Long road back for Contact Energy

David Baldwin says overconfidence had been building within Contact Energy for some time before last year's executive pay blunder. Photo / Greg Bowker

Contact Energy boss David Baldwin says this year is all about taking the knife to hubris.

Market watchers and company critics say dealing to its notorious overconfidence is not before time - last year's PR blunder over directors' fees and generation woes had elements of tragedy and farce.

Baldwin is at pains to point out that the company - New Zealand's third largest by market capitalisation - must now be judged on actions, not words.

And he candidly admits it was the executive team he leads that failed last year to warn the board of the damage its fees decision could do.

"The management team didn't do enough deep thought about what the consequences of that decision would be. That's not a board issue."

In a bid to claw back customers, Contact foot soldiers are going door-to-door in Auckland offering attractive deals in what has been described as the most intensely competitive retail market for a decade.

He says Contact is now winning more connections than it's losing although they only number in the hundreds, so it's going to be a long road back. At the peak of customer exodus earlier this year it was losing 5000 a month.

Fallout from power price rises at the same time the company sought to double the pool of directors' fees cost Contact more than 40,000 customers. Worse, it dealt a huge blow to its reputation. Like all utility giants, that image was innately vulnerable.

After last month's announcement of a 50 per cent fall in annual profit to $117 million, Baldwin gave it the full palms up, mea culpa treatment during a briefing for journalists.

While losing that many customers was not financially material compared with climatic factors that can wipe tens of millions of dollars off a result in weeks, it undid years of work building up a nationwide electricity customer base to around 520,000.

The company, 51 per cent owned by Australia's Origin Energy, had blown it.

Baldwin has led Contact for the past three years and over the past two weeks he has hit the road himself explaining to around 1000 staff the financial hammering the company has taken and, more pointedly, what's been learned from October's PR bloodbath.

"There's a fair amount of reflection over what we've done in Contact and it has to be said hubris had been building up over several years."

The 45-year-old is urging his staff to re-adjust their thinking.

"If we assume that everything good that happens to us is all good luck then we won't carry that confidence [forward] and we'll start afresh."

Baldwin points to support for a bond issue in February as a vote of confidence in the company. A $300 million issue when the fallout from October was most intense was closed off at $550 million.

"Investors saw past the noise," says Baldwin. While there's headway on the customer front - where margins are thin - there are ongoing difficulties for Contact's overall performance.

The weather gods helped deliver the knockout blow to profit last year and so far aren't helping out with a fresh start.

Contact does best when the prospect of low South Island lakes pushes up the price in Auckland for power it generates from its gas-fired plants in Taranaki. That equation relies on smooth interisland transmission.

Last year lakes were low but transmission constraints meant Contact could not move thermal-generated power south, requiring it to buy very expensive power on the South Island spot market for its retail customers.

At times last winter Contact was paying twice what it could charge its South Island customers and in August the company traded at a loss.

In the second half of the last financial year the opposite happened. The continuing deluge in the South Island forced South Island generators to spill water - Contact missed out on $160 million in revenue from its Clutha system - as they were unable to export excess power north.

For the first two months of this financial year inflows into South Island lakes are well above average and wholesale prices suppressed.

Baldwin this week was at the Otahuhu B power station, home to a hulking great jet engine that when switched on produces power from a turbine spinning at 3000rpm at one end and steam superheated by its exhaust to 530C at the other.

The plant can produce about 8 per cent of the country's peak use on a good day, but it's been idle more often than the company would like as it has not worth firing up.

The company is running its gas-fired station in Taranaki - it has to under punitive take-or-pay arrangements for increasingly expensive gas - and like last year the thermal portfolio is still probably running at aloss.

Baldwin says the company is on the cusp of being better able to navigate its way through fuel fluctuations.

In a New Zealand first, the company is spending $250 million redeveloping a depleted gas field at Ahuroa in Taranaki as a reservoir to dip into when needed. Ahuroa will hold the equivalent amount of fuel that would keep the South Island hydro system running at any one time. So while the gas keeps coming Contact will later this year have the capacity to store it and use it in its new Taranaki peaking station when wholesale prices are right.

There have been delays but Baldwin says he is confident gas storage will start in October, although Contact won't be able to draw gas from the field until next year.

Like all power generators, Contact is looking forward to the upgrade of Transpower's interisland link in 2012 and has $1.5 billion in geothermal development ready to go and a live application for a $1 billion wind farm near Raglan.

In an embarrassing change of tack, the company was forced to request "time out" for a year on the wind farm after what Baldwin says was another case of overconfidence.

It had pushed for fast-track consideration of the project only to run into powerful opponents.

"We had a well-resourced opposition. It's the same thing, there was a bit of hubris in the system."

One big banana skin on the road to redemption is the company's annual meeting, this year in Wellington on October 22.

Even in good years these are flashpoints involving some of the tens of thousands of mum and dad shareholders who get along to the meeting and the board, effectively made up of whoever Origin wants.

The Shareholders Association is always especially energised for Contact meetings and this year says it will again be pushing for independent directors, particularly to replace director Phil Pryke.

Association spokesman Des Hunt said the early signs did not suggest Contact had learned lessons about being more open with small shareholders. It had heard nothing from the company in the past year.

"We don't like having a go at the company necessarily but what we do want is independent directors."

Baldwin, with Sue Sheldon, will be confirmed as new board members in October but this week he wasn't offering much comfort to Hunt and his organisation.

He says this year's meeting will be run differently, with the company's performance and outlook being discussed before any grievances are aired.

"What we need to do is shift away from personality and move on to the issues - that's where the conversation was completely lost last year."