Navigating through the waters of uncertainty

David Baldwin has to come up with the right answers to the questions about Contact Energy's future resource alternatives. Marty Melville / Getty Images

Contact Energy chief executive David Baldwin is comfortable with uncertainty. When he returned in May to New Zealand after 12 years to head the country's largest energy company he was not sure if he would be running a branch office or a listed firm.

At the time, the company's largest shareholder, Australia's Origin Energy, was mulling a controversial move to buy out the 49 per cent of the company it did not own to create an $8 billion Australasian energy giant.

But Baldwin, who saw the role at Contact as an opportunity to return home without sacrificing a high-flying career with the world's energy giants, was unconcerned.

"When I signed on to this position I knew there would be a risk that the proposed merger would not succeed. And if that was the case, the position would be more akin to what it had been in the past ... I was quite comfortable with either outcome."

Despite an intense campaign, Origin could not budge minority investor perceptions that the deal was aimed at shoring-up its own balance sheet at the expense of Contact's minority investors. It pulled out in June and Baldwin says there are no plans to revisit an amalgamation in the future.

But considerable uncertainty remains.

Contact needs gas. It has supply agreements covering its demand for the estimated hundreds of millions it has invested in gas-fired generation, which equals half its total capacity. But after that the future is murky.

Domestic prospects near Taranaki such as the Pohokura, Kupe or the untapped reserves near the now-depleted Maui field will offer some relief. But they are not enough, and so the question of alternatives hangs over all the major decisions Contact faces.

Should it build a $500 million 380MW gas-fired power station at Otahuhu in South Auckland? Should it take advantage of its healthy balance sheet and return as much as $1.15 billion to shareholders? Or should it hold back in anticipation of the huge upfront investment in on-shore infrastructure needed to import compressed or liquefied natural gas?

"The big dilemma for New Zealand is that we think there is lots of domestic gas. What we would like to do is to see how long we can defer capital investment in hard infrastructure such as land-based LNG."

Baldwin says New Zealand is best served by a delay. An LNG terminal will only be built if Contact and other large gas users go on to long-term contracts, potentially reducing the incentive for oil and gas exploration.

He says Contact has put all variables - from its commitment to its BBB Standard & Poor's credit rating, through to the needs of its shareholders - on the table as part of a strategic review, due to be completed by next year.

"[Otahuhu] has a really good chance of happening. It is the most economic next block of capacity in the country.

"Otahuhu B was covered for seven or eight years ... if we can get to that position of go or no go within this financial year [it] ... would lead to a 2010 outcome."

Baldwin also highlights the potential of renewable energy sources such as wind. Contact has just signed an agreement with boutique investment bank Investec to develop sites the latter has acquired around New Zealand. Contact's geothermal operations in the central North Island also have much potential but are being held back by regulatory battles.

"We have enough steam ... capacity at Wairakei to provide energy to 200,000 homes, which cannot be delivered today because of the Resource Management Act. We would like to see the appeal processes for our consents to be resolved."

Baldwin rejects some investor allegations that the needs of Origin will take priority over the needs of smaller investors. Shareholders - such as the Auckland-based activist fund manager Brook Asset Management - want a revamp of the board and the management team to alleviate these concerns.

They argue Baldwin, who is seconded from Origin, faces a potential conflict of interest in matters such as the negotiations over fuel (Origin is a potential supplier). Other issues include mergers and acquisitions and the company's capital distribution policies.

Baldwin's response to the accusations is predictable: "The vast majority of investors do not see this as a problem. They say it is standard stuff for majority investors to place their own chief executive in the business - we will judge you on performance."

Meanwhile, the prospect of harsh regulation, including the split of Contact and its rivals into generation and retail operations, remains a possibility. Industry observers believe this could be one of the outcomes of an energy review launched in July.

"We don't believe the splitting you mention is under consideration ... The Minister [of Energy, David Parker] has noted that he doesn't believe the system is broken and we completely agree with him. Splitting might be an option for monopoly businesses, but there is very strong competition in both the energy retail and the generation space."

But he admits to concern about regulation elsewhere in the sector.

The Commerce Commission is conducting its own review of the electricity market - an action Baldwin believes is beyond the mandate. And the day before the Business Herald met Baldwin, the Government, with little explanation, sacked Electricity Commissioner Roy Hemmingway.

These developments highlight what Baldwin characterises as regulatory "confusion".

"There are lot of things coming together, which I think from an investor's point of view is creating some uncertainty, which raises the antenna for global capital. In the case of Origin they have got choices as far as Kenya to Taranaki.

"When they look at New Zealand - and as recently as Hemmingway's [removal] - there is a view that the lack of clarity and certainty has to be taken into consideration.

"[Offshore] the relationship between a utility like Contact and a regulatory body is co-operative, not to the point of being on the same side of the table. But affairs have been conducted in a business-like fashion; they are conducted with a degree of process certainty where everybody knows the outcome, when it will be, how it will be arrived at. Here it is less defined."


David Baldwin

Personal: Aged 42, married to Juanita, two children.
Position: Chief executive, Contact Energy.
Education: University of Canterbury BE, Victoria University MBA.
1986-1992: Shell engineering and project development roles, New Zealand, the Netherlands.
1993-1994: Study at Victoria University.
1994-1997 Southpac (Jakarta).
1997-2004: MidAmerican Energy (Manila, Philippines).
2004-2005: MidAmerican's US HQ (head of global development and acquisitions).
2005-2006: Ritchie Capital: head of energy private equity investments (Chicago/Hong Kong).