Contact Energy Limited · NZX:CEN
Contact Energy — H1 FY2020 Earnings Presentation
53 slides from Contact Energy's earnings presentation, Feb 10, 2020
Slide 1: Interim results presentation, six months ended 31 December 2019
For personal use only Interim results presentation Six months ended 31 December 2019 Putting our energy where it matters Contact Energy / FY20 Interim Financial Results / 10 February 2020 1
Slide 2: Disclaimer and important information
For personal use only Disclaimer and important information This presentation may contain projections or forward-looking statements regarding a variety of items. Such forward-looking statements are based upon current expectations and involve risks and uncertainties. Actual results may differ material
Slide 3: Presentation agenda
For personal use only PRESENTATION AGENDA 1 1H20 Highlights and Progress on Strategy / Dennis Barnes, CEO 4-18 2 Operational Performance and Financial Results / Dorian Devers, CFO 19-30 3 Market Update and Outlook / Dennis Barnes, CEO 31-38 4 Supporting Materials 39-53 Contact Contact Energy Energy
Slide 4: 1H20 highlights and progress on strategy
1H20 highlights For personal use only and progress on strategy Dennis Barnes, CEO Contact Energy / FY20 Interim Financial Results / 10 February 2020 4 4
Slide 5: Summary of key financial performance measures
For personal use only SUMMARY OF KEY FINANCIAL PERFORMANCE MEASURES Six months ended Comparison against Six months ended 31 December 2019 continuing operations3 31 December 2018 Operating earnings (EBITDAF) were down by $57m when compared to (1H20) 1H19 (1H19) continuing operations in 1H19, a period
Slide 6: Focus on operational improvement
For personal use only FOCUS ON OPERATIONAL IMPROVEMENT Maintaining financial discipline Safe and engaged employees Rewarding shareholders Controllable opex and capex costs ($m) Total recordable injury frequency rate Distributions ($m) (Recordable injuries per million hours worked) 178 189 5.2 149 13
Slide 7: Focus on sustainability
For personal use only FOCUS ON SUSTAINABILITY Total generation emissions intensity Customers with impaired credit now accepted Gender diverse workforce tCO2-e / MWh % of impaired credit customers accepted % of total workforce that is female 0.226 35% 0.158 0.145 0.138 Science 0.119 0.121 0.128 47.0%
Slide 8: Market demand
For personal use only MARKET DEMAND Regional change (%) 0% National electricity demand (TWh) 1H20 vs 1H19 0% Demand flat 1% +2% Irrigation related increase (2%) 1% 21.3 21.2 21.0 21.4 on prior period 20.8 2% 0% 4% North Island 13.4 13.3 13.4 13.4 13.5 1% (1%) 0% South Island 5.3 7% 5.4 5.0 5.3 5.0 (
Slide 9: Market fuel supply
For personal use only MARKET FUEL SUPPLY Production from the major fields (PJ) Demand from key sectors (PJ) Calendar year Six months Calendar year Six months -12 90 90 167 167 83 83 155 155 146 19 146 74 33 74 12 22 41 30 16 76 38 15 19 73 30 31 62 33 Maui Petrochemical 24 12 Mangahewa Electricity P
Slide 10: Fuel supply
For personal use only FUEL SUPPLY Generation by type (TWh) National hydro storage against mean storage (TWh) Generation from generator retailers (source: company reports) Mean storage 1926 – 2019 (source: NZX hydro) Despite high inflows in 5.0 2.5 2.7 Gas November and December 4.5 0.6 Coal 2019, hyd
Slide 11: Fuel supply and short-term price impact
For personal use only FUEL SUPPLY AND SHORT-TERM PRICE IMPACT Short-term external factors that Wholesale and futures electricity pricing ($/MWh) can influence the market Aluminium NZAS running below their contracted volumes but up on historic 300 Long-dated futures (>12 months) 200 Short-dated futur
Slide 12: Fuel supply and long-term price impact
For personal use only FUEL SUPPLY AND LONG-TERM PRICE IMPACT Thermal generation and spot price ASX electricity futures prices ($/MWh) 126 111 112 1,500 300 17 101 96 250 37 102 1,000 200 6 2 $/MWh 65 GWh 150 . 500 100 50 ASX FY16 Additional 50% Carbon price emsTradepoint Thermal fuel ASX 2H ASX FY21
Slide 13: Market: customer connections and retail tariffs
For personal use only MARKET Change in customer connections (000s) Tier 1: -13k customers Tier 2: +68k customers 149% Retail competition remains intense. 40 Divergent views on the value of a customer: 30 Tier 1: Mercury reducing customer numbers, Meridian 20 24% growing market share 10 -1% -1% 8%
Slide 14: Delivering portfolio strategy
For personal use only DELIVERING PORTFOLIO STRATEGY Optimise the Customer and Wholesale businesses to deliver strong cash flows. Customer Wholesale Disciplined and transparent approach to operating and capital expenditure. Continuing to investigate ways to optimise our portfolio of assets. Contact E
Slide 15: Delivering customer strategy
For personal use only DELIVERING CUSTOMER STRATEGY Technology Brand Leverage advances in Brand and reputation technology to drive efficiency repositioned from a strong with automated customer operational retailer to a smart experiences. customer solutions provider. Operating model Simple and lean op
Slide 16: Delivering customer strategy: update
DELIVERING CUSTOMER STRATEGY: UPDATE Technology Brand Optimisation through ‘clouding’ and digital Winning brand recognition and awareness collaboration Operating model For personal use only Targeting reductions in cost to serve New app 20,000 broadband downloaded 65k times connections Robotic Proces
Slide 17: Delivering wholesale strategy
For personal use only DELIVERING WHOLESALE STRATEGY Thermal generation Customer solutions Develop options to enable the Leveraging capability to expand economic substitution of C&I products and services; Contact’s thermal generation underpinned by our investment assets with renewables. in Simply Ene
Slide 18: Renewable development
For personal use only RENEWABLE DEVELOPMENT Pre-FID drilling of first four wells scheduled to continue until April. Excellent progress being made with the rig, Consent variation given to Tender process competitive, multiple bids received with substantial improvements allow build of Binary or Steam.
Slide 19: Operational performance and financial results
Operational For personal use only performance and financial results Dorian Devers, CFO Contact Energy / FY20 Interim Financial Results / 10 February 2020 19 19
Slide 20: 1H20 results
For personal use only 1H20 RESULTS Profit ($m) EBITDAF ($m) -57 278 276 19 10 17 7 221 4 1 2 3 4 5 1H19 on Pricing Hydro Natural gas Market Fixed costs 1H20 177 continuing constraint making operations 1 2 3 4 5 99 FY19 support Lower Continued Market to stressed hydro Full year gas makers market duri
Slide 21: 1H20 results
For personal use only 1H20 RESULTS Wholesale EBITDAF ($m) Customer EBITDAF ($m) Corporate / unallocated ($m) -39 -18 0 243 48 1 7 10 11 22 Electricity 204 2 Networks -13 3 30 1 13 13 Price recovery of cost inflation Electricity gross margin (-$14m) 1H19 Generation Total Trading, 1H20 1H19 Electricit
Slide 22: 1H20 results: wholesale business
For personal use only 1H20 RESULTS: WHOLESALE BUSINESS Electricity generated or acquired (GWh) Electricity generated or acquired costs ($m) Hydro generation down 159GWh on 1H19 (-8%), 5% below that expected in a mean year. Geothermal volumes were in 4,754 line with the prior year and average 4,617 +
Slide 23: 1H20 results: wholesale business
For personal use only 1H20 RESULTS: WHOLESALE BUSINESS Contracted revenue ($m) • Fixed price variable volume electricity sales to the -10 Customer segment and C&I customers ended 401GWh lower than 1H19 (-$33m), this was partially offset by 362 higher prices (+$13m) to the Customer business, 8 352 Ot
Slide 24: 1H20 results: wholesale business
For personal use only 1H20 RESULTS: WHOLESALE BUSINESS Trading EBITDAF ($m) Long / short position (GWh) Merchant generation • 10GWh decrease in merchant sales volumes -22 457 Spot sales and buy 46 CFD settlement (-$1m). The price received for this “long” generation 24 449 Spot purchases and was down
Slide 25: 1H20 results: customer business
For personal use only 1H20 RESULTS: CUSTOMER BUSINESS EBITDAF ($m) Complex retail electricity tariff 1H19 1H20 Variance -18 Revenue & Tariff1 ($m) structures mean transparency $m $m Tariff $m Tariff 48 is essential to understand 30 Other 2 3 performance. Electricity gross revenue 451.6 448.8 241.2 -
Slide 26: 1H20 results: other operating cost movement
For personal use only 1H20 RESULTS Other operating cost movement ($m) Underlying movement Delivered $2m of underlying Structural and performance Underlying Learn and movement operating cost improvement in Improve 110 2 line with our FY20 target. $2m from ICT procurement savings: 7 • Configuration ma
Slide 27: 1H20 results: normalised EBITDAF assumptions
For personal use only 1H20 RESULTS 1H assumptions that deliver expected & normalised EBITDAF of $480m EBITDAF reconciliation to 1H20 1 Channel choices maximise long term value¹ x 2 Net price² driven by best commercial practices = Total Normalised & Expected 246 CFDs 725GWh x $64/MWh = $46m C&I 1,675
Slide 28: 1H20 results: cash flow and capex
For personal use only 1H20 RESULTS SIB capital expenditure ($m) 6 months 6 months Comparison 80 64 ended ended against 1H19 31 Dec. 2019 31 Dec. 2018 60 46 35 EBITDAF $221m $291m ↓ ($70m) 40 29 27 20 Working capital changes $5m $18m ↓ ($13m) 0 Tax paid ($56m) ($41m) ↑ ($15m) 1H16 1H17 1H18 1H19 1H20
Slide 29: 1H20 results: net debt and maturities
For personal use only 1H20 RESULTS Closing net debt ($m) Borrowing maturities ($m) Net debt to EBITDAF (x) Face value of borrowings less cash Average tenor of 3.4 years as at 31 December 2019 Includes S&P adjustments (in FY19 AGS was treated as a lease) 1,626 242 252 3.4 3.2 3.2 1,539 1,445 210 3.1
Slide 30: Distributions
For personal use only DISTRIBUTIONS Ordinary dividends (cps) 39 39 Interim dividend for 1H20 of 16 cents per share Declared or target • Interim dividend of 16 cents per share (Interim FY19 16 cents per 32 share) is imputed to 63% or 10 cents per share for qualifying shareholders. This represents a p
Slide 31: Market update and outlook
Market update For personal use only and outlook Dennis Barnes, CEO Contact Energy / FY20 Interim Financial Results / 10 February 2020 31 31
Slide 32: Tiwai Point aluminium smelter
TIWAI POINT ALUMINIUM SMELTER w For personal use only Target completion first quarter 2020 • Electricity would flow North, in a curtailment Early LSI transmission upgrade agreed scenario without grid upgrades. Production • Reduced return on thermal assets and lower Alternative electricity demand gro
Slide 33: Outlook
For personal use only OUTLOOK Claim of undesirable trading situation (UTS) and Market making alleged breach of high standards of trading Revenue / (loss) ($m) • Profit/loss in market making conduct driven primarily by the net sales/purchase position when 8 the forward prices move. No We are continui
Slide 34: Fuel outlook
For personal use only FUEL OUTLOOK Portfolio requirements for thermal generation (TWh) Contracted gas volumes (PJ) Thermal plant fuel cost ($/MWh) 8.5 +13% 18.4 18.0 96 16.6 85 Hydro variation >> 4.0 76 3.7 -3.3 59 62 3.7 Carbon 7.6 12.2 4.5 -0.3 1.8 6.3 Gas 3.4 4.5 -2.9 4.5 FY17 FY18 FY19 FY20(f) F
Slide 35: Managing 2020 risk
For personal use only MANAGING 2020 RISK Managing earnings at risk more 1 – Reduce sales volumes Gas supply and demand 2020 (PJ) important than current year earnings -0.5 15.0 15.0 Limited fixed price sales, reduced mean 4.4 4.3 (P50) EBITDAF but improved earning 3.9 Balance 2.0 at risk (P5) Custome
Slide 36: Focus
For personal use only FOCUS Constructive engagement to promote renewable advantage. Continue to advance Tiwai mitigation options. Effective risk management. Manage wholesale Gas contracts will allows for greater participation in contracting market fixed price sales. volatility Recover rising input c
Slide 37: Guidance
For personal use only GUIDANCE FY20 Change to prior guidance Other operating costs $200 – 205m Stay in business capital expenditure $55 – 60m Cash spend forecast range unchanged Cash spend (‘Totex’) $255 – 265m TCC now to be fully depreciated by 2023. Depreciation and amortisation $213 – 223m ↑ $18m
Slide 38: Questions
For personal use only Questions Contact Energy / FY20 Interim Financial Results / 10 February 2020 38 38
Slide 39: Supporting material
For personal use only Supporting material Contact Energy / FY20 Interim Financial Results / 10 February 2020 39 39
Slide 40: Basis for distributions
For personal use only BASIS FOR DISTRIBUTIONS Distribution policy Long run average CAPEX ($m) Medium term OFCF ($m) Excludes capex associated with *Operating Free Cash Flow (OFCF) is operating Wairakei extension post 2026 Contact’s policy is to distribute cash flow less stay-in-business capital expe
Slide 41: Assumptions for normalised earnings
For personal use only ASSUMPTIONS FOR NORMALISED EARNINGS FY assumptions that deliver expected & normalised EBITDAF of $480m Expected & normalised FY EBITDAF 1 Channel choices maximise long term value¹ x 2 Net price² driven by best commercial practices = Total 480 CFDs 1,450GWh x $64/MWh = $93m C&I
Slide 42: Operational data
For personal use only OPERATIONAL DATA Contact generation output sold to the national grid (GWh) Electricity and generation sales position (GWh) -137 4,755 4,755 4,618 1 171 51 1 4,618 4,812 Direct generation 459 208 50 449 4,738 4,669 Merchant sales 4,533 Acquired generation 4,310 4,327 4,359 708 1
Slide 43: Geothermal performance
For personal use only GEOTHERMAL PERFORMANCE Geothermal fuel extracted at Wairakei vs consented Wairakei, Poihipi and Te Mihi conversion effectiveness (GWh) (MWh per kT extracted) +3% 0% 50 101% 100% -5% 98% 97% 45 94% 88% 32.0 32.3 30.3 30.8 30.6 30.7 40 35 30 25 20 15 10 5 0 1H15 1H16 1H17 1H18 1H
Slide 44: Operational data
For personal use only OPERATIONAL DATA Geothermal generation (GWh) Hydro generation (GWh) Thermal generation (GWh) 1,090 1,726 1,886 54 1,016 1,623 99 1,652 1,649 2 116 50 1,552 92 95 887 875 98 161 94 155 2,073 2,045 133 4 165 171 2,010 51 50 1 159 209 211 203 181 1,635 736 114 111 208 199 52 69 2,
Slide 45: Operational data
For personal use only OPERATIONAL DATA Hydro Geothermal Net Availability Capacity Electricity Pool revenue Net Availability Capacity Electricity Pool revenue (%) capacity (%) factor output capacity factor output (MW) (%) (GWh) ($/MWh) ($m) (MW) (%) (GWh) ($/MWh) ($m) 1H17 784 91% 60% 2,073 42 87 1H1
Slide 46: Operational data
For personal use only OPERATIONAL DATA Hawea strorage (GWh) Gas storage (GWh equivalent) Using the 1H20 thermal efficiency (9.04 TJ/GWh) 257 CLOSING STORAGE CLOSING STORAGE 152 770 833 152 Gas injected 164 623 27 53 208 93 159 351 294 103 495 Inflows 277 174 550 231 60 252 153 216 Opening storage 86
Slide 47: Operational data
For personal use only OPERATIONAL DATA Contracted gas volumes (PJ) Ahuroa gas storage monthly Sources and uses of gas (PJ) injections and extractions (PJ) Closing storage 7.0 18.6 18.4 5.6 18.0 18.0 7.6 16.7 16.6 5.0 4.0 3.7 Purchases 11.1 4.5 6.9 10.0 4.1 9.3 0.46 9.0 0.42 0.39 7.6 12.1 9.8 0.30 0.
Slide 48: Non-GAAP profit measure
For personal use only NON-GAAP PROFIT MEASURE • EBITDAF is Contact’s earnings before net interest expense, tax, depreciation, amortisation, change in The adjustments from EBITDAF to reported profit and fair value of financial instruments and other significant items. movements on 1H19 are as follows:
Slide 49: Non-GAAP profit measure
For personal use only NON-GAAP PROFIT MEASURE Variance on The only adjustment from reported profit to underlying profit 6 months ended 6 months ended prior year for 1H20 was: 31 December 2019 31 December 2018 • Change in the fair value of financial instruments (net of $m % taxation) The adjustments
Slide 50: Historic performance
For personal use only HISTORIC PERFORMANCE Unit 1H16 1H17 1H18 1H19 1H20 Revenue $m 1,120 1,037 1,190 1,363 1,110 Expenses $m 866 773 954 1,072 889 EBITDAF $m 254 264 236 291 221 Profit/(loss) $m (116) 96 58 276 59 Underlying profit $m 73 82 59 107 58 Underlying profit per share cps 10 11.5 8.2 15.0
Slide 51: Historic performance
For personal use only HISTORIC PERFORMANCE 1H20 1H19 Reference number for Six months ended 31 December 2019 Six months ended 31 December 2018 Wholesale segment Volume GWAP Volume GWAP note (see following Note: this table has not been rounded and might not add GWh $/MWh $m GWh $/MWh $m page) Electric
Slide 52: Segment note to operational performance
For personal use only SEGMENT NOTE TO OPERATIONAL PERFORMANCE Reference to detailed operating Wholesale segment Comment segment performance C&I electricity – Fixed Price 2 Spot sales are regarded as a pass-through and not reflected in C&I electricity – Spot 2-spot performance reporting, any margin i
Slide 53: Historic performance
For personal use only HISTORIC PERFORMANCE Residential electricity unit 1H17 1H18 1H19 1H20 Residential gas unit 1H17 1H18 1H19 1H20 Average connections # 363,472 361,412 352,159 355,216 Average connections # 59,565 60,870 61,332 61,959 Sales volumes GWh 1,398 1,343 1,335 1,328 Sales volumes TJ 951