Discussion of Unaudited Financial Results

Management Discussion of Unaudited Financial Results for the nine month period ended 30 June 2003

Summary of Financial Results

The net surplus for the period ended 30 June 2003 at $74.2 million was 5% above that for the corresponding period last year of $70.4 million. However, the adjusted result for the period ended 30 June 2002 was $81.7 million, 9% above the result for the period ended 30 June 2003. The net surplus for the period ended 30 June 2003 included $19.5 million of increased depreciation. Much of this increase in depreciation was due to the revaluation of fixed assets which took effect from 30 September 2002 ($11.3 million), and the addition of the Taranaki Combined Cycle (“TCC”) power station to the asset base ($8.2 million.)

Total revenue for the period ended 30 June 2003 has increased by 11%, driven by strong growth in electricity revenue. Operating expenses for the same period have increased by 9%. This expense increase is due to a number of factors including increased electricity transmission costs associated with the growing customer base and some unanticipated costs incurred in this period. These costs include the write off of drilling expenses incurred in unsuccessful deep drilling at the Ohaaki geothermal field, the costs associated with the retail electricity savings campaigns and the costs incurred by Empower in its customer acquisition campaigns up to 30 June 2003.

Customer numbers as at 30 June 2003 were 612,000, up 14% from this time last year and up 5% in the quarter ended 31 March 2003.

Despite the increase in costs, EBITDA for the nine month period ended 30 June 2003 was up 15% to $251.7 million from $219.5 million, reflecting the overall increase in electricity revenue.

Total revenue from the gas business was 24% lower than for the corresponding period last year. The reduction in wholesale sales was in part due to the inclusion of the TCC station within Contact’s portfolio and the corresponding movement of the station’s use of gas into internal use for generation. In this period TCC has used just over 4.5 PJ of gas since the completion of the acquisition. This reduction in TCC gas wholesale sales has been partially offset in this three month period by increased sales of gas to Genesis Power Limited. Retail gas sales have reduced by 7% as a result of continuing loss of large volume customers as Contact reflects the increasing value of gas in its charges to customers.

The detailed results for each part of the business are summarised below.

Wholesale and Retail Electricity

Wholesale electricity revenue for the nine month period ended 30 June 2003 was 105% higher than for the period ended 30 June 2002. This reflects both increased volumes (up 12%) and increased prices. The increase in generation volumes is primarily due to the addition of TCC to the portfolio.

The average price earned by Contact’s generation in the nine month period ended 30 June 2003 was $93.44/MWh. The equivalent price in the nine month period ended 30 June 2002 was $45.93/MWh. The higher prices in this period reflect the dry conditions which prevailed during most of the period. Higher than expected rainfall during June has restored storage back to mean conditions resulting in a significant reduction in wholesale prices towards the end of the quarter.

Retail electricity revenue has increased by 34%, reflecting the significant increase in customer numbers during the past year. Retail sales volumes have increased by 30% in the same period, up to 5,009GWh from 3,852GWh in the nine month period ended 30 June 2002. Electricity customers have increased by 19% from 430,000 as at 30 June 2002 to 514,000 as at 30 June 2003. These include most of the customers added during the quarter ended 30 June 2003 in the final months of marketing under the Empower arrangement. However, a further 5,000 customers acquired by Empower were switched after the end of the quarter and therefore total electricity customer numbers are about 519,000 at the time of writing. As previously announced, as from 30 June 2003 Empower’s marketing activities have now been absorbed within Contact.

The average price paid for electricity purchases in the period ended 30 June 2003 was $98.54/MWh compared with $47.80/MWh in the nine month period ended 30 June 2002, reflecting the higher wholesale prices which applied particularly during the second and third quarters.

The overall average level of hedging increased in volume terms to around 94% in the nine month period ended 30 June 2003 from approximately 77% in the nine month period ended 30 June 2002. This was due primarily to an increase in retail load and forward sales in the hedge market. In addition, the hedge level is impacted by discretionary reductions in generation in periods of low price as well as planned and forced outages. The retail load provided approximately 75% hedge for Contact’s generation in the nine month period ended 30 June 2003. Contact anticipates that the average hedge level for the full financial year will be approximately 90%, although the final level will be highly dependent on demand during the rest of the winter.

Wholesale gas revenue was 38% lower than for the corresponding nine month period last year primarily due to a reduction in sales of gas to other generators. In addition, following the acquisition of the TCC station, use of gas for TCC has now been included in internal use for generation (in this period this was approximately 4.5PJ). This use was previously included as wholesale gas sales. This reduction has been offset in this quarter by increased sales to Genesis Power Limited for use at the Huntly power station. As announced on 1 May 2003, Contact has made additional sales this winter. These sales include the sale of up to 4.6PJ which was scheduled for delivery to Genesis in future years. In addition Contact has made available additional gas up to 40TJ/day which was supplied from Contact’s future gas entitlements. This arrangement operated on a day to day basis subject to availability and Contact ceased to make that gas available once the TCC station commenced operation following completion of its outage in mid May.

Retail gas revenue was 7% lower than for the corresponding nine month period last year. This was due to a range of factors including: sale of some large customers as reported in Contact’s annual report for the period ended 30 September 2002; non-renewal of sales contracts with some large customers; reduction in demand due to the relatively warm conditions in this quarter; and reduction in export related commercial and industrial activity consequent upon higher exchange rates.

Retail gas customers continue to reduce. Total gas customers were 98,500 compared with 101,500 customers as at 31 March 2003. As previously reported Contact has experienced considerable competition in its gas incumbency areas. However, it is clear that Contact’s view of the long term value of gas differs from its competitors and therefore Contact has to accept that it will lose some sales volumes to those other retailers.

Other Expenses

During this quarter Contact’s operating expenses increased due to some unanticipated factors. These included: costs associated with the acquisition of customers by Empower. The arrangement with the previous owners of Empower under which they managed Empower’s marketing activities ceased on 30 June 2003. Prior to the completion of that arrangement the Empower management entered into an agreement with Trustpower under which Trustpower encouraged its customers in Christchurch and Wellington to switch to Empower prior to 30 June 2003. The costs incurred by Empower in acquiring those customers as well as those acquired through other marketing activities of Empower have been expensed as incurred. These costs include any marketing costs and commissions and in this quarter amounted to approximately $5 million (pre tax); the write off of drilling costs following suspension of deep well drilling at the Ohaaki geothermal station. As previously announced this follows technical difficulties with the drilling. This cost was approximately $5.8 million (pre tax); and the costs associated with Contact’s contribution to the recent national campaign to conserve energy and Contact’s energy savings campaigns directed at its own customers. This had an impact of approximately $6 million before tax on the operating expenses for the nine month period ended 30 June 2003.

Depreciation and Amortisation

Depreciation and amortisation for the nine month period ended 30 June 2003 was $79.5 million, compared with $59.4 million in the period ended 30 June 2002. Depreciation has increased by $19.5 million from $51.9 million to $71.4 million. Most of this increase was attributable to two factors: the revaluation of the company’s fixed assets which took effect on 30 September 2002 ($11.3 million) and the addition of TCC to the asset base ($8.2 million).

Interest Expense

Net interest expense for the period ended 30 June 2003 was $52.6 million, compared with $39.8 million in the period ended 30 June 2002, a 32% increase. This was due to the fact that Contact has increased its average debt levels during the period and that the net interest cost includes the cost associated with arranging the financing of the acquisition of TCC. Net debt had increased from $734.9 million as at 30 June 2002 to $1,165.0 million as at 30 June 2003. Despite this, the level of gearing at 33% is similar to the 31% which applied in the period ended 30 June 2002. This is primarily due to the increase in shareholder funds arising from the revaluation of assets by $843 million as at 30 September 2002.

Taxation Expenses Tax provided for the nine month period ended 30 June 2003 was $39.7 million compared with $37.7 million for the period ended 30 June 2002. The effective tax rate is lower as that which applied at the time of the half year report ended 31 March 2003 due to a reassessment of the deferred tax position of Contact going forward.

Approved for release by resolution of the Board of Contact Energy Limited

31 July 2003

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