relate to the allocation of: • • • • HVAC rental rebates between ‘hedged generation’ and ‘retail electricity’, purchases between ‘hedged generation’ and ‘retail electricity’, gas costs between ‘hedged generation’ and ‘Other’ segment, operating expenses between ‘hedged generation’, ‘retail electricity’ and ‘Other’ segment. Geographical segment information Contact operates predominantly in one geographical location, being New Zealand. Contact’s operations in Australia are immaterial. Therefore, disclosure of geographical revenue and assets has not been made. Major customers Contact has a large number of customers, but no single external customer accounts for more than 10 per cent of revenue. 68 Contact Energy Limited Annual Report 2011 Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 Segment note Group 2011 Total segment revenue and other income Total segment direct costs Segment operating margin Segment other operating expenses Segment EBITDAF* Depreciation and amortisation Segment result Change in fair value of ﬁ nancial instruments Equity accounted earnings of associates Net interest expense Income tax expense Proﬁ t for the year Group 2010 Total segment revenue and other income Total segment direct costs Segment operating margin Segment other operating expenses Segment EBITDAF* Depreciation and amortisation Segment result Change in fair value of ﬁ nancial instruments Other signiﬁ cant items Equity accounted earnings of associates Net interest expense Income tax expense Proﬁ t for the year Electricity $000 1,969,012 (1,351,578) 617,434 (212,355) 405,079 (156,545) 248,534 Electricity $000 1,859,223 (1,284,331) 574,892 (193,279) 381,613 (153,274) 228,339 Other $000 Inter-segment $000 Total $000 291,088 (215,469) 75,619 (39,283) 36,336 (9,777) 26,559 (29,246) 29,246 2,230,854 (1,537,801) – – – – – 693,053 (251,638) 441,415 (166,322) 275,093 (5,940) 3,862 (62,338) (60,383) 150,294 Other $000 Inter-segment $000 Total $000 334,167 (253,310) 80,857 (35,488) 45,369 (8,629) 36,740 (28,982) 28,982 2,164,408 (1,508,659) – – – – – 655,749 (228,767) 426,982 (161,903) 265,079 4,531 (8,894) 3,272 (55,980) (53,340) 154,668 * In addition to the above information, the chief operating decision-maker also considers the following components of EBITDAF within the ‘Electricity’ segment: Group Hedged generation Exposed generation Retail electricity Electricity segment EBITDAF 30 June 2011 $000 30 June 2010 $000 346,884 29,919 28,276 405,079 294,610 36,673 50,330 381,613 Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 3 Revenue Wholesale electricity revenue Retail electricity revenue Gas revenue LPG revenue Steam revenue Total revenue 4 Operating expenses Electricity purchases Electricity transmission, distribution and levies Gas purchases and transmission LPG purchases Meter costs Emission costs Labour costs Christchurch earthquake costs* Other operating expenses Contact Energy Limited Annual Report 2011 69 Group 30 June 2011 $000 Group 30 June 2010 $000 Parent 30 June 2011 $000 Parent 30 June 2010 $000 505,701 1,443,602 123,241 117,037 19,709 539,359 1,301,924 153,490 130,304 17,940 505,701 1,309,477 123,241 – 19,709 539,359 1,138,189 153,490 – 17,940 2,209,290 2,143,017 1,958,128 1,848,978 Group 30 June 2011 $000 Group 30 June 2010 $000 Parent 30 June 2011 $000 Parent 30 June 2010 $000 476,723 542,315 381,059 85,416 22,032 30,257 98,456 4,000 149,181 480,360 511,413 396,719 99,175 20,992 – 83,490 – 145,277 439,002 488,578 381,685 – 18,519 28,276 95,426 4,000 141,892 429,311 451,405 397,944 – 16,922 – 80,532 – 136,579 Total operating expenses 1,789,439 1,737,426 1,597,378 1,512,693 * Christchurch earthquake costs include donations made to the Red Cross Earthquake Relief Fund, free LPG reﬁ lls oﬀ ered to customers, hardship support through bill waivers and grants for electricity and gas customers. Other operating expenses include: Auditor’s remuneration – Audit services: KPMG * Total auditor’s remuneration Donations Write-oﬀ of receivables Increase/(decrease) in provision for impairment of receivables Rental expense on operating leases Write-oﬀ of Energyhedge Limited Group 30 June 2011 $000 Group 30 June 2010 $000 Parent 30 June 2011 $000 Parent 30 June 2010 $000 Note 598 598 26 12,095 6 6,849 8 612 598 612 612 75 15,046 (891) 6,583 – 598 26 10,663 – 5,213 8 612 75 11,988 (800) 5,005 – 20 * In the year ended 30 June 2011, KPMG charged $46,914 for other assurance services in relation to the prospectus for the Entitlement Oﬀ er. These amounts have been included in the transaction costs of the Entitlement Oﬀ er, which have been recognised in equity. In addition KPMG charged $36,174 for IT security assurance services in relation to Contact’s Enterprise Transformation project, which was capitalised to the cost of the asset. Labour costs include: Contributions to KiwiSaver Group 30 June 2011 $000 Group 30 June 2010 $000 Parent 30 June 2011 $000 Parent 30 June 2010 $000 1,982 1,624 1,861 1,568 70 Contact Energy Limited Annual Report 2011 Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 5 Other signiﬁ cant items Retail transaction processing outsourcing costs Removal of New Plymouth asbestos and related costs Write-back of subsidiary advance* Write-oﬀ of advance to subsidiary Total other signiﬁ cant items Note 25 Group 30 June 2011 $000 Group 30 June 2010 $000 Parent 30 June 2011 $000 Parent 30 June 2010 $000 – – – – – 3,330 5,564 – – 8,894 – – – – – 3,330 5,564 (48,100) 26 (39,180) * As a result of the amalgamation of Stratford Power Limited into Empower Limited on 7 September 2009, $48.1 million relating to a subsidiary advance was written-back to the Parent in the year ended 30 June 2010. 6 Net interest expense Interest expense Interest expense: unwind on restoration provision Interest expense capitalised Interest income Net interest expense Note 25 Group 30 June 2011 $000 Group 30 June 2010 $000 Parent 30 June 2011 $000 Parent 30 June 2010 $000 101,350 3,903 (41,838) (1,077) 105,509 3,057 (48,208) (4,378) 101,350 3,826 (41,838) (992) 105,509 2,843 (48,208) (4,299) 62,338 55,980 62,346 55,845 The weighted average capitalisation rate on funds borrowed is 7.54 per cent per annum (2010: 7.4 per cent). 7 Income tax Income tax expense Proﬁ t before income tax Tax thereon at 30% Plus/(less) tax eﬀ ect of adjustments: Impact of change in corporate income tax rate* Removal of tax depreciation on buildings* Temporary diﬀ erences no longer expected to reverse Other diﬀ erences Research and development tax credit 2009 Income tax (over) provided in prior year Non-assessable write-back of subsidiary advance Income tax expense Comprising: Current tax Deferred tax Group 30 June 2011 $000 Group 30 June 2010 $000 Parent 30 June 2011 $000 Parent 30 June 2010 $000 210,677 208,008 172,677 210,942 63,203 62,402 51,803 63,283 (3,503) – (13) 1,669 – (973) – (42,650) 34,765 7 151 (669) (666) – (3,516) – – 1,769 – (640) – (42,335) 34,412 – (297) (669) (171) (14,430) 60,383 53,340 49,416 39,793 23,449 36,934 60,383 43,090 10,250 53,340 14,669 34,747 31,538 8,255 49,416 39,793 * The 2010 Budget contained two provisions which have had a material eﬀ ect on the Group and Parent’s tax expense: Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 Contact Energy Limited Annual Report 2011 71 • • a decrease in the corporate income tax rate from 30 per cent to 28 per cent, eﬀ ective from Contact’s income tax year ending 30 June 2012. As a result of this change, deferred tax has been restated to 28 per cent, as deferred tax is required to be recorded at the tax rate that will apply when the future tax liability/asset is expected to crystallise, the removal of tax depreciation on buildings with estimated useful lives of 50 years or more. Contact is no longer able to claim tax depreciation on buildings from its income tax year ending 30 June 2012. This resulted in an increased deferred tax liability in the year ended 30 June 2010 in respect of buildings completed before May 2010. Imputation credits Group Opening balance Imputation credits attached to dividends paid Imputation credits attached to dividends received New Zealand income tax paid Closing balance 30 June 2011 $000 30 June 2010 $000 205,256 (13,830) 165 22,990 186,219 (20,823) 694 39,166 214,581 205,256 The imputation credits are available to shareholders through the consolidated imputation group. Under current legislation, imputation credits can be attached to future dividends at a ratio of 30/70. 8 Distributions Group and Parent Distribution payment date Cents per share 30 June 2011 $000 30 June 2010 $000 Distributions 2009 year ﬁ nal distribution 2010 year interim distribution 2010 year ﬁ nal distribution 2011 year interim distribution Supplementary dividend Foreign investor tax credit Total distributions 22 September 2009 30 March 2010 27 September 2010 31 March 2011 17.0 11.0 14.0 11.0 – – 84,915 68,133 1,184 (1,184) 99,503 65,934 – – 1,293 (1,293) 153,048 165,437 All distributions were made pursuant to the Parent’s Proﬁ t 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 an equivalent cost under the oﬀ -market buy-back facility are treated as having received a fully imputed cash dividend. On 19 August 2011, the Board declared a distribution in the form of a non-taxable bonus issue under the PDP equivalent to 12.0 cents per share, for shares on issue at 5 September 2011, the record date, with bonus shares allocated and/or cash distributed, if elected, on 27 September 2011. Refer to note 33. 72 Contact Energy Limited Annual Report 2011 Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 9 Earnings and net tangible assets per share Group Underlying earnings per share (cents)* Basic and diluted earnings per share (cents) Weighted average number of shares on issue over the year Net tangible assets per share (dollars) Number of shares on issue at the end of the year * Non-statutory measure. 30 June 2011 30 June 2010** 24.00 23.89 629,068,222 4.16 695,068,288 24.78 25.58 604,650,134 4.06 604,934,976 ** The June 2010 comparatives have been restated to reﬂ ect the one-for-nine renounceable Entitlement Oﬀ er in June 2011. Refer to note 10. The calculation of underlying earnings per share is based on underlying earnings after tax after adjusting for signiﬁ cant one-oﬀ items and the non-cash change in fair value of ﬁ nancial instruments attributable to holders of unrestricted ordinary shares. It is calculated using the weighted average number of shares on issue over the year. The weighted average number of shares on issue over the year is reﬂ ective of the issue and repurchase of ordinary share capital (excluding treasury stock) pursuant to the Parent’s PDP and the Entitlement Oﬀ er. For the purpose of calculating the weighted average number of shares on issue, the restricted shares previously issued under Contact’s Employee Long-Term Incentive Scheme are excluded until the shares become unrestricted. The dilutive eﬀ ect of share options, performance share rights and restricted shares has not been taken into account in the calculation of diluted earnings per share at 30 June 2011 and 30 June 2010, as the relevant performance hurdles have not yet been met. The calculation of basic and diluted earnings per share is based on proﬁ t after tax. The calculation of net tangible assets per share at 30 June 2011 and 30 June 2010 is based on the total net assets less intangible assets, divided by the number of shares on issue at the end of each year. The calculation of net tangible assets per share at 30 June 2010 has been adjusted to reﬂ ect the one-for-nine renounceable Entitlement Oﬀ er in June 2011. 10 Share capital Group and Parent Opening balance as at 1 July 2009 Share capital issued Share capital repurchased and cancelled during the year Restricted shares vested during the year Transaction costs Closing balance as at 30 June 2010 Opening balance as at 1 July 2010 Share capital issued Share capital repurchased and cancelled during the year Entitlement Oﬀ er Transaction costs Closing balance as at 30 June 2011 Ordinary shares – unrestricted Number $000 585,314,624 26,907,379 (7,288,507) 1,480 – 828,613 165,437 (44,904) 10 (159) 604,934,976 948,997 604,934,976 26,537,944 (5,942,974) 69,538,342 – 948,997 153,048 (34,351) 351,169 (6,003) 695,068,288 1,412,860 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. The Parent issued 14,871,511 and 11,666,433 ordinary shares pursuant to the Parent’s PDP on 27 September 2010 and 31 March 2011 respectively. The PDP allows 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 2,736,590 shares on 27 September 2010 and 3,206,384 shares on 31 March 2011. These shares were immediately cancelled upon buy-back. Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 Contact Energy Limited Annual Report 2011 73 On 9 June 2011, the Parent issued 65,741,274 shares in relation to a one-for-nine renounceable Entitlement Oﬀ er made to all New Zealand and Australian resident shareholders at an issue price of $5.05 per share. On 13 June 2011, the Parent issued a further 3,797,068 shares in relation to a shortfall bookbuild for Rights not taken up during the initial oﬀ er. Contact has previously issued restricted ordinary shares (restricted shares) pursuant to the Employee Long-Term Incentive Scheme. The restricted shares are held in trust, and are recognised as part of the share-based payment reserve until performance hurdles are met. The restricted shares then become unrestricted and are transferred to ordinary share capital. While restricted shares confer the same rights on the holder as unrestricted ordinary 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 11. 11 Share-based payments Contact has an Employee Long-Term Incentive Scheme for participating employees whereby the value of the long-term incentive award is allocated as a mix of share options and performance share rights (options with an exercise price of zero), both under a Share Option Scheme, and restricted shares under a Restricted Share Plan. Under the Share Option Scheme and Restricted Share Plan, the share options and performance share rights will only be exercisable, and the restricted shares will only become unrestricted, to the extent that the relevant performance hurdles are met. For the restricted shares, share options and performance share rights issued under the Share Option Scheme and Restricted Share Plan, the hurdle is a comparison of Contact’s total shareholder return (TSR) relative to the TSR of a reference group comprising the NZX50 index over the relevant period, commencing on the eﬀ ective grant date. As a result of a review of the Employee Long-Term Incentive Scheme in 2010, no further restricted shares have been issued since the 1 October 2009 grant date. Performance share rights replaced restricted shares from October 2010. The Restricted Share Plan is now grand-parented but restricted shares issued prior to October 2010 are still held by participants and remain subject to the exercise hurdles and vesting criteria. The share options, performance share rights and restricted shares are unlisted and are personal to the employee and therefore cannot be traded. The total expense recognised for share-based payments under the Share Option Scheme and Restricted Share Plan during the year ended 30 June 2011 was $2.9 million (2010: $1.6 million). Share Option Scheme Under the Share Option Scheme, the Board issues share options to participating employees to acquire ordinary shares in the Parent at the market price determined at the eﬀ ective grant date. For share options granted in the years ended 30 June 2011 and 30 June 2010, the market price was the weighted average market price of the Parent’s ordinary shares traded on the NZSX over the ﬁ ve business days prior to the eﬀ ective grant date. Under the Share Option Scheme, the Board also issues performance share rights to participating employees to acquire ordinary shares in the Parent at zero cost. The share options and performance share rights do not entitle the participating employees to receive dividends or distributions from, nor vote in respect of, the shares subject to the share options and performance share rights. There is a vesting period of approximately three years from the eﬀ ective grant date before share options and performance share rights 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 ﬁ rst test date during which share options and performance share rights may be exercised, again to the extent that the performance hurdles are met. The share options and performance share rights may also be exercised if, between the eﬀ ective 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 and performance share rights 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 and performance share rights will lapse: • • • • if the performance hurdles are not met by the last measurement date, or if the share options or performance share rights are not exercised by the lapse date, or on the date on which the participant ceases to be employed by the Parent or, in certain cirumstances, the ultimate parent company (Origin Energy Limited) (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 and performance share rights). 74 Contact Energy Limited Annual Report 2011 Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 In the event of redundancy, the Share Option Scheme will continue, except that the number of share options and performance share rights will be recalculated on a proportionate basis. The number of share options granted and lapsed during the reporting period and on issue at the end of the reporting period is summarised below: Group and Parent 2011 Eﬀ ective grant date First exercise date 1 Jul 2006 15 Jan 2007 1 Oct 2007 1 Feb 2008 1 Oct 2008 1 Oct 2009 1 Oct 2010 1 Oct 2009 1 Oct 2009 1 Oct 2010 1 Oct 2010 1 Oct 2011 1 Oct 2012 1 Oct 2013 Expiry date 30 Nov 2011 30 Nov 2011 30 Nov 2012 30 Nov 2012 30 Nov 2013 30 Nov 2014 30 Nov 2015 Exercise price per option $7.35 $8.28 $9.15 $7.63 $8.60 $5.75 $5.71 Balance at 1 July 2010 284,077 13,413 314,031 15,008 670,919 1,656,203 – Granted Lapsed Balance at 30 June 2011 Exercisable at 30 June 2011 – – – – – – 3,982,607 – (13,413) (51,484) – (115,181) (183,924) (56,757) 284,077 – 262,547 15,008 555,738 1,472,279 3,925,850 2,953,651 3,982,607 (420,759) 6,515,499 – – – – – – – – Group and Parent 2010 Eﬀ ective grant date First exercise date 1 Jul 2006 15 Jan 2007 1 Oct 2007 1 Feb 2008 1 Oct 2008 1 Oct 2009 1 Oct 2009 1 Oct 2009 1 Oct 2010 1 Oct 2010 1 Oct 2011 1 Oct 2012 Expiry date 30 Nov 2011 30 Nov 2011 30 Nov 2012 30 Nov 2012 30 Nov 2013 30 Nov 2014 Exercise price per option Balance at 1 July 2009 Granted Lapsed Balance at 30 June 2010 Exercisable at 30 June 2010 $7.35 $8.28 $9.15 $7.63 $8.60 $5.75 316,898 13,413 364,486 15,008 804,833 – – – – – – 1,701,718 (32,821) – (50,455) – (133,914) (45,515) 284,077 13,413 314,031 15,008 670,919 1,656,203 1,514,638 1,701,718 (262,705) 2,953,651 – 7,927 – – – – 7,927 A further 59,485 share options have lapsed since 30 June 2011. The number of performance share rights granted and lapsed during the reporting period and on issue at the end of the reporting period is summarised below: Group and Parent 2011 Eﬀ ective grant date First exercise date Expiry date Exercise price per option Balance at 1 July 2010 Granted Lapsed Balance at 30 June 2011 Exercisable at 30 June 2011 1 Oct 2010 1 Oct 2013 30 Nov 2015 $0.00 – – 885,056 (12,613) 872,443 885,056 (12,613) 872,443 – – A further 12,433 performance share rights have lapsed since 30 June 2011. Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 Contact Energy Limited Annual Report 2011 75 Restricted Share Plan Under the now grand-parented Restricted Share Plan, the Board issues restricted shares to the participants at the market price determined at the eﬀ ective grant date. Although the participant has beneﬁ cial title to the restricted shares, under the terms of the Restricted Share Plan: • • the restricted shares are issued to an independent 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 to the restricted shares 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. No restricted shares were issued during the year ended 30 June 2011. For restricted shares issued in the year ended 30 June 2010, 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 ﬁ ve business days prior to the eﬀ ective grant date. Payment of the allocation price for the restricted shares was 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 eﬀ ective 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 or, in certain circumstances, the ultimate parent 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. The number of restricted shares granted, lapsed and vested during the reporting period and the unvested number of restricted shares at the end of the reporting period is summarised below: Group and Parent 2011 Eﬀ ective grant date First test date Final test date Shares issued Unallocated pool 1 Jul 2006 20 Nov 2006 15 Jan 2007 1 Oct 2007 1 Feb 2008 1 Oct 2008 1 Oct 2009 1 Oct 2009 1 Oct 2009 1 Oct 2009 1 Oct 2010 1 Oct 2010 1 Oct 2011 1 Oct 2012 1 Oct 2011 1 Oct 2011 1 Oct 2011 1 Oct 2012 1 Oct 2012 1 Oct 2013 1 Oct 2014 70,890 3,581 2,504 83,242 3,091 104,712 241,940 509,960 Allocation price per share $7.35 $7.55 $8.28 $9.15 $7.63 $8.60 $5.75 Unvested balance at 1 July 2010 8,028 55,125 – 1,024 55,066 2,807 94,318 292,112 508,480 Returned to unallocated pool Granted Vested – – – – – – – – – 58,683 – – (1,024) (9,028) – (16,192) (32,439) – – – – – – – – – – Unvested balance at 30 June 2011 66,711 55,125 – – 46,038 2,807 78,126 259,673 508,480 76 Contact Energy Limited Annual Report 2011 Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 Group and Parent 2010 Eﬀ ective grant date First test date Final test date Shares issued Unallocated pool 1 Jul 2006 20 Nov 2006 15 Jan 2007 1 Oct 2007 1 Feb 2008 1 Oct 2008 1 Oct 2009 1 Oct 2009 1 Oct 2009 1 Oct 2009 1 Oct 2010 1 Oct 2010 1 Oct 2011 1 Oct 2012 1 Oct 2011 1 Oct 2011 1 Oct 2011 1 Oct 2012 1 Oct 2012 1 Oct 2013 1 Oct 2014 70,890 3,581 2,504 83,242 3,091 104,712 241,940 509,960 Allocation price per share $7.35 $7.55 $8.28 $9.15 $7.63 $8.60 $5.75 Unvested balance at 1 July 2009 24,159 61,494 – 2,504 63,913 2,807 113,143 – Returned to unallocated pool 42,069 (6,369) – – (8,847) – (18,825) (8,028) Granted (58,200) – – – – – – 300,140 Unvested balance at 30 June 2010 8,028 55,125 – 1,024 55,066 2,807 94,318 292,112 Vested – – – (1,480) – – – – 268,020 241,940 – (1,480) 508,480 Pursuant to the Restricted Share Plan’s rules, where the rights to the restricted shares lapse, beneﬁ cial ownership of the restricted shares is transferred to the trustee to hold in trust in an unallocated pool, to be reallocated by the Board at a future date. As at 30 June 2011, 66,711 (2010: 8,028) restricted shares were held by the trustee in the unallocated pool. A further 624 restricted shares have been transferred to the unallocated pool since 30 June 2011. Adjustments to the Share Option Scheme and Restricted Share Plan In June 2011, Contact’s Board approved the following adjustments under the Share Option Scheme and Restricted Share Plan to compensate participants for any loss in value as a result of the Entitlement Oﬀ er: • • an adjustment to the exercise price for options issued under the Share Option Scheme in accordance with the formula set out in NZX Listing Rule 8.1.7(b), and the issue of further performance share rights in respect of performance share rights already issued under the Share Option Scheme and restricted shares issued under the Restricted Share Plan. Any additional securities issued remain subject to normal exercise hurdles and vesting periods. As a result, the Board approved the following adjustments to the exercise price for options issued under the Share Option Scheme: Group and Parent 2011 Tranche Old exercise price of options New exercise price of options 1 July 2006 $7.35 $7.27 1 October 2007 1 February 2008 1 October 2008 1 October 2009 1 October 2010 $9.15 $9.07 $7.63 $7.55 $8.60 $8.53 $5.75 $5.67 $5.71 $5.63 On 19 August 2011, the Board also approved the issue of 18,002 additional performance share rights. Fair value of share-based payments The fair value of services received in return for share options and performance share rights granted is based on the fair value of share options and performance share rights granted, measured using a combination of Monte-Carlo simulation and a binomial option pricing model. The valuation of the options and performance share rights granted in the year ended 30 June 2011 was based on the following weighted average assumptions: Group and Parent Risk-free interest rate Expected dividend yield Expected option life (in years) Expected share price volatility Weighted average remaining contractual life (in years) 30 June 2011 30 June 2010 4.3% 3.8% 5.1 18.0% 3.8 5.0% 5.0% 5.1 26.0% 3.7 Restricted shares are valued based on the market price at the eﬀ ective grant date, adjusted for dividends and distributions that are not received until the restricted shares vest. Volatility is based on historical 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 performance share rights issued during the year. Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 12 Cash and cash equivalents Unrestricted cash Cash and short-term deposits Bank overdrafts (refer to note 22) Cash and cash equivalents in the Statement of Cash Flows 13 Receivables and prepayments Contact Energy Limited Annual Report 2011 77 Group 30 June 2011 $000 Group 30 June 2010 $000 Parent 30 June 2011 $000 Parent 30 June 2010 $000 47,267 47,267 (2,099) 45,168 921 921 (2,039) (1,118) 47,191 47,191 (1,907) 45,284 – – (2,333) (2,333) Retail electricity, other receivables and accruals Less: provision for impairment Wholesale electricity receivables Net receivables Prepayments Interest receivable Advances to subsidiaries Advance to associates Group 30 June 2011 $000 Group 30 June 2010 $000 Parent 30 June 2011 $000 Parent 30 June 2010 $000 Note 193,383 (6,307) 53,147 240,223 2,985 3 – 310 176,308 (6,301) 47,049 217,056 1,796 1 – 295 163,024 (4,521) 53,147 211,650 2,985 3 32,896 – 141,391 (4,521) 47,049 183,919 1,796 1 24,699 – 29 Total receivables and prepayments 243,521 219,148 247,534 210,415 Receivables past due but not impaired Included in retail electricity, other receivables and accruals are receivables that are past due but not impaired. These relate to a number of customers who pay outside terms and for whom there is no recent history of default. 0–30 days past due 30–90 days past due Over 90 days past due Total receivables past due but not impaired Group 30 June 2011 $000 Group 30 June 2010 $000 Parent 30 June 2011 $000 Parent 30 June 2010 $000 21,874 8,010 2,497 32,381 18,885 6,510 2,722 28,117 18,687 7,035 2,232 27,954 14,755 4,459 2,431 21,645 Included in other operating expenses are receivables written-oﬀ during the year totalling $12.1 million (Group) and $10.7 million (Parent) (2010: $15.0 million (Group) and $12.0 million (Parent)). Refer to note 4. Provision for impairment Provision for impairment at the start of the year (Increase)/decrease in provision for the year Provision for impairment at the end of the year Group 30 June 2011 $000 Group 30 June 2010 $000 Parent 30 June 2011 $000 Parent 30 June 2010 $000 (6,301) (6) (6,307) (7,192) 891 (6,301) (4,521) – (4,521) (5,321) 800 (4,521) 78 Contact Energy Limited Annual Report 2011 Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 14 Inventories LPG Consumables and spare parts Inventory gas Total inventories Group 30 June 2011 $000 Group 30 June 2010 $000 Parent 30 June 2011 $000 Parent 30 June 2010 $000 7,162 6,597 97,753 111,512 4,677 6,774 46,915 58,366 – 6,417 97,753 104,170 – 6,537 46,915 53,452 Inventory gas relates to the gas reserves in the Ahuroa reservoir in excess of the reserves required for cushion gas. Refer to note 17. 15 Property, plant and equipment Group Cost Generation plant and equipment (including land and buildings) at deemed cost $000 Other land and buildings at cost $000 Other plant and equipment at cost $000 Generation capital work in progress at cost $000 Development capital work in progress at cost $000 Other capital work in progress at cost $000 Total $000 Balance as at 1 July 2009 Additions Transfers from capital work in progress Disposals 4,237,044 75,282 104,120 (10) 61,893 1,021 117 – 263,760 4,081 13,898 (2,058) 72,132 102,946 (40,572) – 321,501 232,685 (63,548) – 23,416 11,355 (14,015) – 4,979,746 427,370 – (2,068) Balance as at 30 June 2010 4,416,436 63,031 279,681 134,506 490,638 20,756 5,405,048 Balance as at 1 July 2010 Additions Transfers from capital work in progress Reclassiﬁ cation of asset class Transfer to intangible assets Disposals 4,416,436 151,876 422,832 6,748 – (58,309) 63,031 741 215 (10,706) – (227) 279,681 8,787 7,972 5,382 (2,229) (10,330) 134,506 28,365 (21,279) (1,480) – – 490,638 261,867 (401,386) 2,224 – – 20,756 6,085 (8,354) (2,168) – – 5,405,048 457,721 – – (2,229) (68,866) Balance as at 30 June 2011 4,939,583 53,054 289,263 140,112 353,343 16,319 5,791,674 Depreciation and impairment losses Balance as at 1 July 2009 Depreciation charge Disposals (574,754) (139,897) 10 (11,333) (2,636) – (151,228) (12,877) 1,811 Balance as at 30 June 2010 (714,641) (13,969) (162,294) Balance as at 1 July 2010 Depreciation charge Reclassiﬁ cation of asset class Transfer to intangible assets Disposals (714,641) (140,503) 989 – 58,309 (13,969) (1,422) 1,365 – 16 (162,294) (13,259) (2,354) 2,219 10,319 Balance as at 30 June 2011 (795,846) (14,010) (165,369) – – – – – – – – – – (2,830) – – (2,830) (2,830) – – – – (2,830) – – – – – – – – – – (740,145) (155,410) 1,821 (893,734) (893,734) (155,184) – 2,219 68,644 (978,055) Carrying value As at 30 June 2010 As at 30 June 2011 3,701,795 49,062 117,387 134,506 487,808 20,756 4,511,314 4,143,737 39,044 123,894 140,112 350,513 16,319 4,813,619 Contact Energy Limited Annual Report 2011 79 Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 Parent Cost Generation plant and equipment (including land and buildings) at deemed cost $000 Other land and buildings at cost $000 Other plant and equipment at cost $000 Generation capital work in progress at cost $000 Development capital work in progress at cost $000 Other capital work in progress at cost $000 Total $000 Balance as at 1 July 2009 Additions Transfers from capital work in progress Disposals 4,237,044 75,282 104,120 (10) 57,654 865 – – 136,127 5,293 6,256 (316) 72,132 102,946 (40,572) – 307,564 220,742 (63,548) – 18,003 4,828,524 409,892 – (326) 4,764 (6,256) – Balance as at 30 June 2010 4,416,436 58,519 147,360 134,506 464,758 16,511 5,238,090 Balance as at 1 July 2010 Additions Transfers from capital work in progress Reclassiﬁ cation of asset class Disposals 4,416,436 151,876 422,832 6,748 (58,309) 58,519 533 45 (10,225) – 147,360 6,915 6,264 4,468 (9,053) 134,506 28,365 (21,279) (1,480) – 464,758 254,424 (401,386) 2,224 – 16,511 5,238,090 445,368 – – (67,362) 3,255 (6,476) (1,735) – Balance as at 30 June 2011 4,939,583 48,872 155,954 140,112 320,020 11,555 5,616,096 Depreciation and impairment losses Balance as at 1 July 2009 Depreciation charge Disposals (574,754) (139,897) 10 (10,543) (2,550) – (79,969) (9,670) 316 Balance as at 30 June 2010 (714,641) (13,093) (89,323) Balance as at 1 July 2010 Depreciation charge Reclassiﬁ cation of asset class Disposals (714,641) (140,503) 989 58,309 (13,093) (1,255) 1,408 – (89,323) (9,527) (2,397) 9,053 Balance as at 30 June 2011 (795,846) (12,940) (92,194) – – – – – – – – – – – – – – – – – – – – – – – – – – – (665,266) (152,117) 326 (817,057) (817,057) (151,285) – 67,362 (900,980) Carrying value As at 30 June 2010 As at 30 June 2011 3,701,795 45,426 58,037 134,506 464,758 16,511 4,421,033 4,143,737 35,932 63,760 140,112 320,020 11,555 4,715,116 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 Ma-ori claimants. In the event that the Tribunal’s initial recommendation is conﬁ rmed and the land is to be returned, compensation will be paid to Contact under the provisions of the Public Works Act 1981. Generation plant and equipment and capital work in progress Deloitte, as an independent valuer, valued the generation plant and equipment and generation capital work in progress as at 30 June 2010. The carrying amount of generation plant and equipment and generation capital work in progress, had they been recognised at fair value at 30 June 2010, would have been in the range of $3.9 billion to $5.0 billion. 80 Contact Energy Limited Annual Report 2011 Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 16 Intangible assets Group Cost Balance as at 1 July 2009 Additions Disposals Balance as at 30 June 2010 Balance as at 1 July 2010 Additions Transfer from property, plant and equipment Disposals Balance as at 30 June 2011 Amortisation and impairment losses Balance as at 1 July 2009 Amortisation charge Disposals Balance as at 30 June 2010 Balance as at 1 July 2010 Amortisation charge Transfer from property, plant and equipment Disposals Balance as at 30 June 2011 Carrying value As at 30 June 2010 As at 30 June 2011 Parent Cost Balance as at 1 July 2009 Additions Disposals Balance as at 30 June 2010 Balance as at 1 July 2010 Additions Disposals Balance as at 30 June 2011 Amortisation and impairment losses Balance as at 1 July 2009 Amortisation charge Disposals Balance as at 30 June 2010 Balance as at 1 July 2010 Amortisation charge Disposals Balance as at 30 June 2011 Carrying value As at 30 June 2010 As at 30 June 2011 Goodwill $000 Patents $000 Gas storage rights $000 Computer software $000 Total $000 181,941 – – 181,941 181,941 – – – 181,941 – – – – – – – – – 1,222 – – 1,222 1,222 – – – 1,222 (1,222) – – (1,222) (1,222) – – – (1,222) 30,868 2,485 – 51,897 36,050 (135) 265,928 38,535 (135) 33,353 87,812 304,328 33,353 1,659 – – 87,812 67,592 2,229 (7,080) 304,328 69,251 2,229 (7,080) 35,012 150,553 368,728 – – – – – (294) – – (294) (12,547) (6,493) 135 (13,769) (6,493) 135 (18,905) (20,127) (18,905) (10,844) (2,219) 7,080 (20,127) (11,138) (2,219) 7,080 (24,888) (26,404) 181,941 181,941 – – 33,353 68,907 284,201 34,718 125,665 342,324 Goodwill $000 Patents $000 Gas storage rights $000 Computer software $000 Total $000 123,307 – – 123,307 123,307 – – 123,307 – – – – – – – – 123,307 123,307 – – – – – – – – – – – – – – – – – – 30,868 2,485 – 51,897 36,050 (135) 206,072 38,535 (135) 33,353 87,812 244,472 33,353 1,659 – 87,812 67,592 (7,080) 244,472 69,251 (7,080) 35,012 148,324 306,643 – – – – – (294) – (294) (12,547) (6,493) 135 (12,547) (6,493) 135 (18,905) (18,905) (18,905) (10,834) 7,080 (18,905) (11,128) 7,080 (22,659) (22,953) 33,353 68,907 225,567 34,718 125,665 283,690 Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 Contact Energy Limited Annual Report 2011 81 Goodwill For the purpose of impairment testing, all goodwill is allocated to the retail electricity (Group: $143.0 million; Parent: $87.6 million), retail gas (Group and Parent: $35.7 million) and LPG (Group: $3.2 million; Parent: nil) cash-generating units. The impairment test for each unit is based on a value in use discounted cash ﬂ ow valuation. Cash ﬂ ow projections are based on a 10-year ﬁ nancial forecast for the underlying business and are extrapolated using an average annual growth rate of approximately 1.0–3.0 per cent. 10-year ﬁ nancial forecasts are considered appropriate because of the long-term nature of the business. The cash ﬂ ow projections are discounted using post-tax discount rates of 8.0–10.0 per cent. Key assumptions in the value in use calculations for the cash-generating units are: Assumptions Method of determination Customer numbers and customer churn Gross margin per customer Operating costs 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. Review of actual gross margin per customer and consideration of expected market movements and impacts. Review of actual operating costs and consideration of expected market movements and impacts. Gas storage rights In June 2008, Contact acquired the exclusive right to use the Ahuroa reservoir in order to develop an underground gas storage facility. The 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. These assets included a petroleum mining licence (PML 38139, the PML) for an area that includes the Ahuroa reservoir. In December 2010 Contact was issued Petroleum Mining Permit (PMP) 52278 with a term of 40 years. The PMP exists concurrently with the PML but gives Contact exclusive rights to the Ahuroa reservoir. Additions to gas storage rights since acquisition relate to capitalised interest on the original acquisition of the rights. Impairment No impairment exists for any intangible asset at 30 June 2011 (2010: nil). 17 Gas storage – cushion gas As part of the acquisition of the gas storage rights (refer to note 16), Contact also secured beneﬁ cial 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 since acquisition, are referred to as cushion gas and represent the investment necessary to enable the ﬁ eld to be used for the storage of future ‘operational’ gas. Cushion gas is recognised at cost, which includes capitalised interest, and is presented in the Statement of Financial Position as a separate non-current, non-depreciable asset, referred to as gas storage – cushion gas. Gas injected in excess of cushion gas requirements is treated as inventory. Refer to note 14. 82 Contact Energy Limited Annual Report 2011 Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 18 Investment in jointly controlled entity Name of entity Gasbridge Joint Venture 30 June 2011 30 June 2010 Principal activity 50% 50% Liqueﬁ ed natural gas importation development Interest held by Group 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. During the year ended 30 June 2009, Contact and Genesis Power Limited decided to put on hold the development of the land-based liqueﬁ ed natural gas terminal. As a result of this decision, Contact wrote-oﬀ its share of the assets of the Gasbridge Joint Venture relating to the facility. The following amounts represent Contact’s 50 per cent share of the remaining assets and liabilities, income and results of the joint venture. These are included in the Statement of Financial Position and the Income Statement. Group Assets Current assets Total assets Liabilities Current liabilities Total liabilities Net (liabilities)/assets Income Expenses Loss after income tax Proportionate interest in joint venture’s commitments 30 June 2011 $000 30 June 2010 $000 4 4 5 5 (1) – (5) (5) – 7 7 2 2 5 3 (10) (7) – There are no contingent liabilities relating to Contact’s interest in the joint venture and no contingent liabilities in the joint venture itself (2010: nil). 19 Investment in subsidiaries Interest held by Parent Name of entity 30 June 2011 30 June 2010 Principal activity Country of incorporation Empower Limited Contact Aria Limited Contact Wind Limited Rockgas Limited Contact Australia Pty Limited Contact Operations Australia Pty Limited 100% 100% 100% 100% 100% 100% 100% Electricity retailer and gas wholesaler 100% Investment holding company 100% Wind generation development 100% LPG retailer 100% Investment holding company 100% Manages Australian interests relating to operation and New Zealand New Zealand New Zealand New Zealand Australia Australia maintenance of Oakey Power Holdings Pty Limited All subsidiaries have a 30 June balance date. Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 20 Investment in associates Contact Energy Limited Annual Report 2011 83 Interest held by Group Name of entity 30 June 2011 30 June 2010 Principal activity Oakey Power Holdings Pty Limited Rockgas Timaru Limited Energyhedge Limited 25% 50% 20% 25% Electricity generation 50% LPG distribution 20% Futures trading Country of incorporation Australia New Zealand New Zealand Carrying value of associates Carrying value at the start of the year Purchase of investment in Energyhedge Write-oﬀ of investment in Energyhedge* Share of recognised revenue and expenses Movements taken to foreign currency translation reserve Dividends received Carrying value at the end of the year Group 30 June 2011 $000 Group 30 June 2010 $000 Parent 30 June 2011 $000 Parent 30 June 2010 $000 8,809 – (8) 3,862 420 (1,480) 11,603 8,687 8 – 3,272 (147) (3,011) 8,809 1,587 – (8) – – – 1,579 1,579 8 – – – – 1,587 * In the year ended 30 June 2011 Contact wrote-oﬀ its investment in Energyhedge Limited following the transition of the energy hedge trading platform to the ASX. Rockgas Timaru Limited has a balance sheet date of 31 March. Group Aggregate summary ﬁ nancial information of associates, not adjusted for the percentage held by Contact Total assets Total liabilities Total revenues Proﬁ t for the year 30 June 2011 $000 30 June 2010 $000 146,324 100,355 49,507 15,186 146,487 111,803 43,791 13,334 There are no contingent liabilities relating to Contact’s interest in associates and no contingent liabilities in the associates themselves (2010: nil). 21 Available-for-sale ﬁ nancial assets Available-for-sale ﬁ nancial assets are ﬁ nancial assets that do not fall into any other ﬁ nancial instrument category. Contact does not currently intend to sell these assets. At cost* Unlisted shares in Liquigas Limited Total available-for-sale ﬁ nancial assets Group 30 June 2011 $000 Group 30 June 2010 $000 Parent 30 June 2011 $000 Parent 30 June 2010 $000 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. 84 Contact Energy Limited Annual Report 2011 Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 22 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 23. Carrying value of borrowings Borrowing currency denomination Group 30 June 2011 $000 Group 30 June 2010 $000 Parent 30 June 2011 $000 Parent 30 June 2010 $000 Current borrowings Bank overdraft Finance lease liabilities Total current borrowings Non-current borrowings Non-current portion of term borrowings 6.9% February 2013 5.3% March 2014 5.3% March 2015 5.6% March 2018 7.1% April 2018 Fixed rate senior notes 8.0% retail ﬁ xed rate bonds May 2014 7.86% wholesale ﬁ xed rate bonds April 2017 Total non-current portion of term borrowings Committed credit facilities Finance lease liabilities NZD NZD USD USD USD USD USD NZD NZD NZD NZD 2,099 913 3,012 97,989 112,848 135,851 53,691 36,536 436,915 543,681 99,788 2,039 1,141 3,180 121,094 136,282 163,223 64,913 44,573 530,085 541,809 99,795 1,907 899 2,806 2,333 1,120 3,453 97,989 112,848 135,851 53,691 36,536 436,915 543,681 99,788 121,094 136,282 163,223 64,913 44,573 530,085 541,809 99,795 1,080,384 – 1,726 1,171,689 106,200 1,344 1,080,384 – 1,722 1,171,689 106,200 1,327 Total non-current borrowings 1,082,110 1,279,233 1,082,106 1,279,216 Foreign currency denominated term borrowings are hedged by cross currency interest rate swaps and are measured at fair value less deferred ﬁ nancing costs in the Statement of Financial Position. All other borrowings are held at amortised cost using the eﬀ ective interest rate less deferred ﬁ nancing costs. The reconciliation of the New Zealand dollar equivalent of contracted term borrowings to the Statement of Financial Position carrying value is detailed below: Group and Parent 2011 New Zealand dollar equivalent of notional borrowings Deferred ﬁ nancing costs Net fair value adjustment Fixed rate senior notes $000 Retail ﬁ xed rate bonds $000 587,299 (1,006) (149,378) 550,000 (6,319) – Wholesale ﬁ xed rate bonds $000 100,000 (212) – Total term borrowings $000 1,237,299 (7,537) (149,378) Carrying value of term borrowings 436,915 543,681 99,788 1,080,384 Current Non-current Group and Parent 2010 New Zealand dollar equivalent of notional borrowings Deferred ﬁ nancing costs Net fair value adjustment – 436,915 – 543,681 – 99,788 – 1,080,384 436,915 543,681 99,788 1,080,384 Fixed rate senior notes $000 Retail ﬁ xed rate bonds $000 587,299 (1,275) (55,939) 550,000 (8,191) – Wholesale ﬁ xed rate bonds $000 100,000 (205) – Total term borrowings $000 1,237,299 (9,671) (55,939) Carrying value of term borrowings 530,085 541,809 99,795 1,171,689 Current Non-current – 530,085 – 541,809 – 99,795 – 1,171,689 530,085 541,809 99,795 1,171,689 Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 Contact Energy Limited Annual Report 2011 85 Compliance with covenants All borrowing covenant requirements were met at 30 June 2011 and at 30 June 2010. Security Except for ﬁ nance 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. Credit facilities Contact has total committed facilities at 30 June 2011 of $450.0 million, of which nil has been drawn (2010: $520.0 million, $106.2 million drawn). As at 30 June 2011, $150.0 million of the facilities mature in December 2012, $270.0 million mature in March 2016 and $30.0 million mature in May 2016. These committed credit facilities also support a $250.0 million commercial paper programme. This programme is unutilised at 30 June 2011 (30 June 2010: unutilised). Finance lease liabilities Future minimum lease payments are as follows: Group 30 June 2011 $000 Group 30 June 2010 $000 Parent 30 June 2011 $000 Parent 30 June 2010 $000 959 1,876 2,835 (196) 2,639 1,191 1,655 2,846 (361) 2,485 941 1,871 2,812 (191) 2,621 1,166 1,637 2,803 (356) 2,447 Not later than one year Later than one year and not later than ﬁ ve years Minimum lease payments Future ﬁ nance charges on ﬁ nance leases Present value of ﬁ nance lease liabilities The ﬁ nance leases relate to computer equipment. The present value of ﬁ nance lease liabilities are as follows: Not later than one year Later than one year and not later than ﬁ ve years Present value of ﬁ nance lease liabilities Group 30 June 2011 $000 Group 30 June 2010 $000 Parent 30 June 2011 $000 Parent 30 June 2010 $000 913 1,726 2,639 1,141 1,344 2,485 899 1,722 2,621 1,120 1,327 2,447 86 Contact Energy Limited Annual Report 2011 Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 23 Derivative ﬁ nancial instruments Financial risk management objectives In the normal course of business, Contact is exposed to a variety of ﬁ nancial 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 ﬁ nancial markets and seeks to minimise potential adverse eﬀ ects on Contact’s ﬁ nancial performance. Contact uses derivative ﬁ nancial instruments to hedge these risk exposures. Fair value of derivative ﬁ nancial instruments The fair value of the signiﬁ cant types of derivative ﬁ nancial instruments outstanding are summarised below: Group Cross currency interest rate swaps Interest rate derivatives Cross currency interest rate swaps – margin Forward foreign exchange derivatives Electricity price hedges Total derivative ﬁ nancial instruments Current Non-current Parent Cross currency interest rate swaps Interest rate derivatives Cross currency interest rate swaps – margin Forward foreign exchange derivatives Electricity price hedges Total derivative ﬁ nancial instruments Current Non-current Fair value assets 30 June 2011 $000 Fair value liabilities 30 June 2011 $000 Fair value assets 30 June 2010 $000 Fair value liabilities 30 June 2010 $000 771 – – – 1,255 2,026 1,669 357 2,026 (150,160) (30,723) (6,026) (14,093) (25,489) (226,491) (46,142) (180,349) (226,491) 724 – – 91 4,927 5,742 4,955 787 5,742 (56,555) (32,405) (3,325) (1,511) (36,910) (130,706) (31,895) (98,811) (130,706) Fair value assets 30 June 2011 $000 Fair value liabilities 30 June 2011 $000 Fair value assets 30 June 2010 $000 Fair value liabilities 30 June 2010 $000 771 – – – 1,255 2,026 1,669 357 2,026 (150,160) (30,723) (6,026) (14,093) (25,489) (226,491) (46,142) (180,349) (226,491) 724 – – 50 4,927 5,701 4,914 787 5,701 (56,555) (32,405) (3,325) (1,511) (36,910) (130,706) (31,895) (98,811) (130,706) Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 Contact Energy Limited Annual Report 2011 87 Changes in fair value of ﬁ nancial instruments The changes in the fair value of ﬁ nancial instruments recognised in the Income Statement and cash ﬂ ow hedge reserve are summarised below: Group Favourable/(unfavourable) Cross currency interest rate swaps Borrowings Hedge accounting designation Fair value hedge Interest rate derivatives Cross currency interest rate swaps – margin Forward foreign exchange derivatives Electricity price hedges Electricity price hedges Income tax on change in fair value of ﬁ nancial instruments taken to other comprehensive income No hedge Cash ﬂ ow hedge Cash ﬂ ow hedge Cash ﬂ ow hedge No hedge Total change in fair value of ﬁ nancial instruments Income Statement 30 June 2011 $000 Cash ﬂ ow hedge reserve 30 June 2011 $000 Income Statement 30 June 2010 $000 Cash ﬂ ow hedge reserve 30 June 2010 $000 (93,558) 93,439 (119) 1,477 (6,160) – (1,627) 489 – (5,940) – – – 205 3,459 (12,673) 8,887 – (4,957) (5,079) (1,012) 1,104 92 3,683 3,135 – (3,097) 718 – 4,531 – – – 647 (4,123) 807 10,967 – (1,693) 6,605 Parent Favourable/(unfavourable) Cross currency interest rate swaps Borrowings Hedge accounting designation Fair value hedge Interest rate derivatives Cross currency interest rate swaps – margin Forward foreign exchange derivatives Electricity price hedges Electricity price hedges Income tax on change in fair value of ﬁ nancial instruments taken to other comprehensive income No hedge Cash ﬂ ow hedge Cash ﬂ ow hedge Cash ﬂ ow hedge No hedge Total change in fair value of ﬁ nancial instruments Income Statement 30 June 2011 $000 Cash ﬂ ow hedge reserve 30 June 2011 $000 Income Statement 30 June 2010 $000 Cash ﬂ ow hedge reserve 30 June 2010 $000 (93,558) 93,439 (119) 1,477 (6,160) 1 (1,627) 489 – (5,939) – – – 205 3,459 (12,633) 8,887 – (4,957) (5,039) (1,012) 1,104 92 3,683 3,135 – (3,097) 718 – 4,531 – – – 647 (4,123) 715 10,967 – (1,693) 6,513 88 Contact Energy Limited Annual Report 2011 Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 Movement in cash ﬂ ow hedge reserve Balance as at 1 July 2009 Eﬀ ective portion of cash ﬂ ow hedges recognised in the cash ﬂ ow hedge reserve Amount transferred from the cash ﬂ ow hedge reserve to revenue Amount transferred from the cash ﬂ ow hedge reserve to operating expenses Amount transferred from the cash ﬂ ow hedge reserve to change in fair value of ﬁ nancial instruments (ineﬀ ectiveness) Amount transferred from the cash ﬂ ow hedge reserve to property, plant and equipment Amount transferred from the cash ﬂ ow hedge reserve to deferred tax Balance as at 30 June 2010 Balance as at 1 July 2010 Eﬀ ective portion of cash ﬂ ow hedges recognised in the cash ﬂ ow hedge reserve Amount transferred from the cash ﬂ ow hedge reserve to revenue Amount transferred from the cash ﬂ ow hedge reserve to operating expenses Amount transferred from the cash ﬂ ow hedge reserve to change in fair value of ﬁ nancial instruments (ineﬀ ectiveness) Amount transferred from the cash ﬂ ow hedge reserve to property, plant and equipment Amount transferred from the cash ﬂ ow hedge reserve to deferred tax Balance as at 30 June 2011 Group $000 (38,660) 1,680 2,213 505 647 1,863 (303) Parent $000 (38,608) 1,538 2,213 555 647 1,863 (303) (32,055) (32,095) (32,055) (9,871) 283 182 6,405 1,238 (3,316) (32,095) (9,871) 283 222 6,405 1,238 (3,316) (37,134) (37,134) Risk management Contact is committed to having appropriate systems to identify material risks, and to ensuring that the ﬁ nancial impact of these risks are well understood and reported, limits are in place to control selected exposures, and collective and individual responsibilities and accountabilities are assigned and understood. Risk management is carried out by a central treasury department (Treasury) for interest rate and foreign exchange exposures and Wholesale and Energy Risk functions for the management and oversight of commodity risk through the Commodity Risk Management System, which provides the framework for identifying, monitoring and managing the commodity exposures of Contact. Treasury, Energy Risk and Wholesale operate under policies approved by the Board. The Board’s policies provide written principles for overall risk management, as well as written policies covering speciﬁ c areas, such as foreign currency risk, price risk, credit risk, interest rate risk, use of derivative ﬁ nancial instruments and non-derivative ﬁ nancial 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 currencies other than Contact’s functional currency, New Zealand dollars. The currencies giving rise to this risk are primarily the Australian dollar, US dollar, Swiss franc, Japanese yen 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 (ﬁ xed to ﬂ oating), 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. Forward foreign exchange contracts The aggregate notional principal amount of the outstanding forward foreign exchange contracts at 30 June 2011 is $196.6 million (2010: $44.4 million). As at 30 June 2011, all forward foreign exchange contracts are designated in a cash ﬂ ow hedge relationship. The hedged anticipated transactions denominated in foreign currencies are expected to occur at various dates between one month and four years and one month (2010: between one month and nine months) from the end of the reporting period. Gains and losses recognised in the cash ﬂ ow hedge reserve in other comprehensive income on forward foreign exchange contracts as at 30 June 2011 will be released at dates when the cash ﬂ ow 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 ended 30 June 2011, no hedges were de-designated, and all underlying forecast transactions remain highly probable to occur as originally forecast. Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 Sensitivity analysis Contact Energy Limited Annual Report 2011 89 At 30 June 2011, 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 proﬁ t for the year would not have been materially diﬀ erent, and the cash ﬂ ow hedge reserve component of other comprehensive income would have been $10.9 million higher/ lower (2010: $2.7 million higher/lower), arising from unrealised foreign exchange gains/losses on the revaluation of forward foreign exchange contracts in a cash ﬂ ow hedge relationship. (ii) Price risk Contact is exposed to commodity price risk, primarily from electricity prices. To manage its commodity price risk in respect of electricity, Contact utilises electricity price hedges including options, where Contact sells and buys electricity price hedges at a ﬁ xed price. Electricity price hedges The aggregate notional volume of the outstanding ﬁ xed volume electricity price hedges at 30 June 2011 is 656 gigawatt hours (GWh) (2010: 1,028 GWh). The aggregate notional volume of the outstanding variable volume electricity price hedges at 30 June 2011 is 846 GWh (2010: 1,073 GWh). Electricity price hedges are hedging underlying exposures over various trade periods out to December 2014. As at 30 June 2011 the fair value of the electricity price hedges is $(24.2) million (2010: $(32.0) million), of which $(23.7) million is designated in a cash ﬂ ow hedge relationship (2010: $(30.9) million). The hedged anticipated transactions are expected to occur at various dates between one month and three years and six months (2010: between one month and four years and six months) from the end of the reporting period. Gains and losses on hedged electricity price hedges recognised in the cash ﬂ ow hedge reserve in other comprehensive income will be continually released to the Income Statement in the year in which the underlying sale/purchase transactions are recognised in the Income Statement. Sensitivity analysis The following table summarises the impact of increases/decreases in the relevant electricity forward prices on Contact’s post-tax proﬁ t for the year and on the cash ﬂ ow hedge reserve component of other comprehensive income. The sensitivity analysis is based on the assumption that the relevant market prices have increased/decreased by 10 per cent, with all other variables held constant: Group and Parent Favourable/(unfavourable) Impact on post-tax proﬁ t Impact on other comprehensive income 30 June 2011 +10% $000 30 June 2011 -10% $000 30 June 2010 +10% $000 30 June 2010 -10% $000 1,047 5,221 433 (3,910) (1,535) 6,518 (686) (7,040) (iii) Interest rate risk (cash ﬂ ow and fair value) Contact’s income and operating cash ﬂ ows 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 ﬁ xed interest rates. Contact manages the combined interest and foreign currency risk on borrowings issued in foreign currencies by entering into cross currency interest rate swaps to convert the proceeds into a ﬂ oating rate New Zealand dollar exposure. In addition, New Zealand dollar interest rate swaps are used to cover domestic interest rate risk. Cross currency interest rate swaps The aggregate notional principal amount of the outstanding cross currency interest rate swap contracts at 30 June 2011 is $587.3 million (2010: $587.3 million). The cross currency interest rate swaps have been split into two components for the purpose 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 ﬂ ow hedge. The hedged anticipated interest payments are expected to occur at various dates between one month and seven years (2010: one month and eight years) from the end of the reporting period as a result of the maturities of the underlying borrowings. 90 Contact Energy Limited Annual Report 2011 Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 Interest rate swaps The aggregate notional principal amount of the outstanding interest rate swap contracts at 30 June 2011 is $730.0 million (2010: $895.0 million) including $95.0 million of forward starting swaps (2010: $170.0 million). The anticipated interest payment transactions are expected to occur at various dates between one month and eight years (2010: one month and nine years) from the end of the reporting period. Sensitivity analysis The following table summarises the impact on Contact’s post-tax proﬁ t if interest rates had been 100 basis points higher or 25 basis points lower, with all other variables held constant. 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 NZ IAS 39. There would be no eﬀ ect on other comprehensive income. Group and Parent Favourable/(unfavourable) Impact on post-tax proﬁ t 30 June 2011 +100bps $000 30 June 2011 -25bps $000 30 June 2010 +100bps $000 30 June 2010 -25bps $000 7,646 (1,990) 7,207 (2,694) (b) Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations, resulting in ﬁ nancial loss to Contact. Contact is exposed to credit risk in the normal course of business arising from cash, short-term investments, trade receivables, other receivables and derivative ﬁ nancial instruments. The Board has approved a policy of only dealing with creditworthy counterparties and obtaining suﬃ cient collateral, where appropriate, as a means of mitigating the risk of ﬁ nancial 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 ﬁ nancial institutions and other organisations in the relevant industry. Contact’s exposure and the credit ratings of its counterparties are continually monitored, and the aggregate value of transactions concluded is spread amongst approved counterparties. The carrying amounts of ﬁ nancial assets recognised in the Statement of Financial Position best represent Contact’s maximum exposure to credit risk at the end of the reporting period without taking account of the value of any collateral obtained. Contact does not have any signiﬁ cant 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 owing to Contact’s large customer base in a diverse range of industries throughout New Zealand. Contact has no signiﬁ cant concentration of credit risk with any one institution, despite there being signiﬁ cant sales to NZX Energy. NZX Energy acts as an electricity market clearing agent and the counterparty risk sits with the market participants. Market participants are required to provide letters of credit to NZX Energy, which could be called upon should any market participant default. (c) Liquidity risk Contact’s liquidity risk arises from its need to ensure it has access to suﬃ cient committed ﬁ nancing to meet its committed expenditure and debt repayment obligations over an appropriate time period. Prudent liquidity risk management requires Contact to maintain suﬃ cient liquidity, which can comprise cash and marketable securities and/or the availability of funding through committed credit facilities and the spreading of debt maturities. To reduce reﬁ nancing risk, debt maturities are spread over a number of years. Liquidity risk is monitored by continually forecasting actual cash ﬂ ows. Contractual maturities of ﬁ nancial liabilities and derivative ﬁ nancial instruments The contractual and expected maturities disclosed below are the contracted undiscounted cash ﬂ ows for all ﬁ nancial liabilities, except for the derivative ﬁ nancial instruments where the contractual maturities are the undiscounted settlements expected under the contracts. As the amounts presented are contracted undiscounted cash ﬂ ows and include forward starting derivatives, the totals will not reconcile with the Statement of Financial Position. Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 Contact Energy Limited Annual Report 2011 91 Group 2011 Outﬂ ow/(inﬂ ow) Payables and accruals Borrowings Finance lease liabilities Net settled derivative ﬁ nancial instruments: Electricity price hedges Interest rate derivatives Gross settled derivative ﬁ nancial instruments: Forward foreign exchange derivatives – Inﬂ ow – Outﬂ ow Cross currency interest rate swaps – Inﬂ ow – Outﬂ ow Total Group 2010 Outﬂ ow/(inﬂ ow) Payables and accruals Borrowings Finance lease liabilities Net settled derivative ﬁ nancial instruments: Electricity price hedges Interest rate derivatives Gross settled derivative ﬁ nancial instruments: Forward foreign exchange derivatives – Inﬂ ow – Outﬂ ow Cross currency interest rate swaps – Inﬂ ow – Outﬂ ow Total contractual cash ﬂ ows $000 229,440 1,317,434 2,835 Note 22 Less than 1 year $000 229,440 77,237 959 1–2 years $000 – 165,249 1,427 2–5 years $000 – 879,262 449 More than 5 years $000 – 195,686 – 23,196 33,776 17,324 11,013 5,632 8,383 240 11,188 – 3,192 (179,462) 196,647 (137,722) 150,229 (35,707) 40,659 (6,033) 5,759 – – (486,092) 700,125 (23,151) 22,981 (113,371) 162,456 (261,733) 386,249 (87,837) 128,439 1,837,899 348,310 234,728 1,015,381 239,480 Total contractual cash ﬂ ows $000 242,170 1,600,704 2,846 Note 22 Less than 1 year $000 242,170 82,486 1,191 30,037 36,761 7,411 11,889 (42,707) 44,127 (610,540) 748,000 (42,707) 44,127 (27,763) 27,321 1–2 years $000 – 79,746 969 13,902 7,782 2–5 years $000 – 1,211,689 686 More than 5 years $000 – 226,783 – 8,724 12,725 – 4,365 – – – – – – (27,756) 32,200 (449,713) 559,664 (105,308) 128,815 Total 2,051,398 346,125 106,843 1,343,775 254,655 92 Contact Energy Limited Annual Report 2011 Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 Parent 2011 Outﬂ ow/(inﬂ ow) Payables and accruals Borrowings Finance lease liabilities Net settled derivative ﬁ nancial instruments: Electricity price hedges Interest rate derivatives Gross settled derivative ﬁ nancial instruments: Forward foreign exchange derivatives – Inﬂ ow – Outﬂ ow Cross currency interest rate swaps – Inﬂ ow – Outﬂ ow Total Parent 2010 Outﬂ ow/(inﬂ ow) Payables and accruals Borrowings Finance lease liabilities Net settled derivative ﬁ nancial instruments: Electricity price hedges Interest rate derivatives Gross settled derivative ﬁ nancial instruments: Forward foreign exchange derivatives – Inﬂ ow – Outﬂ ow Cross currency interest rate swaps – Inﬂ ow – Outﬂ ow Total contractual cash ﬂ ows $000 261,054 1,317,434 2,812 Note 22 Less than 1 year $000 261,054 77,237 941 1–2 years $000 – 165,249 1,422 2–5 years $000 – 879,262 449 More than 5 years $000 – 195,686 – 23,196 33,776 17,324 11,013 5,632 8,383 240 11,188 – 3,192 (179,462) 196,647 (137,722) 150,229 (35,707) 40,659 (6,033) 5,759 – – (486,092) 700,125 (23,151) 22,981 (113,371) 162,456 (261,733) 386,249 (87,837) 128,439 1,869,490 379,906 234,723 1,015,381 239,480 Total contractual cash ﬂ ows $000 271,536 1,600,998 2,803 Note 22 Less than 1 year $000 271,536 82,780 1,166 30,037 36,761 7,411 11,889 (44,691) 46,152 (610,540) 748,000 (44,691) 46,152 (27,763) 27,321 1–2 years $000 – 79,746 952 13,902 7,782 2–5 years $000 – 1,211,689 685 More than 5 years $000 – 226,783 – 8,724 12,725 – 4,365 – – – – – – (27,756) 32,200 (449,713) 559,664 (105,308) 128,815 Total 2,081,056 375,801 106,826 1,343,774 254,655 Fair values The carrying amount of ﬁ nancial assets and ﬁ nancial liabilities recorded in the ﬁ nancial statements approximates their fair values, with the exception of the wholesale and retail ﬁ xed rate bonds. The retail bonds have a fair value of $598.8 million (2010: $591.6 million), compared with a carrying value of $543.7 million (2010: $541.8 million). The wholesale bonds have a fair value of $108.4 million (2010: $104.3 million), compared with a carrying value of $99.8 million (2010: $99.8 million). Estimation of fair values The fair values of ﬁ nancial assets and ﬁ nancial liabilities are determined using a hierarchy as follows: • • Level one – the fair value is determined using unadjusted quoted prices from an active market for identical assets and liabilities. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The quoted market price used for ﬁ nancial instruments held by Contact is the current bid price. Level two – the fair value is derived from inputs other than quoted prices included within level one that are observable for the asset or liability. Fair value is determined by using a discounted future cash ﬂ ow valuation model derived from a directly (i.e from prices) or indirectly (i.e derived from prices using a discounted future cash ﬂ ow valuation model) observable applicable forward price curve (for the relevant interest rate, foreign exchange rate or commodity price) and a discount rate. Financial instruments in this level include short-term electricity derivatives, forward foreign exchange contracts, interest rate derivatives and foreign currency denominated debt. Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 Contact Energy Limited Annual Report 2011 93 • Level three – the fair value is derived from inputs that are not based on observable market data and is estimated by using a discounted future cash ﬂ ow valuation model involving internal price curves (for the relevant commodity price) and a discount rate. Financial instruments included in this level include certain long-term electricity price hedges, which are valued using internal price paths. Where the fair value of a derivative ﬁ nancial instrument is calculated as the present value of the estimated future cash ﬂ ows of the instrument, the two key types of variable used by the valuation technique are: • • forward price curves (for the relevant underlying interest rate, foreign exchange rate or electricity prices), and discount rates. The selection of variables requires signiﬁ cant judgement and therefore there is a range of reasonably possible assumptions in respect of these variables that could be used in estimating the fair values of these derivatives. Maximum use is made of observable market data when selecting variables and developing assumptions for the valuation techniques. The following table presents the hierarchy of the Group and Parents’ ﬁ nancial assets and liabilities that are recognised at fair value: Group 2011 Financial assets at fair value Derivatives designated as cash ﬂ ow hedging instruments Derivatives designated as fair value hedging instruments Derivatives held for trading Financial liabilities at fair value Derivatives designated as cash ﬂ ow hedging instruments Derivatives designated as fair value hedging instruments Fixed rate senior notes Derivatives held for trading Group 2010 Financial assets at fair value Derivatives designated as cash ﬂ ow hedging instruments Derivatives designated as fair value hedging instruments Financial liabilities at fair value Derivatives designated as cash ﬂ ow hedging instruments Derivatives designated as fair value hedging instruments Fixed rate senior notes Derivatives held for trading Level one $000 Level two $000 Level three $000 Total balance $000 – – – – – – – 1,184 771 71 22,736 150,160 436,915 31,326 – – – 22,269 – – – 1,184 771 71 45,005 150,160 436,915 31,326 Level one $000 Level two $000 Level three $000 Total balance $000 – – – – – – 5,018 724 5,191 56,555 530,085 33,365 – – 5,018 724 35,595 – – – 40,786 56,555 530,085 33,365 94 Contact Energy Limited Annual Report 2011 Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 Parent 2011 Financial assets at fair value Derivatives designated as cash ﬂ ow hedging instruments Derivatives designated as fair value hedging instruments Derivatives held for trading Financial liabilities at fair value Derivatives designated as cash ﬂ ow hedging instruments Derivatives designated as fair value hedging instruments Fixed rate senior notes Derivatives held for trading Parent 2010 Financial assets at fair value Derivatives designated as cash ﬂ ow hedging instruments Derivatives designated as fair value hedging instruments Financial liabilities at fair value Derivatives designated as cash ﬂ ow hedging instruments Derivatives designated as fair value hedging instruments Fixed rate senior notes Derivatives held for trading Level one $000 Level two $000 Level three $000 Total balance $000 – – – – – – – 1,184 771 71 22,736 150,160 436,915 31,326 – – – 22,269 – – – 1,184 771 71 45,005 150,160 436,915 31,326 Level one $000 Level two $000 Level three $000 Total balance $000 – – – – – – 4,977 724 5,191 56,555 530,085 33,365 – – 4,977 724 35,595 – – – 40,786 56,555 530,085 33,365 The following table presents the changes in level three instruments: Group and Parent Balance as at 1 July 2009 Gains and losses recognised in proﬁ t or loss* Gains and losses recognised in cash ﬂ ow hedge reserve Balance as at 30 June 2010 Balance as at 1 July 2010 Gains and losses recognised in proﬁ t or loss* Gains and losses recognised in cash ﬂ ow hedge reserve Balance as at 30 June 2011 * Change in fair value of ﬁ nancial instruments Derivatives designated as cash ﬂ ow hedging instruments $000 (49,134) (3,022) 16,561 (35,595) (35,595) (1,586) 14,912 (22,269) The following table summarises the impact of a reasonable change in the assumptions used to measure the fair value of ﬁ nancial instruments categorised as level three. A 10 per cent increase/decrease in the internal electricity forward price with all other variables held constant would have the following eﬀ ect on Contact’s post-tax proﬁ t for the year and on the cash ﬂ ow hedge reserve component of other comprehensive income. Group and Parent Favourable/(unfavourable) Impact on post-tax proﬁ t Impact on other comprehensive income 30 June 2011 +10% $000 30 June 2011 -10% $000 30 June 2010 +10% $000 30 June 2010 -10% $000 1,395 9,025 85 (7,714) (1,207) 11,882 (1,967) 12,405 Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 Financial instruments by category The following tables provide an analysis of ﬁ nancial assets and ﬁ nancial liabilities by category: Contact Energy Limited Annual Report 2011 95 Group 2011 Assets Cash and short-term deposits Receivables Derivative ﬁ nancial instruments Available-for-sale ﬁ nancial assets Total ﬁ nancial assets Total non-ﬁ nancial assets Total assets Liabilities Borrowings Derivative ﬁ nancial instruments Payables and accruals Total ﬁ nancial liabilities Total non-ﬁ nancial liabilities Total liabilities Group 2010 Assets Cash and short-term deposits Receivables Derivative ﬁ nancial instruments Available-for-sale ﬁ nancial assets Total ﬁ nancial assets Total non-ﬁ nancial assets Total assets Liabilities Borrowings Derivative ﬁ nancial instruments Payables and accruals Total ﬁ nancial liabilities Total non-ﬁ nancial liabilities Total liabilities 12 21 22 12 21 22 Held for trading $000 Loans and receivables $000 Note Available- for-sale ﬁ nancial assets $000 Other ﬁ nancial liabilities $000 Derivatives designated as fair value hedging instruments $000 Derivatives designated as cash ﬂ ow hedging instruments $000 – – 71 – 71 47,267 240,536 – – – – – 2,935 287,803 2,935 – – – – – – – 771 – 771 – – 1,184 – 1,184 – 31,326 – 31,326 – – – – – 1,085,122 – – 229,440 – – 150,160 – – 1,314,562 150,160 – 45,005 – 1,085,122 226,491 229,440 45,005 1,541,053 866,836 2,407,889 Held for trading $000 Loans and receivables $000 Note Available- for-sale ﬁ nancial assets $000 Other ﬁ nancial liabilities $000 Derivatives designated as fair value hedging instruments $000 Derivatives designated as cash ﬂ ow hedging instruments $000 – – – – – 921 217,352 – – – – – 2,935 218,273 2,935 – – – – – – – 724 – 724 – – 5,018 – 5,018 – 33,365 – 33,365 – – – – – 1,282,413 – – 242,170 – – 1,524,583 – 56,555 – 56,555 – 40,786 – 1,282,413 130,706 242,170 40,786 1,655,289 715,750 2,371,039 Total $000 47,267 240,536 2,026 2,935 292,764 5,350,735 5,643,499 Total $000 921 217,352 5,742 2,935 226,950 4,920,867 5,147,817 96 Contact Energy Limited Annual Report 2011 Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 Parent 2011 Assets Cash and short-term deposits Receivables Derivative ﬁ nancial instruments Total ﬁ nancial assets Total non-ﬁ nancial assets Total assets Liabilities Borrowings Derivative ﬁ nancial instruments Payables and accruals Total ﬁ nancial liabilities Total non-ﬁ nancial liabilities Total liabilities Parent 2010 Assets Receivables Derivative ﬁ nancial instruments Total ﬁ nancial assets Total non-ﬁ nancial assets Total assets Liabilities Borrowings Derivative ﬁ nancial instruments Payables and accruals Total ﬁ nancial liabilities Total non-ﬁ nancial liabilities Total liabilities Available- for-sale ﬁ nancial assets $000 Other ﬁ nancial liabilities $000 Derivatives designated as fair value hedging instruments $000 Derivatives designated as cash ﬂ ow hedging instruments $000 Held for trading $000 Loans and receivables $000 – – 71 71 47,191 244,549 – 291,740 – – – – – – – – – – 771 771 – – 1,184 1,184 Note 12 Total $000 47,191 244,549 2,026 293,766 5,309,020 5,602,786 22 – 31,326 – 31,326 – – – – – 1,084,912 – – 261,054 – – 150,160 – – 1,345,966 150,160 – 45,005 – 1,084,912 226,491 261,054 45,005 1,572,457 885,378 2,457,835 Held for trading $000 Loans and receivables $000 Note Available- for-sale ﬁ nancial assets $000 Other ﬁ nancial liabilities $000 Derivatives designated as fair value hedging instruments $000 Derivatives designated as cash ﬂ ow hedging instruments $000 – – – 208,619 – 208,619 – – – – – – – 724 724 – 4,977 4,977 Total $000 208,619 5,701 214,320 4,892,607 5,106,927 22 – 33,365 – 33,365 – – – – – 1,282,669 – – 271,536 – – 1,554,205 – 56,555 – 56,555 – 40,786 – 1,282,669 130,706 271,536 40,786 1,684,911 708,612 2,393,523 Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 Contact Energy Limited Annual Report 2011 97 Capital risk management objectives Contact’s capital includes share capital, reserves and retained earnings. Contact’s objective when managing capital is to safeguard Contact’s ability to continue as a going concern, so that it can continue to provide returns for shareholders and beneﬁ ts 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. The Board reviews the capital structure on a regular basis. Contact monitors capital on the basis of the cash ﬂ ow metrics required to sustain an investment credit rating. Contact manages its capital structure to ensure it can continue to attract capital from investors and banks on reasonable terms. Contact seeks to retain a modest gearing ratio of net debt to total capital funding and maintain earnings suﬃ cient to cover its interest borrowing costs satisfactorily. 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 eﬀ ect of foreign exchange hedging of the borrowings and before the deduction of deferred ﬁ nancing costs. Total capital funding is calculated as shareholders’ equity, adjusted for the net eﬀ ect of the fair value of ﬁ nancial instruments, plus net debt. The gearing ratios at 30 June 2011 and 30 June 2010 are as follows: Group Net debt Current borrowings New Zealand dollar equivalent of notional borrowings – after foreign exchange hedging and before deferred ﬁ nancing costs Retail ﬁ xed rate bonds – before deferred ﬁ nancing costs Wholesale ﬁ xed rate bonds – before deferred ﬁ nancing costs Committed credit facilities Other non-current borrowings Cash and short-term deposits Total net debt Equity Shareholders’ equity Remove net eﬀ ect of fair value of ﬁ nancial instruments after tax Note 30 June 2011 $000 30 June 2010 $000 22 22 22 22 22 22 12 (3,012) (3,180) (587,299) (550,000) (100,000) – (1,726) 47,267 (587,299) (550,000) (100,000) (106,200) (1,344) 921 (1,194,770) (1,347,102) (3,235,610) (52,561) (2,776,778) (48,317) (3,288,171) (2,825,095) (4,482,941) (4,172,197) 26.7% 32.3% Adjusted equity Total capital funding Gearing ratio 24 Payables and accruals Electricity purchases accrual Other trade payables and accruals* Advances from subsidiaries Employee beneﬁ ts Interest payable Total payables and accruals Note 29 Group 30 June 2011 $000 Group 30 June 2010 $000 Parent 30 June 2011 $000 Parent 30 June 2010 $000 49,732 272,005 – 22,754 10,202 34,192 199,647 – 17,029 11,562 45,460 249,550 86,438 22,754 10,202 30,870 163,187 69,148 16,561 11,562 354,693 262,430 414,404 291,328 * Other trade payables and accruals include transactions with Contact’s ultimate parent entity (Origin) and its subsidiaries. Refer to note 29. 98 Contact Energy Limited Annual Report 2011 Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 25 Provisions Group Balance as at 1 July 2009 Provisions made during the year Provisions used during the year Provisions reversed during the year Unwind of discount rate Balance as at 30 June 2010 Balance as at 1 July 2010 Provisions made during the year Provisions used during the year Provisions reversed during the year Unwind of discount rate Balance as at 30 June 2011 Current Non-current Parent Balance as at 1 July 2009 Provisions made during the year Provisions used during the year Provisions reversed during the year Unwind of discount rate Balance as at 30 June 2010 Balance as at 1 July 2010 Provisions made during the year Provisions used during the year Provisions reversed during the year Unwind of discount rate Balance as at 30 June 2011 Current Non-current Restoration/ environmental rehabilitation $000 Retail transaction processing outsourcing $000 39,694 14,309 (5,506) (87) 3,057 51,467 51,467 5,004 (3,871) – 3,903 56,503 3,639 52,864 56,503 – 3,330 (427) – – 2,903 2,903 – (1,390) – – 1,513 1,513 – 1,513 Restoration/ environmental rehabilitation $000 Retail transaction processing outsourcing $000 37,818 14,309 (5,363) – 2,843 49,607 49,607 4,321 (3,684) – 3,826 54,070 3,415 50,655 54,070 – 3,330 (427) – – 2,903 2,903 – (1,390) – – 1,513 1,513 – 1,513 Other $000 2,251 1,215 (114) (1,147) – 2,205 2,205 950 (116) (170) – 2,869 1,199 1,670 2,869 Other $000 2,251 1,215 (114) (1,147) – 2,205 2,205 950 (116) (170) – 2,869 1,199 1,670 2,869 Total $000 41,945 18,854 (6,047) (1,234) 3,057 56,575 56,575 5,954 (5,377) (170) 3,903 60,885 6,351 54,534 60,885 Total $000 40,069 18,854 (5,904) (1,147) 2,843 54,715 54,715 5,271 (5,190) (170) 3,826 58,452 6,127 52,325 58,452 The restoration and environmental rehabilitation provision includes estimates of future expenditure for the abandonment and restoration of areas from which natural resources are extracted and the expected cost of environmental rehabilitation of commercial sites. The provision also includes estimates of future expenditure for the removal of asbestos from generation properties and New Plymouth. Cash outﬂ ows are typically expected to coincide with the end of the useful lives of the sites, with the exception of asbestos removal costs, which are expected to be incurred within the next ﬁ ve years. The retail transaction processing outsourcing provision represents the best estimate of the costs relating directly to the outsourcing of some back-oﬃ ce retail processes. Cash outﬂ ows in relation to this are expected to occur within the next year. Other provisions cover a range of commercial matters that are the subject of legal privilege and/or conﬁ dentiality arrangements. Contact Energy Limited Annual Report 2011 99 Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 26 Deferred tax Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are oﬀ set on the face of the Statement of Financial Position where they relate to entities within a Consolidated Income Tax Group. Group Property, plant and equipment Investment in associates Inventories Employee beneﬁ ts Provisions Financial instruments Other Total Parent Property, plant and equipment Investment in associates Inventories Employee beneﬁ ts Provisions Financial instruments Other Total Movement in deferred tax Group Property, plant and equipment Investment in associates Inventories Employee beneﬁ ts Provisions Financial instruments Other Total Assets 30 June 2011 $000 Assets 30 June 2010 $000 Liabilities 30 June 2011 $000 Liabilities 30 June 2010 $000 – – 2,537 6,488 12,379 17,079 510 38,993 – – 2,113 5,884 17,831 19,440 – (716,334) (2,863) – – – – – (673,977) (2,270) – – – – (7,211) 45,268 (719,197) (683,458) Assets 30 June 2011 $000 Assets 30 June 2010 $000 Liabilities 30 June 2011 $000 Liabilities 30 June 2010 $000 – – 2,537 6,488 11,196 17,079 498 37,798 – – 2,113 5,741 16,738 19,440 – (710,720) (162) – – – – – (669,686) (174) – – – – (7,552) 44,032 (710,882) (677,412) Balance 1 July 2010 $000 Recognised in income $000 (673,977) (2,270) 2,113 5,884 17,831 19,440 (7,211) (45,409) (675) 454 1,067 (5,413) 1,782 7,757 (638,190) (40,437) Recognised in other comprehensive income $000 – (123) – – – (3,765) – (3,888) Change in tax rate* $000 Balance 30 June 2011 $000 3,052 205 (30) (463) (39) (378) (36) (716,334) (2,863) 2,537 6,488 12,379 17,079 510 2,311 (680,204) 100 Contact Energy Limited Annual Report 2011 Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 Group Property, plant and equipment Investment in associates Inventories Employee beneﬁ ts Provisions Financial instruments Other Total Parent Property, plant and equipment Investment in associates Inventories Employee beneﬁ ts Provisions Financial instruments Other Total Parent Property, plant and equipment Investment in associates Inventories Employee beneﬁ ts Provisions Financial instruments Other Total Balance 1 July 2009 $000 Recognised in income $000 (666,021) (2,235) 2,179 4,241 15,173 23,889 (3,512) (52,421) (74) 85 1,643 3,503 (1,359) (4,277) (626,286) (52,900) Balance 1 July 2010 $000 Recognised in income $000 (669,686) (174) 2,113 5,741 16,738 19,440 (7,552) (44,208) – 454 1,210 (5,587) 1,782 8,086 (633,380) (38,263) Balance 1 July 2009 $000 Recognised in income $000 (663,190) (174) 2,179 4,053 14,048 23,889 (4,237) (50,646) – 85 1,688 3,535 (1,359) (3,893) (623,432) (50,590) Recognised in other comprehensive income $000 – 39 – – – (2,248) – (2,209) Recognised in other comprehensive income $000 – – – – – (3,765) – (3,765) Recognised in other comprehensive income $000 – – – – – (2,248) – (2,248) Change in tax rate* $000 Balance 30 June 2010 $000 44,465 – (151) – (845) (842) 578 (673,977) (2,270) 2,113 5,884 17,831 19,440 (7,211) 43,205 (638,190) Change in tax rate* $000 Balance 30 June 2011 $000 3,174 12 (30) (463) 45 (378) (36) (710,720) (162) 2,537 6,488 11,196 17,079 498 2,324 (673,084) Change in tax rate* $000 Balance 30 June 2010 $000 44,150 – (151) – (845) (842) 578 (669,686) (174) 2,113 5,741 16,738 19,440 (7,552) 42,890 (633,380) * The change in tax rate column reﬂ ects the net change in deferred tax as a result of the reduction in the corporate income tax rate to 28 per cent eﬀ ective for Contact’s income tax year ending 30 June 2012. The eﬀ ect of the change is recognised in the Income Statement; Group and Parent $3.5 million (2010: Group $42.7 million and Parent $42.3 million) and in other comprehensive income; Group and Parent $(1.2) million (2010: Group and Parent $0.6 million) consistent with the underlying items that give rise to the deferred tax. Unrecognised deferred tax assets and liabilities There are no unrecognised deferred tax assets and liabilities. Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 27 Commitments Capital and investment commitments Not later than one year Later than one year and not later than ﬁ ve years Later than ﬁ ve years Contact Energy Limited Annual Report 2011 101 Group 30 June 2011 $000 Group 30 June 2010 $000 Parent 30 June 2011 $000 Parent 30 June 2010 $000 296,761 96,766 272 86,158 70,390 296 296,761 96,766 272 86,158 70,390 296 Total capital and investment commitments 393,799 156,844 393,799 156,844 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 buildings and accommodation. The remainder relate to vehicles and plant and equipment. Not later than one year Later than one year and not later than ﬁ ve years Later than ﬁ ve years Total operating lease commitments Group 30 June 2011 $000 Group 30 June 2010 $000 Parent 30 June 2011 $000 Parent 30 June 2010 $000 7,577 17,859 9,798 35,234 6,614 14,967 11,540 33,121 6,039 14,021 5,057 25,117 5,119 10,615 6,672 22,406 Lease commitments are stated exclusive of GST. Operating lease income The operating lease income is of a rental nature and on normal commercial terms and conditions. Group 30 June 2011 $000 Group 30 June 2010 $000 Parent 30 June 2011 $000 Parent 30 June 2010 $000 1,355 2,235 217 3,807 1,476 3,107 177 4,760 1,216 1,858 50 3,124 1,157 2,525 80 3,762 Not later than one year Later than one year and not later than ﬁ ve years Later than ﬁ ve years Total operating lease income Operating lease income is stated exclusive of GST. Gas commitments Maui contracts with Maui Development Limited Contact has entered into four contracts to secure Maui gas from Maui Development Limited, each with a 1 April 2007 ﬁ rst delivery date and a 31 December 2014 expiry date. Delivery of gas from early 2014 is subject to conﬁ rmation of suﬃ cient Maui reserves. Under the four contracts, and while the contracts remain in eﬀ ect, Contact has agreed to make ﬁ xed 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. 102 Contact Energy Limited Annual Report 2011 Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 OMV New Zealand Limited Contact has contracts with OMV New Zealand Limited giving Contact rights to gas from the Pohokura gas ﬁ eld until 31 December 2013. Under the current contract that expires on 31 March 2012, Contact is committed to pay ﬁ xed fees and may have to pay additional fees if the amount of gas actually uplifted is less than a contractually speciﬁ ed amount on each day. Under a second contract that has a ﬁ rst delivery date of 1 April 2012 and an expiry date of 31 December 2013, Contact has agreed to make ﬁ xed annual payments for the right to take gas. Under a third agreement Contact has an option to take gas on a daily basis through to 31 December 2011. All 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. 28 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 and its Ahuroa underground gas storage facility in Taranaki as well as to enable the direct supply of geothermal energy to industry in Taupo. The duration of resource consents, once exercised, 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 operations, Contact has consents to construct and operate a net 220 MW geothermal power station at Te Mihi (near Taupo). Construction has commenced on a two-unit 166 MW Te Mihi power station and works are well underway. Contact also holds consents to install a third unit at Te Mihi. At Otahuhu, Contact holds resource consents to construct and operate a new 400 MW combined-cycle power station (Otahuhu C) for which the lapse date (the date by which the consents must be exercised) has been extended to 2015. The consents themselves expire in 2021. Contact also has the ability to construct and operate a 120 MW open-cycle power station under its existing consents (Otahuhu A). In Taranaki Contact has consents to construct and operate an up to 500 MW combined-cycle power station at its Stratford site (TCC 2) for which the lapse period has been extended to 2017. These consents expire in 2034. Contact has obtained consents to construct and operate a 17.2 MW hydro power station on the Hawea Dam. In December 2010, Contact secured consents for a 250 MW geothermal project (Tauhara II) near Taupo. In March 2011, Contact was granted the consents necessary to build a 156 MW wind farm at Waitahora, near Dannevirke in the Tararua District. In May 2011, Contact was granted consents for a 504 MW wind farm on the west Waikato coast called Haua-uru ma- raki. 29 Related party transactions Parent company As at 30 June 2011, Origin Energy Paciﬁ c Holdings Limited is the majority shareholder in the Parent, owning 51.8 per cent (2010: 51.0 per cent) of the ordinary shares of the Parent. Further shares amounting to 0.8 per cent (2010: 0.8 per cent) of the Parent’s ordinary shares are held by Origin Energy Universal Holdings Limited and Origin Energy New Zealand Limited at 30 June 2011. All three companies are 100 per cent owned by Origin, an Australian incorporated company. The ultimate parent entity of Contact is Origin. Identities of related parties with whom material transactions have occurred Notes 18, 19 and 20 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 Group entities, the Directors and members of the Leadership Team. Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 Material related party transactions Contact Energy Limited Annual Report 2011 103 Transactions with ultimate parent entity • The Parent issued 7,679,632 and 6,035,007 ordinary shares to its Origin shareholders pursuant to the Parent’s PDP on 27 September 2010 and 31 March 2011 respectively (2010: 8,252,200 on 22 September 2009 and 5,563,640 on 31 March 2010). As a result of elections, the Parent completed an oﬀ -market buy-back of 606,849 shares on 27 September 2010 and 589,718 shares on 31 March 2011 (2010: 868,865 on 22 September 2009 and 568,385 on 31 March 2010). • On 9 June 2011, the Parent issued 36,206,220 shares to its Origin shareholders as part of the Entitlement Oﬀ er made to all New Zealand and Australian resident shareholders at an issue price of $5.05 per share. A further 3,322,068 shares were issued as part of the book-build. Refer to note 10. Amounts paid/payable • • • • • • Dennis Barnes, Chief Executive Oﬃ cer of Contact, is seconded to Contact from his employer Origin. Fees incurred or accrued since Mr Barnes’ appointment on 1 April 2011 total $0.4 million (2010: nil), which includes the cost of his salary and other employment beneﬁ ts including a 2010/2011 short-term incentive payment. At 30 June 2011, $0.3 million remains outstanding (2010: nil). In addition, share-based payments under Contact’s Employee Long-Term Incentive Scheme amounting to $0.04 million (2010: nil) were accrued for Mr Barnes, being the fair value of the share-based payments relating to this reporting period. Refer to note 11. David Baldwin, former Managing Director of Contact, was seconded to Contact from his employer Origin until 31 March 2011. Fees incurred or accrued during the year ended 30 June 2011 in relation to Mr Baldwin’s role as Managing Director totalled $1.1 million (2010: $1.2 million), which includes the cost of his salary and other employment beneﬁ ts including a 2010/2011 short-term incentive payment. At 30 June 2011, $0.4 million (2010: $0.5 million) of this amount remains outstanding. In addition, share-based payments under Contact’s Employee Long-Term Incentive Scheme amounting to $0.6 million (2010: $0.5 million) were accrued for Mr Baldwin, being the fair value of the share-based payments relating to this reporting period. Refer to note 11. Origin was employed for consulting work on the Stratford Peaker project. There were no transactions during the year ended 30 June 2011 (2010: $0.5 million). At 30 June 2011, no amounts remain outstanding (2010: nil). Contact, Origin and Origin Energy Services Limited have entered into an agreement in respect of the purchase of SAP-related intellectual property. During the year ended 30 June 2011, the transactions under this agreement totalled $5.0 million (2010: nil). At 30 June 2011, $2.5 million of this amount remains outstanding (2010: nil). Contact and Origin have an agreement in respect of the purchase of SAP-related software. During the year ended 30 June 2011, the transactions under this agreement totalled $0.1 million (2010: nil). At 30 June 2011, $0.1 million remains outstanding (2010: nil). Contact and Origin have entered into a Master Services Agreement for the provision of professional, consulting and/or administrative services between the parties. In the year ended 30 June 2011, two members of staﬀ were seconded from Contact to Origin and seven members of staﬀ were seconded from Origin to Contact. These services were charged at normal commercial rates. Subsequent to the Christchurch earthquake, Origin seconded several employees to Contact on a temporary basis. These services were charged at normal commercial rates. Transactions with Origin subsidiaries Amounts paid/payable • • • • Contact and Origin Energy Resources NZ (TAWN) Limited have an agreement in respect of the development and operation of the Ahuroa gas storage facility. During the year ended 30 June 2011, the transactions under this agreement totalled $12.5 million (2010: $7.8 million). At 30 June 2011, $12.0 million remains outstanding (2010: nil). Contact has an agreement with Origin Energy Services Limited to provide infrastructure and data centre services for Contact’s SAP system. During the year ended 30 June 2011, the transactions under this agreement totalled $2.6 million (2010: $1.1 million). At 30 June 2011, $0.2 million remains outstanding (2010: nil). Contact, Origin Energy Resources NZ (TAWN) Limited and Origin Energy Five Star Holdings Limited have an agreement in respect of drilling and other costs associated with the development of assets for the Ahuroa gas storage facility. During the year ended 30 June 2011, the transactions under this agreement totalled $2.8 million (2010: $24.6 million). At 30 June 2011, $0.3 million remains outstanding (2010: $0.6 million). Rockgas Limited and Origin Energy LPG Limited have an LPG Sale and Purchase Agreement for the purchase and shipping of imported LPG. During the year ended 30 June 2011, transactions totalled $7.4 million (2010: $24.8 million). At 30 June 2011, $1.9 million remains outstanding (2010: $2.0 million). 104 Contact Energy Limited Annual Report 2011 Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 • • • Rockgas Limited has an LPG Gas Sale Agreement with Origin Energy Resources NZ (Rimu) Limited and Origin Energy Resources NZ (TAWN) Limited for the supply of LPG from the Rimu Production Station. Transactions for the year totalled $0.9 million (2010: $1.7 million). At 30 June 2011, $0.2 million remains outstanding (2010: $0.1 million). Rockgas Limited has an LPG Sales and Logistics Agreement with Origin Energy Resources (Kupe) Limited and Kupe Mining (No.1) Limited for the supply of LPG from the Kupe Production Station. Transactions for the year totalled $35.9 million (2010: $19.1 million). At 30 June 2011, $2.6 million remains outstanding (2010: $4.4 million). Rockgas Limited and Origin Energy Contracting Limited had an agreement in place during the year whereby Origin Energy Contracting Limited provided coastal LPG shipping services to Rockgas Limited. Transactions for the year totalled $0.2 million (2010: $3.3 million). At 30 June 2011, no amounts remain outstanding (2010: nil). Amounts received/receivable • • Gas sales of $0.1 million to Origin Energy Resources NZ Limited were made in the year ended 30 June 2011 (2010: $0.1 million). At 30 June 2011, no amounts remain outstanding (2010: nil). Contact and Origin Energy Resources NZ Limited have an electricity supply contract to supply Origin’s facilities in Taranaki. Transactions for the year amounted to $0.8 million (2010: $0.9 million). At 30 June 2011, $0.7 million remains outstanding (2010: $0.5 million). Transactions with subsidiaries and associates • Advances to/from subsidiaries and associates are included in notes 13 and 24 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 management fees, which are calculated at arm’s length. These charges totalled $11.3 million for the year ended 30 June 2011 (2010: $13.8 million). All balances are settled through the intercompany account. The Parent had transactions with Empower Limited in respect of gas purchases, which are calculated at arm’s length. Purchases from Empower Limited totalled $56.7 million for the year ended 30 June 2011 (2010: $104.2 million). All balances were settled through the intercompany account and this contract ended on 31 December 2010. The Parent charges Rockgas Limited a management fee for various management services. Total fees charged for the year ended 30 June 2011 amounted to $11.0 million (2010: $10.9 million). All balances are settled through the intercompany account. Contact pays various operating expenses on behalf of its wholly owned subsidiaries, which are passed on directly to those subsidiaries. During the year ended 30 June 2011, Rockgas Limited had transactions with Rockgas Timaru Limited (Rockgas Timaru), an associate, in respect of the supply of LPG to Rockgas Timaru amounting to $1.0 million (2010: $1.1 million), and in respect of the provision of deliveries by Rockgas Timaru amounting to $0.1 million (2010: $0.1 million), both of which were calculated at arm’s length. At 30 June 2011, no amount remains outstanding (2010: $0.2 million receivable). Transactions with Directors and key management personnel • Fees paid or accrued to Directors and Oﬃ cers of Origin for director services for the year ended 30 June 2011 totalled $0.5 million (30 June 2010: $0.5 million). At 30 June 2011, $0.1 million remains outstanding (30 June 2010: $0.1 million). • New Zealand based Directors and members of the Leadership Team purchase gas and electricity from the Group for domestic purposes. 30 Key management personnel The table below includes remuneration of Directors, the Chief Executive Oﬃ cer and his Leadership Team. Group 30 June 2011 $000 Group 30 June 2010 $000 Parent 30 June 2011 $000 Parent 30 June 2010 $000 Note Directors’ fees 1,008 993 1,008 993 Chief Executive Oﬃ cer and Leadership Team Salary and other short-term beneﬁ ts Share-based payments Total Chief Executive Oﬃ cer and Leadership Team Total key management personnel 11 6,068 1,493 7,561 8,569 4,537 1,065 5,602 6,595 6,068 1,493 7,561 8,569 4,537 1,065 5,602 6,595 Contact Energy Limited and Subsidiaries Notes to the ﬁ nancial statements for the year ended 30 June 2011 Group and Parent For the year ended 30 June 2011 Director G King P Pryke B Beeren K Moses S Sheldon W Dewes D Baldwin* Total Group and Parent For the year ended 30 June 2010 Director G King P Pryke B Beeren J Milne (retired 30 June 2010) K Moses S Sheldon W Dewes (appointed 22 February 2010) D Baldwin* Total Contact Energy Limited Annual Report 2011 105 Position Chairman Deputy Chairman Director Director Director Director Director Position Chairman Deputy Chairman Director Director Director Director Director Managing Director Board fees $ Committee and special fees $ Total remuneration $ 200,000 125,000 110,000 110,000 110,000 110,000 27,500 – 35,000 37,000 20,000 86,807 37,000 – 200,000 160,000 147,000 130,000 196,807 147,000 27,500 792,500 215,807 1,008,307 Board fees $ Committee and special fees $ Total remuneration $ 200,000 137,500 105,000 105,000 105,000 105,000 38,575 – – 17,500 37,000 60,000 20,000 32,000 30,710 – 200,000 155,000 142,000 165,000 125,000 137,000 69,285 – 796,075 197,210 993,285 * On 31 March 2011, David Baldwin’s secondment from Origin ended. As Managing Director Mr Baldwin did not receive any fees in his capacity as a Director on the Board. Fees received have been in Mr Baldwin’s capacity as a non-executive Director subsequent to 1 April 2011. 31 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 receives an annual fee under the Operating and Maintenance Management Services Agreement. In December 2010 the Crown oﬀ ered the Whirinaki generating plant for sale by open tender. The Crown has indicated a wish to transfer ownership of the plant on either 1 December 2011 or 1 October 2012. 32 Contingent liabilities There are no known material contingent liabilities at 30 June 2011 (2010: nil). 33 Subsequent events On 19 August 2011, the Board declared a distribution pursuant to the PDP in the form of a non-taxable bonus issue for the year ended 30 June 2011 equivalent to 12.0 cents per share, for shares on issue at 5 September 2011, the record date, with bonus shares allocated and/or cash distributed, if elected, on 27 September 2011. Refer to note 8. On 19 August 2011, the Board approved the issue of 18,002 performance share rights. Refer to note 11. 106 Contact Energy Limited Annual Report 2011 Contact Energy Limited and Subsidiaries Independent Auditor’s Report To the shareholders of Contact Energy Limited Report on the Company and Group Financial Statements We have audited the accompanying ﬁ nancial statements of Contact Energy Limited (‘the company’) and the group, comprising the company and its subsidiaries, on pages 52 to 105. The ﬁ nancial statements comprise the statements of ﬁ nancial position as at 30 June 2011, the income statements and statements of comprehensive income, changes in equity and cash ﬂ ows for the year then ended, and a summary of signiﬁ cant accounting policies and other explanatory information, for both the company and the group. Directors’ Responsibility for the Company and Group Financial Statements The directors are responsible for the preparation of company and group ﬁ nancial statements in accordance with generally accepted accounting practice in New Zealand and International Financial Reporting Standards that give a true and fair view of the matters to which they relate, and for such internal control as the directors determine is necessary to enable the preparation of company and group ﬁ nancial statements that are free from material misstatement whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these company and group ﬁ nancial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing (New Zealand). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the company and group ﬁ nancial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the company and group ﬁ nancial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the ﬁ nancial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the company and group’s preparation of the ﬁ nancial statements that give a true and fair view of the matters to which they relate in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the eﬀ ectiveness of the company and group’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates, as well as evaluating the presentation of the ﬁ nancial statements. We believe that the audit evidence we have obtained is suﬃ cient and appropriate to provide a basis for our audit opinion. Our ﬁ rm has also provided other assurance services to the company and group. Partners and employees of our ﬁ rm also 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 ﬁ rm has no other relationship with, or interest in, the company and group. Opinion In our opinion the ﬁ nancial statements on pages 52 to 105: • • • comply with generally accepted accounting practice in New Zealand; comply with International Financial Reporting Standards; give a true and fair view of the ﬁ nancial position of the company and the group as at 30 June 2011 and of the ﬁ nancial performance and cash ﬂ ows of the company and the group for the year then ended. Contact Energy Limited Annual Report 2011 107 Report on Other Legal and Regulatory Requirements In accordance with the requirements of sections 16(1)(d) and 16(1)(e) of the Financial Reporting Act 1993, we report that: • we have obtained all the information and explanations that we have required; and • in our opinion, proper accounting records have been kept by Contact Energy Limited as far as appears from our examination of those records. 19 August 2011 Wellington 108 Contact Energy Limited Annual Report 2011 Corporate directory Board of Directors Grant King, Chairman Phillip Pryke, Deputy Chairman David Baldwin Bruce Beeren Whaimutu Dewes Karen Moses Sue Sheldon Leadership team Dennis Barnes, Chief Executive Oﬃ cer Ruth Bound, General Manager, Retail and Strategic Marketing Graham Cockroft, Chief Operating Oﬃ cer Mark Elliott, Chief Financial Oﬃ cer Luc Hennekens, Chief Information Oﬃ cer and General Manager, Information and Communication Technology Paul Ridley-Smith, General Counsel and Company Secretary Annika Streeﬂ and, General Manager, People and Culture Andy Williams, General Manager, Enterprise Transformation Head oﬃ ce Level 1, Harbour City Tower 29 Brandon Street, Wellington, New Zealand Postal address PO Box 10742, The Terrace, Wellington 6143, New Zealand Telephone: (04) 499 4001 Facsimile: (04) 499 4003 Email: investor.centre@contactenergy.co.nz Website: www.contactenergy.co.nz NZX trading code: CEN Company number: 660760 Contact Energy Limited Annual Report 2011 109 Share registrar Computershare Investor Services Limited Private Bag 92119 Auckland 1142 159 Hurstmere Road Takapuna, Auckland 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: enquiry@computershare.co.nz 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 ﬁ nancial performance should be made to the company at: Chief Financial Oﬃ cer Contact Energy Limited PO Box 10742, The Terrace, Wellington 6143 Email: investor.centre@contactenergy.co.nz Financial calendar Final distribution announced Record date for ﬁ nal distribution Cut-oﬀ date for receipt of election notices for buy back of bonus shares under Proﬁ t Distribution Plan Final distribution date End of ﬁ rst quarter Annual meeting Half year end Results announcement for the half year ended 31 December 2011 End of third quarter Financial year end 22 August 2011 5 September 2011 Noon, 23 September 2011 27 September 2011 30 September 2011 19 October 2011 31 December 2011 February 2012 31 March 2012 30 June 2012 Notes The paper this report is printed on is from sustainable plantation forests. The manufacturer is ISO accredited and an environmental award winner. The ink used in this report is vegetable based, mineral free and from 100 per cent renewable resources.

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