Contact Energy Limited · NZX:CEN
Contact Energy — H1 2018 Earnings Presentation
46 slides from Contact Energy's earnings presentation, Feb 12, 2018
Slide 1: 2018 Interim Results Presentation
2018 Interim Results Presentation Dennis Barnes, Chief Executive Officer Graham Cockroft, Chief Financial Officer Six months ended Contact Energy October 2016 31 December 2017 Annual meeting of shareholders 12 February 2018
Slide 2: Disclaimer
Disclaimer This presentation may contain projections or forward-looking statements EBITDAF, underlying profit, free cash flow and operating free cash flow regarding a variety of items. Such forward-looking statements are based are non-GAAP (generally accepted accounting practice) measures. upon curr
Slide 3: Agenda
Agenda 1 Overview 4-5 2 Market dynamics 6 - 11 3 Progress on strategy 12 - 17 4 Operational and financial performance 18 - 27 5 Outlook 28 - 33 6 Supporting materials 34 - 46 1H18 Results Contact Energy October 2016 Presentation Annual 12 February meeting 2018 of shareholders Contact Energy Limited
Slide 4: Cash flow up despite weak hydro inflows; dividends to shareholders increasing
Cash flow up despite weak hydro inflows; dividends to shareholders increasing Summary of key financial performance measures » Contact has elected to early adopt NZ IFRS 15 6 months Revenue from Contracts with Customers (‘revenue standard’) and NZ IFRS 16 Leases ended (‘leases standard’) for the year
Slide 5: Highlights
Highlights Acceleration of performance and cash discipline paying dividends Comparison against 1H17 MAINTAINING FINANCIAL DISCIPLINE Strong cost control with other operating costs down by $11m (9%). Cash spent on capital expenditure down by $26m (40%). $24m reduction in net debt. +19% Reduction in t
Slide 6: Market dynamics
Market dynamics Dennis Barnes 1H18 Results Contact Energy 12 February Annual 2018of shareholders meeting Presentation October 2016 Contact Energy Limited
Slide 7: Weak South Island hydro generation replaced by thermal and North Island renewable generation
Weak South Island hydro generation replaced by thermal and North Island renewable generation South Island hydro storage was significantly below mean National hydro storage against mean storage during key demand periods, in contrast to 1H17 Source: NZX hydro » With South Island hydro storage averagin
Slide 8: National electricity demand up on cold July and South Island irrigation load
National electricity demand up on cold July and South Island irrigation load National electricity demand was up 1% over the first 6 Regional demand change (%) 1H18 vs 1H17 months compared to 1H17 Source: EA reconciled demand data 1% » Dry, hot South Island conditions in November and December saw irr
Slide 9: Retail electricity market remains competitive with tier 2 retailers capturing market share
Retail electricity market remains competitive with tier 2 retailers capturing market share Generation component of electricity price flat in a Year on year quarterly change in residential electricity prices Source: MBIE Quarterly Survey of Domestic Electricity Prices competitive retail market 8% Lin
Slide 10: Wholesale electricity prices responded to low hydro storage levels and stronger demand
Wholesale electricity prices responded to low hydro storage levels and stronger demand Generation weighted monthly wholesale electricity prices Tighter market supply and demand balance, post thermal Source: EA – Wholesale energy prices retirements, saw wholesale prices move in line with South FY13 -
Slide 11: Contact managed the variability in hydrological conditions using portfolio flexibility
Contact managed the variability in hydrological conditions using portfolio flexibility Thermal portfolio flexibility crucial in managing record low Contact hydro generation by quarter for FY15 – 18 inflows Source: Contact » Clutha hydro inflows during 1H18 were 22% below mean and 590 1,100 GWh below
Slide 12: Progress on our strategy
Progress on our strategy Dennis Barnes 1H18 Results Contact Energy 12 February Annual 2018of shareholders meeting Presentation October 2016 Contact Energy Limited
Slide 13: Contact's strategy is to optimise the Customer and Generation businesses to deliver strong cash flows
Contact’s strategy is to optimise the Customer and Generation businesses to deliver strong cash flows Customer Generation Provide customers with choice, certainty A low cost, long life and flexible generation and control while reducing cost to serve and portfolio with a continuous improvement improv
Slide 14: The Customer business continues to reduce cost to serve while improving the customer experience
The Customer business continues to reduce cost to serve while improving the customer experience CUSTOMER BUSINESS STRATEGY Deliver value by providing customers with choice, certainty and control while reducing cost to serve and improving the customer experience through systems-enabled operational im
Slide 15: The Generation business remains focused on delivering on continuous improvement initiatives
The Generation business remains focused on delivering on continuous improvement initiatives GENERATION BUSINESS STRATEGY A low cost, long life and flexible generation portfolio with a continuous improvement programme focused on safety, spend, reliability and resource utilisation to improve the effic
Slide 16: Creating value by optimising the portfolio of assets – sale of AGS
Creating value by optimising the portfolio of assets – Strong strategic rationale for the sale of AGS Contact has entered into a conditional agreement to sell the Ahuroa Monetising unused GSNZ is a higher Reduction in gas Independent Gas Storage capacity value owner storage costs owner of storage fa
Slide 17: Operational efficiency focus is leading to a sustainable reduction in ongoing operating costs
Operational efficiency focus is leading to a sustainable reduction in ongoing operating costs Continued focus on the controllable aspects of the 1H18 controllable operating cost improvement against 1H17 business led to a 9% reduction in other operating costs 130 » Leaner corporate centre with aligne
Slide 18: Operational and financial review
Operational and financial review Graham Cockroft 1H18 Results Contact Energy 12 February Annual 2018of shareholders meeting Presentation October 2016 Contact Energy Limited
Slide 19: Statutory profit of $58m, down $38m on lower operating earnings
Statutory profit of $58m, down $38m on lower operating earnings Underlying profit down 28% from $82m in 1H17 to $59m Financial performance compared Contact’s statutory profit to 1H17 100 » Underlying profit of $59m, was down 90 $23m (28%), reflecting the $28m 14 reduction in EBITDAF and increased 80
Slide 20: EBITDAF down $28m, primarily due to weak hydrology
EBITDAF down $28m, primarily due to weak hydrology Customer segment EBITDAF movement » Customer EBITDAF of $63m is $3m (5%) lower than 1H17 with increasing retail margins but lower electricity sales volumes 265 • Electricity and gas netback was down $5m (1%) to $347m, with 3 reduced electricity sale
Slide 21: Customer electricity EBITDAF down $2m as lower sales volumes offset netback expansion
Customer electricity EBITDAF down $2m as lower sales volumes offset netback expansion EBITDAF from electricity sales totaled $35m in 1H18, Electricity EBITDAF movements down $2m (6%) from the prior period 48 » Mass market electricity sales EBITDAF was flat in the period despite a - - -$2m 35 GWh dec
Slide 22: Strong increases in gas and LPG sales volumes, offset by higher LPG product costs
Strong increases in gas and LPG sales volumes, offset by sharply higher LPG product costs EBITDAF from gas, LPG and other revenue totaled Customer segment EBITDAF movements continued $28m in 1H18, down $1m » Retail gas sales EBITDAF of $7m, up $2m on the prior period 35 » Residential gas netback ($/
Slide 23: Lower renewable generation volumes and supply to Tiwai impacted Generation EBITDAF
Lower renewable generation volumes and supply to Tiwai impacted Generation EBITDAF Generation EBITDAF down by $25m (13%). Led by a Generation segment EBITDAF movement $20m (20%) increase in the cost of energy and a $5m (2%) reduction in electricity sales revenue from Customer 210 Unfavourable Favour
Slide 24: Contact operates in weather dependent commodity markets
Contact operates in weather dependent commodity markets Hydrological variability is managed by using Contact is not integrated into upstream LPG supply portfolio flexibility and a strong risk management and is exposed to the fluctuations in oil linked framework commodity prices » 1H18 has seen a sus
Slide 25: Focus continues on the reduction of both operating and capital expenditure
Focus continues on the reduction of both operating and capital expenditure Other operating expenses Capital expenditure and targets » 1H18 other operating expenses of $114m, $11m lower than » 1H18 accounting capex of $40m, $23m lower than 1H17. Cash 1H17 spend on capex of $39m, $26m down on 1H17 • L
Slide 26: Operating free cash flow per share up by 5%
Operating free cash flow per share up by 5% Following the progress on delivering on our cost efficiency targets despite lower operating earnings » The definition of stay in business capital expenditure was refined during FY17 to include spend on restoration / environmental rehabilitation and capital
Slide 27: Strong free cash flow allows for continued debt repayment and higher shareholder distributions
Strong free cash flow allows for continued debt repayment and higher shareholder distributions Debt reduced by $14m in 1H18 Uses of free cash flow » Face value of net borrowings reduced by $14m to $1,531m as surplus cash was applied to debt repayment » Cash on hand increased by $10m since 30 June 20
Slide 28: Outlook
Outlook Dennis Barnes 1H18 Results Contact Energy 12 February Annual 2018of shareholders meeting Presentation October 2016 Contact Energy Limited
Slide 29: Short-term performance impacts and opportunities
Short-term performance impacts and opportunities Opportunities Challenges Increasing returns for Contact thermal Persistent low inflows into the Clutha 01 generation assets 01 catchment; increasing Contact’s cost of energy. Each GWh of hydro generation below 02 Reversion to mean hydrology mean has a
Slide 30: Cost efficiency programme on track to deliver on the guided controllable cost reduction
Cost efficiency programme on track to deliver on the guided controllable cost reduction 450 27% 400 2% 1H18 vs 1H17 9% 19% 350 FY15 FY16 FY17 FY18f 12-17% Other operating $263m $247m $243m $225 - 235m 300 costs Costs excluded 250 $24m $10m $12m - from underlying $m 200 AGS operating $5m $6m -1 - cos
Slide 31: Organisational agility is vital to capturing value in a customer inspired world
Organisational agility is vital to capturing value in a customer inspired world Evolving capability within the Customer business gives Contact confidence that we are well positioned to capture value for shareholders as we shift from operational retailing » Accelerate the move to a simple, lean opera
Slide 32: Competitive new renewable generation is required to support further decarbonisation
Competitive new renewable generation is required to support further decarbonisation Contact has a world class geothermal capability, a track record of improving plant efficiency and a consented resource of scale to support future demand from the decarbonisation of New Zealand » Contact has improved
Slide 33: Distribution policy will grow returns to shareholders as gearing reduces
Distribution policy will grow returns to shareholders as gearing reduces Target ordinary Contact will announce the targeted dividend of between ordinary dividend in August each year Interim dividend FY18 Target Theordinary challengedividend is April to bring growth 80-90% options closer 40% We are t
Slide 34: Supporting material
Supporting material 1H18 Results Contact Energy 12 February Annual 2018of shareholders meeting Presentation October 2016 Contact Energy Limited
Slide 35: Electricity market conditions
Electricity market conditions Price and national storage levels Otahuhu futures settlement price (ASX settlement) 4,500 200 80 180 70 4,000 160 60 140 3,500 120 50 $/MWh 3,000 100 $/MWh 40 GWh 80 2,500 30 60 40 20 2,000 20 10 1,500 0 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 0 C
Slide 36: Plant availability improved in 1H18
Plant availability improved in 1H18 Generation by sources Plant reliability and generation revenue Net Plant availability1 Capacity Electricity Pool revenue 5,000 $35 capacity 1H18 1H17 factor output (MW) (%) (%) (%) (GWh) ($/MWh) ($m) 4,500 Hydro 784 95% 91% 47% 1,635 88 144 $30 Geothermal 429 97%
Slide 37: Gas purchased for FY18 requirements, to augment gas available in storage
Gas purchased for FY18 requirements, to augment gas available in storage Contracted gas volumes Ahuroa gas storage monthly injections and extractions 30 1.5 Genesis Swap Maui Todd Other 25 1.0 20 0.5 Extractions (PJ) PJ 15 0.0 10 -0.5 5 -1.0 Jul Aug Sep Oct Nov Dec FY18 net extractions FY17 net extr
Slide 38: Transfers of value between the two segments appropriately reflect market conditions
Transfers of value between the two segments appropriately reflect market conditions Inter-segment electricity and gas transfer price » The fixed price, variable volume transfer price between the Customer and Generation segments is set in a manner similar to transactions with independent retailers to
Slide 39: Contact's balance sheet is supported by a robust funding portfolio
Contact’s balance sheet is supported by a robust funding portfolio Funding maturity profile Funding sources 450 4% NEXI USPP Domestic bonds Bank 400 350 28% 300 29% 250 $m 200 150 100 9% 50 30% - FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25-FY29 Maturity Bank Debt Domestic bonds CP USPP NEXI » Contact be
Slide 40: Non-GAAP profit measure - EBITDAF
Non-GAAP profit measure - EBITDAF » EBITDAF is Contact’s earnings before net interest expense, tax, depreciation, amortisation, change in fair value of financial instruments and other significant items » EBITDAF is commonly used in the electricity industry so provides a comparable measure of Contact
Slide 41: Explanation of reconciliation between EBITDAF and profit
Explanation of reconciliation between EBITDAF and profit » The adjustments from EBITDAF to reported profit are as follows: • Depreciation and amortisation: Increased by $8m (8%) due to higher depreciation on TCC resulting from higher thermal generation. Forecast depreciation for FY18 expected to be
Slide 42: Non-GAAP profit measure – underlying profit
Non-GAAP profit measure – underlying profit » Underlying profit provides a consistent measure of Contact’s ongoing performance » Underlying profit excludes the effect of significant items from reported profit. Significant items are determined based on principles approved by the Board of Directors »
Slide 43: Explanation of reconciliation from reported profit to underlying profit
Explanation of reconciliation from reported profit to underlying profit » The only adjustment from reported profit to underlying profit for 1H18 (also adjusted in 1H17) was the: • Change in the fair value of financial instruments: Movements in the valuation of interest rate and electricity price der
Slide 44: Impact of adoption of accounting standards to previously reported periods
Impact of adoption of accounting standards to previously reported periods » Contact has elected to early adopt NZ IFRS 15 Revenue from Contracts with Customers (‘revenue standard’) and NZ IFRS 16 Leases (‘leases standard’) for the year ending 30 June 2018. Both standards have been adopted retrospect
Slide 45: Customer segment
Customer segment Customer segment 6 months ended 6 months ended Variance $m 31 December 2017 31 December 2016 $m % Mass market electricity 458 465 (7) (2%) Commercial & industrial electricity 223 231 (8) (3%) Gas 39 36 3 8% LPG 63 62 1 2% Other income 3 3 - - Total revenue and other income 786 797 (
Slide 46: Generation segment
Generation segment Generation segment 6 months ended 6 months ended Variance $m 31 December 2017 31 December 2016 $m % Wholesale electricity 388 222 166 75% Commercial & Industrial electricity 5 4 1 25% Inter-segment electricity sales 296 301 (5) (2%) Steam 14 14 - - Other income 1 - 1 Total revenue