WAV/RULE: CEN: NZX Regulation - CEN - Waiver NZSX Listing Rule 9.2.1

8 Jul 2010 3:16 pm

CEN 08/07/2010 WAV/RULE

REL: 1516 HRS Contact Energy Limited

WAV/RULE: CEN: NZX Regulation - CEN - Waiver NZSX Listing Rule 9.2.1

19 January 2010

NZX Regulation Decision Contact Energy Limited Application for Waiver from NZSX Listing Rule 9.2.1

Background

Contact Energy Limited ("CEN") is an NZSX Listed Issuer ("Issuer").

CEN intends to implement an enteprise-wide project to transform the way CEN does business by introducing new business processes and an integrated SAP single technology platform ("Project"). Implementation of the Project commenced in respect of CEN's Finance and Generation businesses ("F&G Implementation") in October 2009.

The majority of the external work for the Project is expected to be undertaken by an IT services business, using products and services of SAP New Zealand Limited ("SAP"), a global software provider who, for the avoidance of doubt, is unrelated to CEN. For the purposes of this waiver the IT services business undertaking this work is referred to as the "Service Provider". In addition to the F&G Implementation, the Project is expected to include the implementation of SAP software for CEN's retail business, including maintenance and support of the SAP software and applications, and business process outsourcing and infrastructure management services.

Origin Energy Limited ("Origin") is the majority shareholder of CEN and is in the process of undertaking a similar transformation project in respect of its retail business, and has also contracted the Service Provider to provide software implementation services.

The majority of the Project services will be provided by the Service Provider and other third parties using SAP. However, CEN hopes to leverage Origin's experience, resources and common deliverables, by entering into arrangements with Origin including for the provision and hosting by Origin of the F&G Implementation and retail implementation hardware in a suitable data centre and other services to support the SAP application ("Infrastructure Managed Services").

NZSX Listing Rule ("Rule") 9.2.1 restricts an Issuer entering into a Material Transaction if a Related Party is, or is likely to become, a direct or indirect party to the Material Transaction, or to at least one of a related series of transactions of which the Material Transaction forms part. As a holder of approximately 51.8% of CEN's ordinary shares, Origin is a Related Party of CEN under Rule 9.2.3(b). The Average Market Capitalisation of CEN is currently approximately NZ$3.54billion.

While an element of uncertainty exists as to the aggregate costs of the Project, as well as the contracting parties, the highest estimated gross cost of the services CEN expects to receive as part of the Project in any financial year could exceed 1% of CEN's Average Market Capitalisation.

Accordingly, while the Infrastructure Managed Services are not in, and of, themselves a Material Transaction, to the extent that Infrastructure Managed Services and any other arrangements with Origin form one part of a related series of transactions with other aspects of the Project (such as those with the Service Provider and SAP), CEN would require prior shareholder approval of the Project.

Application

CEN has approached NZX Regulation ("NZXR") seeking waiver from Rule 9.2.1 to the extent that it would otherwise be required to obtain shareholder approval of the Project. In support of the application, CEN submits that: The arrangements with Origin do not constitute a Material Transaction in their own right. The highest estimated gross cost to CEN for the Infrastructure Managed Services in any financial year is only $2.5 million (in the financial years 30 June 2011 and 2012). Accordingly, the actual benefit received by Origin from CEN, and the payments made by CEN to Origin, are substantially less than the Material Transaction threshold for services.

It is only because of the broad definition of Material Transaction that the arrangements with the Service Provider and any other third parties may be considered a "related series of transactions" that must be aggregated with the Infrastructure Managed Services, and which tips the group of transactions relating to the Project as a whole over the Material Transaction threshold. As detailed below, there is precedent for NZX granting a waiver where the actual benefit that a Related Party receives from a transaction that is part of a group of transactions which, in total, exceed the threshold, is well below that threshold.

The mischief that Rule 9.2.1 seeks to address (being the potential transfer of value as a result of arrangements, direct and/or indirect between Related Parties, as opposed to arrangements with third parties) does not exist in this situation. The highest estimated gross cost to CEN for the Infrastructure Managed Services is currently expected to be $2.5 million in the financial years ending 30 June 2011-2012.

The decision to enter into any transactions with Origin will be made after consideration by CEN's independent directors, in accordance with CEN's internal Related Party Transaction Policy. It expects that the independent directors of CEN would be prepared to provide a certificate to NZXR that they believe that: The terms and conditions of the Infrastructure Managed Services have been entered into, and negotiated on, an arms' length basis; The directors of CEN who are not Associated with Origin considered the arrangements with Origin separately from the rest of the Board, and approved these arrangements as being in the best interests of CEN; and The Project transactions are in the best interests of all CEN shareholders who are not related to, or Associated Persons of, Origin.

It expects to obtain significant commercial benefits from using the same provider as Origin has engaged and re-using elements of the system that Origin has already implemented for retail, and to otherwise benefit from Origin's experience.

If the payments to Origin for services in connection with the Project substantially increase from the estimated cost corresponded to NZX, CEN will revert to NZX to seek a further waiver.

NZXR has previously granted a waiver to AMP NZ Office Trust (APT) on 7 May 2009 from Rule 9.2.1 in relation to entering into an early commitment agreement and a possible sub underwriting agreement of a proposed rights issue by APT's shareholders. One of the reasons provided by NZX for granting the waiver in that instance was the quantum of the fee paid to the Related Parties for providing the services did not exceed the Material Transaction threshold and it was only because of the scale of the rights offer, which was part of the "related series of transactions", that the agreements were caught by the Rules. This is similar to the current situation in that the costs relating to the Infrastructure Managed Services are well below the Material Transaction threshold. It is only because of the broad application of the Rules that the costs of all the "related series of transactions" need to be aggregated together, and the Material Transaction threshold is exceeded. The Related Party, Origin, receives no additional benefit, nor is it even party to, the other transactions captured by the definition of "Material Transaction".

NZXR has also previously granted a waiver to Kiwi Income Property Trust on 18 November 2004 based on the same rationale. The waiver was granted in relation to an acquisition by the Issuer of a Related Party's stake in another entity, which was well below the relevant Material Transaction threshold, but was part of a "related series of transactions" with the overall acquisition by the Issuer of a much larger stake in that entity from various parties, which did exceed the Material Transaction Threshold.

This rationale has also been recognised in numerous waivers in relation to private placements and rights issues such as to Tower Limited on 19 August 2009, Kermadec Property Fund Limited on 9 May 2007, and to APT on 19 April 2007, 6 December 2006 and 10 December 2004.

Rules

Rule 9.2.1 provides: An Issuer shall not enter into a Material Transaction if a Related Party is, or is likely to become: a direct or indirect party to the Material Transaction, or to at least one of a related series of transactions of which the Material Transaction forms part; or in the case of a guarantee or other transactions of the nature referred to in paragraph (d) of the definition of Material Transaction, a direct or indirect beneficiary of such guarantee or other transaction; unless that Material Transaction is approved by Ordinary Resolution of the Issuer. Rule 9.2.2 provides: For the purposes of Rule 9.2.1, "Material Transaction" means a transaction whereby an Issuer: ... (e) provides or obtains services (including without limitation obtaining underwriting of Securities or services as an employee) in respect of which the actual gross cost to the Issuer in any financial year (ignoring any returns or benefits in connection with such services) is likely to exceed an amount equal to 1% of the Average Market Capitalisation of the Issuer; or ...

Footnote 1 to Rule 9.2.1 provides: NZX may waive the requirement to obtain the approval of a resolution for the purposes of Rule 9.2.1 if it is satisfied that the personal connections with, or involvement or personal interest of a Related Party are immaterial or plainly unlikely to have influenced the promotion of the proposal to enter into the transaction or its terms and conditions.

Decision

On the basis that the information provided to NZXR is full and accurate in all material aspects, NZXR grants CEN a waiver from the requirement to seek shareholder approval of the Project, on the following conditions:

that the independent directors of CEN certify to NZX Regulation that, in their opinion: the terms and conditions of the Infrastructure Managed Services have been negotiated, and entered into, on an arms' length and commercial basis; the directors of CEN who are not Associated with Origin considered the arrangements with Origin separately from the rest of the Board, and approved these arrangements as being in the best interests of CEN; the Infrastructure Managed Services, and the terms on which they will be provided, are in the best interests of CEN shareholders who are not related to, or Associated Persons of, Origin, and that the aggregate payment to Origin for services provided in relation to the Project does not exceed $6 million per annum.

Reasons In coming to the decision to grant CEN a waiver from Rule 9.2.1, NZXR has considered that: The policy of Rule 9.2.1 is to ensure that where a Related Party is a direct or indirect party to a Material Transaction, or a related transaction, there is no undue transfer of value from the Issuer to the Related Party as result of their relationship with the Issuer. In this instance, the Infrastructure Managed Services are a minor aspect of the wider Project undertaken by CEN to integrate its various business systems and technology infrastructure. In light of the comparative cost of the Infrastructure Managed Services to CEN, and the wider cost of the Project, NZXR is satisfied that the relationship between Origin and CEN is unlikely to have influenced the promotion of the proposal, or decision to enter into, the Project.

Among the benefits which strategic shareholders provide companies are the synergies which may be obtained through strategic shareholders' experience, intellectual property and contacts. Origin has commenced, and is continuing to undertake, a similar transformation project in respect of its retail business. In this instance it is appropriate that a waiver be granted so as not to deny CEN the synergies which may be obtained from having Origin as a strategic shareholder who has undertaken a similar transformation.

Obtaining shareholder approval will provide CEN shareholders with no additional benefit which would justify the delay incurred by requiring such approval.

There is precedent for this decision in the waiver decisions in respect of KIP, dated 18 November 2004, and APT, dated 7 May 2009.

Confidentiality

CEN has requested that this application, and the decision resulting from it, be kept confidential until the date CEN enters into an arrangement with Origin in relation to the Project. NZXR grants CEN's request in accordance with Rules 1.6.2 and 1.11.2 and the footnotes to those Rules. End CA:00197098 For:CEN Type:WAV/RULE Time:2010-07-08:15:16:30

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