Contact Energy Limited · NZX:CEN
Contact Energy — Non-Deal Roadshow (May 2019)
54 slides from Contact Energy's roadshow presentation, May 1, 2019
Slide 1: International roadshow
International roadshow Stockholm, Frankfurt, Zurich, London April 2019 Macquarie Australian Conference Sydney, 1st May 2019 1
Slide 2: Disclaimer and important information
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 materially from those stated
Slide 3: Dennis Barnes, Chief Executive Officer
Dennis Barnes Chief Executive Officer Dennis Barnes has been Chief Executive Officer of Contact since 2011. Dennis has completed Contact’s $2bn investment programme in renewable energy, flexible generation and companywide systems. Over his time at Contact Dennis has provided industry leadership on t
Slide 4: Agenda
Agenda 1 Contact in context 5 - 22 2 Why invest in Contact 23 - 32 3 New Zealand electricity market 33 - 42 4 Appendix – 1H19 results extracts 43 - 54 4
Slide 5: Contact's Wholesale business
Contact’s Wholesale business 5 5
Slide 6: Contact Wholesale snapshot
Contact owns and operates thermal plant, which is used to manage the risks associated with hydro intermittency Contact is an owner and operator of low-cost, long- 82% 5 2+1 life renewable RENEWABLE GENERATION GEOTHERMAL STATIONS HYDRO STATIONS / CONTROLLED generation STORAGE LAKE assets with consent
Slide 7: World class geothermal capability
Underpinning these operations is a world class geothermal capability Contact’s » Operational experience on the world’s second longest electricity producing geothermal field (Wairakei - 1958) Operating and stay-in-business capital cost of geothermal geothermal » Capability in construction management,
Slide 8: New Zealand in early stages of decades-long transformation
This transformation is being driven by macro economic fundamentals New Zealand is in the early stages of a decades-long CLIMATE CHANGE GOVERNMENT POLICY transformation from reliance on fossil fuels to renewable electricity QUALITY, LONG LIFE HISTORICALLY LOW RENEWABLE ASSETS COST OF CAPITAL 8 Macro-
Slide 9: Society is demanding action on climate change
The New Zealand regulatory framework is being adapted to deliver on this societal imperative Society is Productivity demanding Phase out coal for Meridian’s current Commission review into Interim Climate Emission Transport supply Trading action on policies electricity generation contract with Tiwai
Slide 10: New Zealand has added subsidy-free renewable generation
With world-class geothermal and wind resources consented for development New Zealand New Zealand electricity supply mix 2006, 2010, 2014, 2018 Source: MBIE electricity statistics has added 100% Electricity generation mix for 2018 (%) subsidy-free 90% 26% 21% 16% 12% 3% 12% 2% 80% 4% renewable 70% 7%
Slide 11: Meaningful reductions in carbon emissions are possible
Enabled by falling renewable technology costs and rising thermal fuel costs Meaningful reductions in WITH HIGH carbon RENEWABLE PENETRATION, emissions are ELECTRICITY IS possible with THE SOLUTION renewable TO REDUCING electricity CARBON displacing EMISSIONS, NOT carbon THE PROBLEM intensive fuels S
Slide 12: Decarbonisation will drive demand growth
Demand at 2008 levels means investment discipline is important Anticipated sources of new renewable demand (TWh) Keys to conversion timing It is clear that » Thermal availability and fuel decarbonisation +56% 55 costs Currently » Carbon prices will drive economically 3 5 competitive » Investment in
Slide 13: Delivering Wholesale strategy
Strong operational performance will be maintained while options to grow earnings are being developed An innovative, THERMAL CUSTOMER RENEWABLE safe and GENERATION SOLUTIONS DEVELOPMENT efficient generator, working with business » Develop options to » Leveraging » Potential to develop Tauhara enable
Slide 14: Capital deployment opportunity: Tauhara and geothermal track record
Geothermal production increased by 55% between FY10 and FY15, when the last unit was commissioned Contact has Contact Geothermal generation (TWh) Tauhara – >250MW consented demonstrated » New Zealand’s pre-eminent proficiency 5.4 0.3 scale renewable and capability development » Baseload renewable ov
Slide 15: Contact's Customer business
Contact’s Customer business 15 15
Slide 16: Contact Customer snapshot
With a presence in 1 in 5 homes, Contact is the only national retailer of electricity, gas, LPG* and broadband Contact’s Customer Retail electricity market share by customer Products by customer connection (%) connections (%) business is a Source: Electricity Authority service- 1% obsessed Nova 8% O
Slide 17: Target to be lowest cost to serve and most advocated for
Market leading meter to cash processes, with significant IT systems investment early in the decade an enabler REDUCING COST TO SERVE BUILDING CUSTOMER ADVOCACY CUSTOMER OPERATING COSTS ($m) NET PROMOTER SCORE Our target is Includes a corporate allocation Promoters less detractors 113 >25 to be the 1
Slide 18: Retail electricity market is highly competitive
Competition remains intense, political and regulatory scrutiny on essential goods and services is expected to continue The retail electricity market is highly CAPABLE LOW BARRIERS TO competitive, REGULATOR ENTRY resulting in pressure on retail margins READILY AVAILABLE EASE OF SWITCHING RISK MANAGEM
Slide 19: Delivering Customer strategy
Targeted investments are being made to support the strategy in FY19, which will enable a $20m reduction in operating costs over the next few years Contact’s OPERATING MODEL TECHNOLOGY BRAND Customer business has a solid foundation on which to » Move to a simple, lean operating model centred on » Lev
Slide 20: Relative earnings, cash flow outlook and operational metrics
Relative earnings, cash flow outlook and performance against operational metrics 20 20
Slide 21: Delivery of strong, stable operating cash flows
Performance underpinned by a continuous improvement programme SEGMENTAL EARNINGS (%) OF FY18 EBITDAF FY20(f) Operating Free Cash Flow – OFCF ($m) Excludes corporate costs of $24m Excludes movements in working capital 285 6% 15% Delivery of 480 strong, stable $505m operating -60 -70 cash flows for 79
Slide 22: Focus on continuous improvement
An efficient and focused business, building capability and disposing of non-core activities SAFE AND ENGAGED The focus on MAINTAINING FINANCIAL DISCIPLINE EMPLOYEES continuous CONTROLLABLE OPEX AND CAPEX COSTS ($m) TOTAL RECORDABLE INJURY FREQUENCY RATE Recordable injuries per million hours worked i
Slide 23: Why invest in Contact?
The investment opportunity in our core markets is large, with good visibility on projects to deliver cash flow growth Strong cash Shares offer value flow generation when benchmarked Why invest in Contact? Dividend policy ESG credentials Latent potential provides with world-class certainty geothermal
Slide 24: A stable economy and political system
New Zealand has an open economy that works on free market principles A stable economy and political system Safe, stable and secure business Ease of doing Comparatively low developed-country Simple tax system business with a environment business costs reputation for innovation Market orientated Innov
Slide 25: Sustainability integrated into strategy
Sustainability is embedded within our decision making and reporting processes, it’s who we are Sustainability Decision frameworks Current reporting frameworks is about People integrating How will this diverse impact people? perspectives Environment Economic into our How will this impact How will thi
Slide 26: Track record of delivering on environmental targets
Leading the decarbonisation of New Zealand’s energy sector by taking steps to address emissions from our own operations and those of our customers Contact has a track record of delivering on ambitious environmental targets 26 Strong ESG credentials
Slide 27: Greenhouse gas emission reduction targets
Contact has become the first energy company in New Zealand to have its emission reduction targets approved by the Science Based Target Initiative (SBTi) Contact has set 2022 2030 greenhouse gas emission reduction targets in line with keeping global warming » Emissions intensity targets: below 1.5ºC
Slide 28: 39 cps distribution policy
Distribution policy provides clarity to investors and will drive a strong capital discipline High yielding investment Distribution policy FY19 Balance sheet Ordinary dividend capacity with a clear distribution Ordinary dividend of policy - backed by a 39 cps 31% strong 100% = 2.8x Net debt to EBITDA
Slide 29: Indicative economics for 250MW geothermal station at Tauhara
Indicative economics for a generic fully developed 250MW geothermal power station at Tauhara Estimated total Operating free Opportunity capital cost cash flow yield A world-class geothermal >25% uplift expertise with from capital deployment into an asset that we have a 60 year consented $4m 8 to 9%
Slide 30: Shares offer value when benchmarked against peers
Sector leading ordinary dividend yield with significant balance sheet capacity Bubble size: Enterprise value to FY20 Net debt / FY20 EBITDAF (%) Ordinary dividend yield (%)* EBITDAF* multiple Contact: FT19 target, Peers consensus 5.7% 5.6% 12 3.1 11 Market Capitalisation ($bn) - 18 April 2019 Meridi
Slide 31: Only listed generator without a majority shareholder
Open share register provides significantly more liquidity and flexibility relative to government owned peers Daily trade by value – last 6 months Sum of register by % of issued share capital holding ($m/day) 9.2 >5% 4 - 5% 0% » No Contact is the 18% holders above 5% only listed <1% 49% 14% 3 - 4% of
Slide 32: Focus on optimising cash flow
Returns to shareholders improving as operational focus enabled ordinary dividend increases which resonated in a weaker forward Focus on interest rate environment optimising 12 MONTH SHARE PRICE VS NZX50 Rebased to 100 DISTRIBUTIONS ($m) Declared or target cash flow Announced change to 558 generation
Slide 33: New Zealand electricity market
New Zealand electricity market 33 33
Slide 34: Reliable, affordable, sustainable electricity system
New Zealand enjoys a reliable, affordable and environmentally sustainable electricity system “New Zealand serves as a model for effective energy markets and secure power system operation” 5 1 29 44 2.1 International Energy Major Spot State-owned Distribution Retailers Million Agency (IEA) generators
Slide 35: Demand at similar level to 2008
Despite the continued energy efficiency in the residential market Electricity consumption breakdown While demand National electricity demand (TWh) Source: EMI Source: MBIE electricity statistics is at a similar 0.5% Agriculture 6% level to 2008, Residential 31% 40.1 40.6 41.3 40.7 41.2 41.2 there ha
Slide 36: Hydro storage is crucial but limited
Hydro schemes are mostly run-of-river with rainfall into key catchments weighted to summer, while demand is winter biased Hydro storage is Clutha Waitaki Manapouri Taupo crucial, but limited; - maximum Average annual generation of 3,900 GWh Average annual generation of 7,000 GWh Average annual
Slide 37: Thermal generation is the swing fuel
Thermal generation sets the opportunity cost of renewables, this includes stored water Thermal generation is National annual supply (TWh) Flexible thermal production is required currently the 43 most 7 5TWh to 10TWh 2 economic 2 per annum of seasonal renewables firming required swing fuel to Major t
Slide 38: Wholesale pricing
In addition to managing the supply and demand balance, thermal fuel supply shocks impact the market in the short-term Short-term external factors that can Wholesale and futures electricity pricing ($/MWh) influence the market The market Source: EMI wholesale pricing quickly 300 Aluminium 200 respond
Slide 39: The market in action – 1H19
The market in action – 1H19 39 39
Slide 40: National electricity demand flat on 1H18
National electricity demand flat on 1H18 REGIONAL CHANGE (%) 1H19 vs 1H18 NATIONAL ELECTRICITY DEMAND (TWh) Source: EMI, Contact Source: EMI, Contact 0% 21.0 21.3 20.8 21.2 21.0 0% 1% 13.3 13.4 13.3 13.4 13.4 1% (1%) (1%) 5.2 5.4 5.0 5.3 5.0 2.5 2.5 2.5 2.5 2.6 1% 0% 1H15 1H16 1H17 1H18 1H19 North I
Slide 41: National storage rising in advance of winter
National storage rising in advance of winter SOUTH ISLAND INFLOWS NORMALISED FROM A NATIONAL HYDRO STORAGE AGAINST MEAN STORAGE (GWh) DRY 1H18 Mean storage 1926 – 2016 (source: NZX hydro) » An acute drought in key South Island catchments between October and 4,000 3,500 December 2017 was broken in Fe
Slide 42: Wholesale spot prices responded to fuel scarcity
Wholesale spot prices responded to fuel scarcity HYDRO STORAGE LEVELS AND THERMAL FUEL MONTHLY WHOLESALE SPOT ELECTRICITY PRICES ($/MWh) CONSTRAINTS INCREASED NEAR TERM PRICES Generation weighted (source: Electricity Authority – Wholesale electricity prices) » While volatile hydrology is a well-know
Slide 43: Appendix - 1H19 Results extracts
Appendix - 1H19 Results extracts 43 43
Slide 44: Profit of $276m, supported by proceeds from portfolio changes
Profit of $276m, supported by proceeds from portfolio changes PROFIT ON CONTINUING OPERATIONS UP BY 111% AS EBITDAF FROM CONTINUING OPERATIONS INCREASED BY $61m STATUTORY PROFIT ($m) 276 +49 4 177 4 20 97 99 2 61 58 11 47 48 1 1H18 profit Discontinued Profit on Items 1H18 EBITDAF Depreciation Net in
Slide 45: EBITDAF from continuing operations up by $61m
EBITDAF from continuing operations up by $61m Continuing business performance WHOLESALE EBITDAF ($m) CUSTOMER EBITDAF ($m) CORPORATE / UNALLOCATED ($m) 0 +58 +3 13 13 243 48 1 1 39 2 1 2 7 185 12 45 1 1 1H18 Generation Contracted Trading / 1H19 1H18 Electricity Gas Energy Other Cost to 1H19 1H18 Lab
Slide 46: Generation costs
Generation costs Renewable generation up 10% on 1H18, costs down by $12m Electricity generated or acquired Electricity generated or acquired ($m) (GWh) » Hydro generation was up 410 GWh (25%) as -12 4,762 4,754 hydro generation returned to mean after a dry 171 176 176 Acquired 385 6 1 1H18, geotherm
Slide 47: Wholesale contracted revenue
Wholesale contracted revenue Energy prices higher on the prior period, reduced exposure to fixed price sales and redirected load to higher priced channels Contracted revenue ($m) +7 » Fixed price variable volume electricity sales to Customer 355 362 7 and C&I customers were 216 GWh (4%) lower than 2
Slide 48: Wholesale trading and merchant revenue
Wholesale trading and merchant revenue Contact was able to generate to support the market during higher priced periods in 1H19 TRADING EBITDAF ($m) LONG / SHORT POSITION (GWh) » Contact’s flexible generation portfolio +39 299 458 and access to stored gas saw a 102 45 GWh increase in merchant sales 3
Slide 49: Customer business performance
Customer business performance EBITDAF up by $3m on higher tariff, lower network costs and a reduction in cost to serve Revenue ($m) EBITDAF ($m) » Electricity sales volume down 33 GWh due to -2 +3 lower customers numbers, offset by higher gas 499 497 45 48 sales to SME customers 2 3 3 39 452 GWh 39
Slide 50: Cost efficiency programme continues to deliver
Cost efficiency programme continues to deliver controllable cost reduction OTHER OPERATING COSTS ($m) OTHER OPERATING COST MOVEMENT ($m) 114 5% reduction in like for -4 2 114 112 like other operating costs 110 110 » Efficiency programme delivers $6m 6 4 operating cost reduction in 1H19, 41 40 106 ag
Slide 51: Cash flow and capital expenditure
Cash flow and capital expenditure OPERATING CASH FLOW UP BY $62m ON HIGHER EBITDAF, FAVOURABLE WORKING CAPITAL MOVEMENTS AND LOWER INTEREST AND CAPEX COSTS 6 months SIB CAPEX ($m) 6 months ended ended Comparison against 31 31 December 1H18 128 December 2017 102 2018 EBITDAF $291m $236m ↑ $55m 69 60
Slide 52: Strong free cash flow directed to balance sheet
Strong free cash flow directed to strengthening the balance sheet EBITDAF TO CASH CONVERSION INCREASED TO 70% IN 1H19 FROM 60% IN 1H18 OPERATING FREE CASH FLOW – OFCF ($m) SOURCES AND USES OF CASH ($M) 203 641 641 141 207 291 438 236 298 8 8 10 142 142 -8 4 1 14 10 7 -60 -77 203 141 136 107 -35 -29
Slide 53: Strong balance sheet
Strong balance sheet ROBUST TREASURY MANAGEMENT ENSURES ACCESS TO DIVERSE FUNDING SOURCES CLOSING NET DEBT ($m) BORROWING MATURITIES ($m) NET DEBT TO EBITDAF (x) Face value of borrowings less cash Average tenor of 3.6 years as at 31 December 2018 Includes S&P adjustments (AGS currently treated as a
Slide 54: Guidance affirmed
Guidance affirmed CONFIDENCE IN THE ABILITY TO DELIVER PERFORMANCE IMPROVEMENTS FY20 OFCF ($m) Change to prior Change to prior FY19 (f) guidance FY20 (f) guidance 285 Other operating costs $200 – 210m - $185 – 195m - Range narrowed 480 Depreciation and amortisation $200 – 205m on completion of $195