Contact Energy Limited · NZX:CEN
Contact Energy — FY2020 Earnings Presentation
59 slides from Contact Energy's earnings presentation, Aug 10, 2020
Slide 1: 2020 Full Year Results Presentation
2020 Full Year Results Presentation Twelve months ended 30 June 2020 Putting our energy where it matters Contact Energy / FY20 Full Year Results Presentation / 10 August 2020 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 assumptions at a point in time, and carry significant risks if relied upon. Actual results may differ materially f
Slide 3: Presentation Agenda
PRESENTATION AGENDA 1 FY20 Highlights and Progress on Strategy / Mike Fuge, CEO 4-19 2 Operational Performance and Financial Results / Dorian Devers, CFO 20-31 3 Market Update and Outlook / Mike Fuge, CEO & Dorian Devers, CFO 32-44 4 Supporting Materials 45-59 Contact Contact Energy Energy // FY20 F
Slide 4: FY20 highlights and progress on strategy
FY20 highlights and progress on strategy Mike Fuge, CEO Contact Energy / FY20 Full Year Results Presentation / 10 August 2020 4 4
Slide 5: Summary of key financial performance measures
SUMMARY OF KEY FINANCIAL PERFORMANCE MEASURES Twelve months ended Comparison against Twelve months ended 30 June 2020 continuing operations3 30 June 2019 Operating earnings (EBITDAF) were down by $54m when compared to (FY20) FY19 (FY19) continuing operations in FY19, a period which included: • Stron
Slide 6: Focus on operational improvement
FOCUS ON OPERATIONAL IMPROVEMENT Maintaining financial discipline Safe and engaged employees Rewarding shareholders Other operating costs and SIB capex ($m) Total recordable injury frequency rate Distributions ($m) (Recordable injuries per million hours worked) 391 357 5.2 301 272 248 286 280 280 3.
Slide 7: Focus on sustainability
FOCUS ON SUSTAINABILITY Total generation emissions intensity Customers with impaired credit now accepted Gender diverse workforce tCO2-e / MWh % of impaired credit customers accepted % of total workforce 19% 20% 21% 0.175 0.156 52% 41% 54% 56% 59% Female 63% 63% 0.134 0.136 0.123 0.111 0.108 Science
Slide 8: Market demand
MARKET DEMAND Regional change (%) (3%) National electricity demand (TWh) FY20 vs FY19 5% Demand flat. Indicates 0% underlying demand growth (3%) 0% once the impact of COVID is (1%) included 41.2 40.9 41.3 41.4 41.2 1% 0% (6%) 0% North Island 25.9 25.9 26.1 26.1 25.8 0% 0% 5% South Island 0% (ex NZAS
Slide 9: Market fuel supply
MARKET FUEL SUPPLY Production from the major fields (PJ) Demand from key sectors (PJ) -3 166 162 163 166 162 163 149 149 31 33 25 26 87 79 82 33 28 38 76 24 Maui Petrochemical Mangahewa Electricity Pohokura 65 61 56 Retail and other 62 Kupe 39 44 41 34 Turangi Kowhai 24 26 27 23 40 39 38 40 11 3 11
Slide 10: Fuel supply
FUEL SUPPLY Generation by type (TWh) National hydro storage against mean storage (TWh) Generation from generator retailers Mean storage 1927 – 2020 4.5 5.1 5.3 Gas Despite high inflows in 4.0 1.6 1.7 Coal November and December 2019, hydro generation was 3.5 slightly down compared with FY19 following
Slide 11: Fuel supply and short-term price impact
FUEL SUPPLY AND SHORT-TERM PRICE IMPACT Short-term external factors that Wholesale and futures electricity pricing ($/MWh) can influence the market NZAS running below their contracted Aluminium volumes. 7July 2020 closure 220 announced by 31 August 2021. 200 Long-dated futures (>12 months) 180 Short
Slide 12: Market
MARKET Change in customer connections (000s) Tier 2: +128k customers 139% Tier 1: -15k customers 126% 50 Retail competition remains intense. 40 Divergent views on the value of a customer: 30 Tier 1: Mercury reducing customer numbers, Meridian 20 growing market share -2% -2% 4% 10 -11% -11% -19%
Slide 13: Regulatory
REGULATORY The Electricity Authority ( EA) reached a preliminary conclusion that a UTS occurred in December 2019 during significant flooding in the lower South Island. The cost of providing market making services needs to be borne by all beneficiaries including generators, While Contact was not foun
Slide 14: Delivering portfolio strategy
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 Energy / FY20 Full Year
Slide 15: Delivering customer strategy
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 operating model centred
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 Targeting reductions in cost to serve Top rated energy app >26,000 broadband in New Zealand, with usage increasing connections 90% o
Slide 17: Delivering wholesale strategy
DELIVERING WHOLESALE STRATEGY Thermal generation Customer solutions Develop options to enable the Leveraging capability to expand C&I products economic substitution of and services; Contact’s thermal generation underpinned by our investment in Simply Energy. assets with renewables. Partner with cust
Slide 18: Renewable development
RENEWABLE DEVELOPMENT The Tauhara development is ready for execution when market conditions allow. Contact Energy / FY20 Full Year Results Presentation / 10 August 2020 18
Slide 19: COVID-19 response
COVID-19 RESPONSE o Enterprise-wide programme management office set up identifying opportunities to improve performance • Reduced controllable operating and capital costs o Increased liquidity by $200m for 18 months at short notice to pre-emptively protect against a potential credit market closure o
Slide 20: Operational performance and financial results
Operational performance and financial results Dorian Devers, CFO Contact Energy / FY20 Full Year Results Presentation / 10 August 2020 20 20
Slide 21: FY20 results
FY20 RESULTS Profit ($m) EBITDAF ($m) -54 505 345 30 17 451 5 5 10 13 -10 1 2 3 4 5 175 FY19 on Renewables Pricing Natural gas Market Fixed costs FY20 continuing constraint making inc. opex Price operations Volume 170 1 2 3 4 5 54 125 17 10 Lower hydro FY19 Gas Market Strong 15 15 year on year suppo
Slide 22: FY20 results
FY20 RESULTS Wholesale EBITDAF ($m) Customer EBITDAF ($m) Corporate / unallocated ($m) -38 -17 +1 67 5 Networks 0 44 48 Electricity 19 50 5 2 464 -14 -26 -25 34 426 Price recovery of cost inflation Electricity gross margin (-$14m) FY19 Generation Total Trading, FY20 FY19 Electricity Cost Gas Gross O
Slide 23: FY20 results: wholesale business
FY20 RESULTS: WHOLESALE BUSINESS Electricity generated or acquired (GWh) Electricity generated or acquired costs ($m) Hydro generation down 479GWh on FY19 (-11%), 4% below that expected in a mean year. Geothermal volumes were 9,625 -44 77GWh up on prior year and 33GWh on an Acquired 634 348 348 aver
Slide 24: FY20 results: wholesale business, contracted revenue
FY20 RESULTS: WHOLESALE BUSINESS Contracted revenue ($m) -48 737 • Fixed price variable volume electricity sales to the Other net income 12 Customer segment and C&I customers ended 896GWh 26 689 Steam sales 2 lower than FY19 (-$75m), this was partially offset by 26 higher prices (+$22m) to the Custo
Slide 25: FY20 results: wholesale business, trading
FY20 RESULTS: WHOLESALE BUSINESS Trading EBITDAF ($m) Long / short position (GWh) Merchant generation • 98GWh decrease in -34 merchant sales volumes Spot sales and buy 75 CFD settlement (-$10m). The price received 973 for this “long” generation 41 Spot purchases and was down by $38.2/MWh $142.3/MWh
Slide 26: FY20 results: customer business
FY20 RESULTS: CUSTOMER BUSINESS EBITDAF ($m) Electricity tariff changes reflect the FY19 FY20 Variance -17 regulatory pressures and the Revenue & Tariff1 ($m) competitive environment: $m $m Tariff $m Tariff 50 67 5 • 16k customers migrated to fit-for- Other income 4 Electricity gross revenue 858 859
Slide 27: FY20 results: other operating costs
FY20 RESULTS Other operating cost movement ($m) Underlying movement Underlying Invest in $5m from procurement savings with ICT delivering Portfolio, performance and non-recurring movement adjacencies reductions from insourcing activity and relocation of 212 1 servers into the cloud. 1 $1m change in
Slide 28: FY20 results: EBITDAF reconciliation
FY20 RESULTS FY assumptions that deliver expected & normalised EBITDAF of $480m EBITDAF reconciliation to FY20 1 Channel choices maximise long term value¹ x 2 Net price² driven by best commercial practices = Total 480 Normalised & Expected CFDs 1,450GWh x $64/MWh = $93m C&I 3,350GWh x $83/MWh = $278
Slide 29: FY20 results: cash flow and capex
FY20 RESULTS SIB capital expenditure – accounting ($m) 12 months 12 months Comparison ended ended against FY19 150 128 30 June 2020 30 June 2019 102 EBITDAF $451m $518m ↓ ($67m) 100 78 60 52 Working capital changes $7m ($7m) ↑ $14m 50 Tax paid ($70m) ($47m) ↓ ($23m) 0 FY16 FY17 FY18 FY19 FY20 Intere
Slide 30: FY20 results: net debt and maturities
FY20 RESULTS Closing net debt ($m) Borrowing maturities ($m) Net debt to EBITDAF (x) Face value of borrowings less cash Average tenor of 3.0 years as at 30 June 2020 Includes S&P adjustments (prior to FY20 AGS was treated as a lease) 1,698 3.4 3.2 3.2 1,626 1,539 3.1 25 23 1,445 41 38 482 2.4 3.1 3.
Slide 31: Distributions
DISTRIBUTIONS Ordinary dividends (cps) Dividend for FY20 of 39 cents per share 39 39 Declared • Final dividend of 23 cents per share (Final FY19 23 cents per share) 32 is imputed to 65% or 15 cents per share for qualifying shareholders. This represents a pay-out of 97% of FY20 operating free cash fl
Slide 32: Market update and outlook
Market update and outlook Mike Fuge, CEO & Dorian Devers, CFO Contact Energy / FY20 Full Year Results Presentation / 10 August 2020 32 32
Slide 33: Tiwai Point aluminium smelter
TIWAI POINT ALUMINIUM SMELTER • Reduced return on thermal assets and lower natural gas demand • Heavy industry Suppliers Joined up thinking is required: • Premature decline of the oil and gas sector Risk of a disorderly exit needs to be fully understood • Impact on the Southland and Taranaki economy
Slide 34: Tiwai Point aluminium smelter
TIWAI POINT ALUMINIUM SMELTER NZAS consumes 13% of national demand, 572MW baseload contract, located in the lower South Island. Proposed phased exit to limit spill Transmission constrained at times until May 2022 leading up to 0.6 TWh of spill p.a. for Contact. July 2020 31 Aug 2021 31 May 2022 Only
Slide 35: Tiwai Point aluminium smelter: hydrology, demand, wind
TIWAI POINT ALUMINIUM SMELTER Hydrology Daily demand shape Wind generation Annual Hydrology (2000 - 2019) Daily demand (MWh) Wind generation (MW by trading period June 2020) 62% 400 300 Winter 200 Min 22.7 TWh | Mean 25.3 TWh | Max 27.7 TWh Summer 100 0 01-Jun 08-Jun 15-Jun 22-Jun 29-Jun Multiple va
Slide 36: Tiwai Point aluminium smelter
TIWAI POINT ALUMINIUM SMELTER o Thermal generation will become increasingly volatile and therefore require flexible gas and/or coal. o On a national level 5.6 TWh of thermal generation is currently required. This would reduce to ~0.6 TWh under mean hydrological conditions once the HVDC is invested i
Slide 37: Tiwai Point aluminium smelter: no role for baseload thermal
TIWAI POINT ALUMINIUM SMELTER North Island Winter Capacity Margin (MW) North Island demand duration curve (MW) Transpower’s North Island Winter Capacity Margin (WCM) Security Generation capacity to meet the market. Standard (April 2020) is still exceeded post NZAS without any CCGTs. 1,100 6,000 5,50
Slide 38: Tiwai Point aluminium smelter: thermal plant assessment
TIWAI POINT ALUMINIUM SMELTER Fuel flexibility/ Efficiency / Dry year Assessment of Daily Plant type Fuel type economic operating / Reserves value post NZAS shape dispatch costs seasonal exit Open cycle Diesel +++ --- - +++ +++ More important role +++ + ++ +++ ++ Critical in managing Gas with storag
Slide 39: Tiwai Point aluminium smelter: strengths and mitigations
TIWAI POINT ALUMINIUM SMELTER Organisational capability to deliver competitive advantage. Strengths Flexible thermal fuel, with asset Track-record Contract position Unique optionality for TCC with limited short- Strong Low-cost of delivering expertise to to support control term price customer Flexib
Slide 40: Tiwai Point aluminium smelter: virtual generators
TIWAI POINT ALUMINIUM SMELTER Virtual generator I Demand Flex platform – 7MW reserve and virtual peaking Hawea 286 GWh storage, ~500 GWh p.a. throughput AGS contract and gas peakers 0-200 MW First rights on further AGS expansion Virtual generator II Huntly swaption – 100 MW Whirinaki peaker plant 15
Slide 41: Contact performance model
Contact performance model Simply Energy Digital investment Executable generation development to meet the market Execution capability provides delivery confidence Decarbonisation New Demand Optimise sales Grow the market by picking Ensuring an understanding Leverage our NI generation the projects whi
Slide 42: Focus
FOCUS Constructive engagement to promote an orderly exit NZAS Effective risk management. Monetise flexible thermal advantage. Manage wholesale Gas contracts will allows for greater participation in contracting market fixed price sales. volatility Recover rising wholesale input costs. Near Delivering
Slide 43: Basis for distributions
BASIS FOR DISTRIBUTIONS Disciplined management and application of cash flows to maximise the returns for shareholders. o This includes an evaluation of the capital required to pursue mitigation/growth opportunities and ongoing investment in the business o Forecast uncertainty reduces confidence in o
Slide 44: Guidance
GUIDANCE FY20 Guidance Result FY21 Guidance Guidance commentary Other operating costs $200 – 205m $196m $190 – 205m* Stay in business capital expenditure $55 – 60m $51m $55 – 60m Targeting further reduction in controllable costs Cash spend (‘Totex’) $255 – 265m $247m $250 – 265m Depreciation a
Slide 45: Questions
Questions Contact Energy / FY20 Full Year Results Presentation / 10 August 2020 45 48 45
Slide 46: Supporting materials
Supporting materials Contact Energy / FY20 Full Year Results Presentation / 10 August 2020 46 49 46
Slide 47: Operational data
OPERATIONAL DATA Contact generation output sold to the national grid (GWh) Electricity and generation sales position (GWh) 9,514 -768 9,255 9,002 9,627 9,627 8,908 2 8,537 8,614 8,444 Pool purchase 83 634 974 8,859 1 8,859 2,321 1,614 1,421 Direct generation Thermal 335 79 Acquired generation 862 Me
Slide 48: Geothermal performance
GEOTHERMAL PERFORMANCE Geothermal fuel extracted at Wairakei vs consented Wairakei, Poihipi and Te Mihi conversion effectiveness (GWh) (MWh per kT extracted) +1% +1% 95 +3% 90 99% 101% 99% 100% 97% 85 94% 30.5 31.1 30.1 30.1 30.1 80 29.3 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 0 FY15 FY16 FY17 F
Slide 49: Operational data
OPERATIONAL DATA Geothermal generation (GWh) Hydro generation (GWh) Thermal generation (GWh) 1,903 3,333 3,752 1,834 3 3,297 3,323 3,257 90 3,233 4,231 1,708 1 196 198 198 4,091 92 189 186 0 211 280 340 94 226 337 336 310 3,562 1,503 3,479 221 1,439 411 83 5 407 403 388 335 79 3 528 195 495 195 506
Slide 50: Operational data
OPERATIONAL DATA Hydro Geothermal Net Availability Capacity Electricity Pool revenue Net Availability Capacity Electricity Pool revenue (%) capacity (%) factor output capacity factor output (MW) (%) (GWh) ($/MWh) ($m) (MW) (%) (GWh) ($/MWh) ($m) FY17 784 92% 52% 3,562 47 169 FY17 429 91% 86% 3,233 5
Slide 51: Operational data
OPERATIONAL DATA Hawea strorage (GWh) Gas storage (GWh equivalent) Using the FY20 thermal efficiency (9.04 TJ/GWh) 257 90 CLOSING STORAGE CLOSING STORAGE 152 770 833 152 623 244 Gas injected 164 27 53 159 351 208 93 294 103 610 Inflows 277 174 495 231 550 60 170 252 216 153 257 152 159 152 Opening s
Slide 52: Fuel outlook
FUEL OUTLOOK Portfolio requirements for thermal generation (TWh) Gas supply and demand FY21 (PJ) Thermal plant fuel cost ($/MWh) 8.5 +8% 17.5 17.5 81 76 77 Hydro variation >> 3.3 62 -3.3 59 3.7 Carbon 0.3 Mean Thermal 8.0 Gas 2.9 -2.9 -65% 2.0 Contracted FY17 FY18 FY19 FY20 FY21 (f) 1.0 -1.0 Co-gene
Slide 53: Operational data
OPERATIONAL DATA Contracted gas volumes (PJ) Ahuroa gas storage monthly Sources and uses of gas (PJ) injections and extractions (PJ) Closing storage 7.7 10.9 18.6 18.4 7.5 18.0 4.5 16.7 16.6 16.5 6.1 4.0 1.7 6.9 6.0 Purchases 18.3 19.5 4.1 14.3 4.7 20.4 0.72 17.3 7.6 0.58 0.62 4.5 0.50 16.5 6.3 0.34
Slide 54: Non-GAAP profit measure
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 FY19 are as follows: • EBITDAF is commonly
Slide 55: Non-GAAP profit measure
NON-GAAP PROFIT MEASURE Variance on The only adjustment from profit to underlying profit for FY20 12 months ended 12 months ended prior year was: 30 June 2020 30 June 2019 • Increase in Holiday Act provision to reflect the recent High $m % Court ruling following the Metro Glass vs MBIE case and esti
Slide 56: Historic performance
HISTORIC PERFORMANCE Unit FY16 FY17 FY18 FY19 FY20 Revenue $m 2,163 2,079 2,275 2,519 2,073 Expenses $m 1,640 1,578 1,794 2,001 1,622 EBITDAF $m 523 501 481 518 451 Profit/(loss) $m -66 151 132 345 125 Underlying profit $m 157 142 130 176 129 Underlying profit per share cps 21.7 19.9 18.1 24.6 18.0
Slide 57: Segmental performance
SEGMENTAL PERFORMANCE FY20 FY19 Reference number for Twelve months ended 30 June 2020 Twelve months ended 30 June 2019 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) Electricity sales to Customer 3
Slide 58: Segment note to operational performance
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 included in C&I netback
Slide 59: Historic performance
HISTORIC PERFORMANCE Residential electricity unit FY17 FY18 FY19 FY20 Residential gas unit FY17 FY18 FY19 FY20 Average connections # 362,570 359,171 353,105 355,073 Average connections # 59,809 60,905 61,711 61,591 Sales volumes GWh 2,628 2,549 2,491 2,532 Sales volumes TJ 1,581 1,600 1,605 1,577 Av