Contact Energy Limited · NZX:CEN
Contact Energy — FY2016 Earnings Presentation
42 slides from Contact Energy's earnings presentation, Aug 15, 2016
Slide 1: 2016 Full Year Results Presentation
2016 Full Year Results Presentation Year ended 30 June 2016 Dennis Barnes, Chief Executive Officer 15 August 2016 Graham Cockroft, Chief Financial Officer
Slide 2: Disclaimer
Disclaimer This presentation may contain projections or forward-looking EBITDAF, underlying profit and free cash flow are non-GAAP statements regarding a variety of items. Such forward-looking (generally accepted accounting practice) measures. Information statements are based upon current expectatio
Slide 3: Agenda
Agenda Strategy » Leverage integrated customer and generation business to deliver strong cash flows • Deliver value to our customers by providing choice, certainty and control • A low cost, long life and flexible generation portfolio with focus on safety, reliability and resource utilisation • Disci
Slide 4: Statutory loss $66m
Statutory loss $66m Underlying profit per share down 1%; Free cash flow per share up 18% » Impairments at Otahuhu and Taheke Year ended and a write-down of inventory gas resulted in a loss for the period of 30 June 2016 $66m EBITDAF1 $523m down 0.4% from $525m Profit/(loss) ($66m) down 150% from $13
Slide 5: Market dynamics and strategy
Market dynamics and strategy Dennis Barnes FY16 Results Presentation 15 August 2016 Contact Energy Limited 5
Slide 6: National demand stable despite warmer 2H16 temperatures
National demand stable despite warmer 2H16 temperatures Year on year demand stable Sectoral demand Source: Transpower/ Contact Source: MBIE 3% 12 months ended 31 March 2015 Residential 12 months ended 31 March 2016 0% Commercial 1% Industrial 1% 14% Agriculture, (3%) 2% forestry 2% & fishing -4% 0%
Slide 7: Recent market trends
Recent market trends Mass market Year on year quarterly change in electricity prices Source: MBIE Quarterly Survey of Domestic Electricity Prices » Retail competition remains intense with low barriers to entry 8% Year on year quarterly change 6% • FY16 market churn increased from 19% in FY15 to 20.6
Slide 8: We are now positioned to compete
We are now positioned to compete +5,380 Net gain in customers in the last 6 months Improving acquisitions, service and churn 1H15 2H15 1H16 2H16 Net promoter score n/a -2% -4% 1% 24% Change in customer numbers1 -7,300 -1,600 -9,800 +5,380 Of mass market customers on a fixed term product Average time
Slide 9: We are delivering our strategy to be truly customer inspired
We are delivering our strategy to be truly customer inspired Earlier Last 6 months Next steps Shaping customer Chief Customer Customer strategic SAP driven cost Infrastructure moved Complete exit from organisation for Officer appointed review completed reduction to cloud services Origin infrastructu
Slide 10: Customer lifetime value is improving
Customer lifetime value is improving 11% reduction in customers with negative CLV Our customer-inspired focus across the value chain is improving CLV 2016 2015 » CLV has improved • Mass market netback stabilised in 2H16 • Network and energy price changes staged across May – July • Customer switching
Slide 11: Moving customer consideration from price to value
Moving customer consideration from price to value Home and Bach was an example of how we can change New product plan launched by configuring different the conversation features within SAP » Retired current products and introduced a new customer centric » Designed to resolve common customer pain poin
Slide 12: Wholesale market conduct remains rational
Wholesale market conduct remains rational Wholesale market volatility We continue to look at options to reduce Tiwai risk » 2H16 national hydro generation was 768 GWh (7%) above average for » Latest contract variation date passed without change last 5 years » 80MW contract to support Tiwai based on
Slide 13: Improving efficiency of generation portfolio, world class geothermal capability
We are improving the efficiency of our generation portfolio in particular with our world class geothermal capability Geothermal Tauhara » Efficiency improvements added 70 GWh for minimal capital » The Tauhara resource is available for additional generation, investment with numerous options for stagi
Slide 14: Regulatory momentum continues but is uncoordinated
Regulatory momentum continues but is uncoordinated Emerging technologies » Our focus is on providing customers with choice, certainty and control. Contact is promoting a level playing field for all sector participants where competitive markets, rather than regulation, drive value for consumers » Reg
Slide 15: Being customer inspired, safe and agile will define Contact's culture
Being customer inspired, safe and agile will define Contact’s culture and performance » We continue to aspire to a generative safety culture through learning and leadership • TRIFR for controlled sites increased to 3.3 • 3.3 million hours worked with unfortunately11 people injured; severity continue
Slide 16: FY16 performance
FY16 performance Graham Cockroft FY16 Results Presentation 15 August 2016 Contact Energy Limited 16
Slide 17: FY16 performance highlights
FY16 performance highlights ($66m) 18% $100m Loss for the period, down Improvement in free cash Share buyback completed from $133m profit flow per share $523m $84/MWh $31/MWh EBITDAF, down from $525m Netback down $2/MWh Cost of energy improved $4/MWh FY16 Results Presentation 15 August 2016 Contact
Slide 18: Statutory loss $66m; Underlying profit down 2% to $157m
Statutory loss $66m; Underlying profit down 2% to $157m Contact’s statutory profit 200 (2) 3 (3) (2) 150 28 100 161 154 157 (223) 133 $m 50 0 (66) -50 -100 FY15 statutory Net items FY15 underlying EBITDAF Depreciation & Net financing Tax FY16 underlying Net items FY16 statutory profit excluded from
Slide 19: FY16 profit negatively impacted by $329m of impairments
FY16 profit is negatively impacted by $329m (before tax) of impairments Inventory gas Otahuhu power station closure and sale » Inventory includes gas in storage at the Ahuroa gas storage facility for » Impairment recognised was $250m offset by $33m net sale proceeds use in thermal generation. At 30
Slide 20: Margin pressure in mass market and lower C&I sales reduce EBITDAF
Margin pressure in mass market and lower C&I sales reduce EBITDAF Integrated energy segment EBITDAF down $2m to $484m EBITDAF Movement » Netback unfavourable $59m (7%) to $769m FY15 525 • Electricity sales down 501 GWh Intergrated Energy $2m • Electricity netback down $2/MWh Retail netback (59) • Im
Slide 21: Netback down $59m (7%) to $769m
7,890 GWh Netback down $59m (7%) to $769m Electricity sales volume, down 6% due to lower C&I sales Lower electricity sales and continued discounting in mass market » FY16 electricity sales volume down 501 GWh to 7,891 GWh $84/MWh Netback down $2/MWh due • MM volumes down 104 GWh due to average custo
Slide 22: Cost of energy improved $57m (17%) to -$285m
82% Cost of energy improved $57m (17%) to -$285m Renewable generation up from 76% in FY15 Lower electricity purchases and improved gas costs reduced cost of energy by $4/MWh » Wholesale spot market up $21m 8,231 GWh • Retail purchases down 608 GWh reflecting lower retail volumes; 96 608 GWh decrease
Slide 23: Transfer price highlights compression of retail margins
Adding a transfer price to segment reporting highlights the compression of retail margins Indicative EBITDAF contribution » Transfer price reflects cost for a standalone retailer to purchase electricity from a generator and is linked to the ASX futures price 100% » Contribution from retail has falle
Slide 24: Focus continues on reduction of operating and capital expenditure
Focus continues on reduction of both operating and capital expenditure Other operating expenses Capital expenditure » FY16 other operating expenses $16m lower than FY15 » FY16 capex $128m, up $23m from FY15 due to the recognition of • Reduced bad debt write-offs (net of recoveries) the Stratford sup
Slide 25: Free cash flow up 17%
Free cash flow up 17% Lower tax paid and proceeds from Otahuhu sale partially offset by higher stay in business capex » Free cash flow measures the cash generating performance of the business and represents cash available to repay debt and to fund distributions to shareholders and growth capital exp
Slide 26: Efficient return of free cash flow to shareholders remains a priority
The efficient return of free cash flow to shareholders remains a priority In FY16 $403m free cash flow was applied to debt Uses of free cash flow reduction and distributions to shareholders 700 » $100m share buyback completed with 20.7m shares purchased at an average cost of $4.83 600 Growth capex »
Slide 27: Options to balance distributions, debt reduction and growth investment
Strong cash performance provides options to balance the distribution of cash to shareholders, reduce debt and invest in growth Distributions » Ordinary dividend equal to 100% underlying profit » Special dividend where Free cash flow Balance Sheet imputation credits available » Share buyback » Operat
Slide 28: Summary
Summary Dennis Barnes FY16 Results Presentation 15 August 2016 Contact Energy Limited 28
Slide 29: Outlook
Outlook » In a competitive market, turning improving operational performance into value remains the focus » Industry structure continues to support strong cash flow • Slow demand growth unlikely to require additional generation to be built in the near term. Tiwai exit likely to remain a risk, althou
Slide 30: Summary
Summary Strategy » Leverage integrated customer and generation business to deliver strong cash flows • Deliver value to our customers by providing choice, certainty and control • A low cost, long life and flexible generation portfolio with focus on safety, reliability and resource utilisation • Disc
Slide 31: Supporting material
Supporting material FY16 Results 15 August 2016 Presentation Contact Energy Limited
Slide 32: Electricity market conditions
Electricity market conditions Otahuhu futures settlement price (ASX settlement) Price and national storage levels 140 4000 85 30/06/2015 31/12/2015 30/06/2016 120 3500 80 7 day average price ($/MWh) 3000 100 2500 National storage (GWh) 80 75 2000 $/MWh 60 1500 70 40 1000 20 500 65 0 0 Jul -15 Aug -1
Slide 33: Thermal generation continues to decline
Thermal generation continues to decline supported by improved geothermal availability in FY16 Generation by source Gross Plant availability1 Capacity Electricity Pool revenue 6,000 $60 output FY16 FY15 factor output (MW) (%) (%) (%) (GWh) ($/MWh) ($m) 5,000 $50 Hydro 752 89% 85% 62% 4,091 55 225 Geo
Slide 34: No change in contracted gas volumes
No change in contracted gas volumes with support provided by gas storage Contracted gas volumes Ahuroa gas storage monthly injections and extractions 25 2.0 Other Maui Swap Genesis 1.5 20 1.0 Net extractions (PJ) 15 0.5 PJ - 10 (0.5) 5 (1.0) Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun FY16 net e
Slide 35: Balance sheet supported by robust funding portfolio
Contact’s balance sheet is supported by a robust funding portfolio Funding maturity profile Funding sources 450 Bank Domestic USPP NEXI 4% 400 10% 350 32% 300 $ million 250 18% 200 150 100 8% 50 28% - 2017 2018 2019 2020 2021 2022 2023 to 2028 to 2027 2032 Bank debt Commercial paper USPP Maturity (f
Slide 36: 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 » The CEO monitors EBITDAF as a key indicator of Contact’s performance at segment and group levels
Slide 37: Explanation of reconciliation between EBITDAF and profit/(loss)
Explanation of reconciliation between EBITDAF and profit/(loss) » The adjustments from EBITDAF to reported profit/(loss) are as follows: • Depreciation and amortisation: Costs decreased by $3m (1%) reflecting a reduction due to the closure of the Otahuhu power station, partially offset by an increas
Slide 38: Non-GAAP profit measure – underlying profit
Non-GAAP profit measure – underlying profit » The CEO monitors underlying profit and believes it assists investors to understand the ongoing performance of the business » Underlying profit is calculated by adjusting reported profit/(loss) for the year for significant items that do not reflect Contac
Slide 39: Explanation of reconciliation from reported profit to underlying profit
Explanation of reconciliation from reported profit to underlying profit » The adjustments from reported profit to underlying profit are as follows: • Change in fair value of financial instruments: Movements in the valuation of interest rate and electricity price derivatives that are not accounted fo
Slide 40: Integrated energy segment
Integrated energy segment Integrated energy segment Year ended Year ended Variance $m 30 June 2016 30 June 2015 $m % Mass market electricity 903 951 (48) (5%) Commercial and industrial electricity 520 563 (43) (8%) Retail gas 62 61 1 2% Steam 25 21 4 19% Total revenue 1,510 1,596 (86) (5%) Cost of e
Slide 41: Cost of energy
Cost of energy Cost of energy Year ended Year ended Variance $m 30 June 2016 30 June 2015 $m % Wholesale electricity revenue 539 693 (154) (22%) Wholesale gas revenue 1 20 (19) (95%) Other income (including liquidated damages) 6 9 (3) (33%) Total wholesale revenue 546 722 (176) (24%) Electricity pur
Slide 42: Other segment
Other segment Other segment Year ended Year ended Variance $m 30 June 2016 30 June 2015 $m % LPG revenue 117 118 (1) (1%) Meter leases revenue 4 4 (0) (6%) Other revenue 1 3 (2) (67%) Total other segment revenue 122 125 (3) (3%) LPG purchases (69) (71) 2 (3%) Total direct costs (69) (71) 2 (3%) Othe