Contact Energy Limited · NZX:CEN
Contact Energy — Non-Deal Roadshow (October 2019)
61 slides from Contact Energy's roadshow presentation, Oct 23, 2019
Slide 1: Investor presentation: London, Boston, New York
23 October 2019 For personal use only Investor presentation: London, Boston, New York Contact is currently presenting to international investors in Singapore, Tokyo, Frankfurt, Zurich, London, Boston and New York. This presentation has been re-issued with minor changes to pages 22 and 41 to provide
Slide 2: International roadshow
International roadshow For personal use only October 2019 Putting our energy where it matters
Slide 3: Disclaimer and important information
Disclaimer and important information For personal use only 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 4: Dennis Barnes / Chief Executive Officer
Dennis Barnes / Chief Executive Officer For personal use only Dennis 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. He has provided industry leadership on topics as wid
Slide 5: Dorian Devers / Chief Financial Officer
Dorian Devers / Chief Financial Officer For personal use only Dorian joined Contact in December 2018 as Contact’s Chief Financial Officer. Dorian has 20 years of financial and operational experience in industrial businesses. He is experienced in business transformations, having led successful turnar
Slide 6: Agenda
AGENDA For personal use only 1 New Zealand electricity market 6-11 2 Contact’s business and value drivers 12-33 3 Why invest in Contact 34-43 4 Appendix 44-61 – Market in action, FY19 results extracts Contact Energy / International Roadshow / October 2019 5
Slide 7: New Zealand electricity market
For personal use only New Zealand electricity market 6
Slide 8: New Zealand electricity market
NEW ZEALAND ELECTRICITY MARKET For personal use only Spot Retailers Major electricity State-owned national Distribution Million generators pool transmission grid businesses (50 brands) consumers operator COMPETITIVE REGULATED MONOPOLIES COMPETITIVE “New Zealand serves as a model for effective energy
Slide 9: Demand
For personal use only DEMAND National electricity demand (TWh) Annual consumption per household (kWh) 0.2% -0.6% 41.1 41.2 40.9 41.3 41.4 7,263 7,187 7,165 7,068 7,102 FY15 FY16 FY17 FY18 FY19 FY15 FY16 FY17 FY18 FY19 Source: EMI Source: MBIE electricity statistics Agriculture Electricity consumptio
Slide 10: Supply fundamentals
SUPPLY FUNDAMENTALS For personal use only Clutha Waitaki Manapouri Taupo Average annual generation of 3,900 GWh Average annual generation of 7,000 GWh Average annual generation of 4,800 GWh Average annual generation of 4,000 GWh Max storage of ~300 GWh Max storage of ~2,500 GWh Max sto
Slide 11: Supply fundamentals
SUPPLY FUNDAMENTALS For personal use only National annual supply (TWh) Major Sources 43 thermal of generators flexibility 8 Flexible thermal production is required 2 Contact: “Dry year”: 2 gas and diesel Genesis’s coal with 15 year stock pile (extendable) contract for Daily and seasonal: 21 gas stor
Slide 12: Wholesale pricing
For personal use only WHOLESALE PRICING Short-term external Wholesale and futures electricity pricing ($/MWh) factors that can Aluminium influence the market 300 Long-dated futures (>12 months) 200 Short-dated futures (<12 months) Monthly average spot price 150 Wholesale electricity 100 Long-term pr
Slide 13: Contact's business and value drivers: Wholesale business
For personal use only Contact’s business and value drivers Wholesale business 12
Slide 14: Contact wholesale snapshot
CONTACT WHOLESALE SNAPSHOT For personal use only 84% Renewable generation 5 Geothermal stations Contact is an owner and 2 Hydro stations / 1 controlled storage lake operator of low-cost, long-life renewable generation assets and is developing its consented 4 Thermal stations geothermal development o
Slide 15: Contact wholesale snapshot: geothermal capability
CONTACT WHOLESALE SNAPSHOT For personal use only • Operational experience on the world’s We have maintained a dedicated, internationally-recognised, subsurface team to: second longest electricity producing • Lower the cost of operations significantly – comfortably New Zealand’s geothermal field (Wai
Slide 16: Macro-economic environment
MACRO-ECONOMIC ENVIRONMENT For personal use only Government policy Quality, long-life renewable assets Historically low cost of capital New Zealand is in the early stages of a decades-long transformation from Climate change reliance on fossil fuels to renewable electricity. Contact Energy / Internat
Slide 17: Climate change and regulation
CLIMATE CHANGE AND REGULATION For personal use only Potential electricity demand impact Potential renewable generation impact Potential wider electricity The New Zealand regulatory framework is being sector impact adapted to deliver on this societal imperative. Coal Net zero Transport Climate phase
Slide 18: Carbon reduction opportunity
CARBON REDUCTION OPPORTUNITY For personal use only With high renewable penetration, electricity is the solution to reducing carbon emissions, not the problem. Meaningful reductions in carbon emissions are possible with renewable electricity displacing carbon intensive fuels. Sources: Productivity Co
Slide 19: Quality, long-life renewable assets
QUALITY, LONG-LIFE RENEWABLE ASSETS For personal use only New Zealand electricity supply mix FY07, 11, 15, 19 New Zealand electricity generation mix for FY19 100% 1% 1% 2% 2% 2% 15% 12% 90% 19% 12% 22% Hydro Coal 5% 80% 5% Wind Gas 4% 5% 10% 18% Geothermal Other 70% 13% 17% 60% 8% 4% 5% 5% 83% 2% 50
Slide 20: Delivering wholesale strategy
DELIVERING WHOLESALE STRATEGY For personal use only Thermal generation Renewable development Customer solutions Develop options to enable the Potential to develop Tauhara, Leveraging capability to expand economic substitution of New Zealand’s best new C&I products and services; Contact’s thermal gen
Slide 21: Capital deployment opportunity
CAPITAL DEPLOYMENT OPPORTUNITY For personal use only Contact Geothermal +67% Tauhara – >250MW consented generation (TWh) 5.4 • New Zealand’s pre-eminent scale renewable development 0.3 • Baseload renewable generation option 2.3 • Close proximity to the transmission grid Operational gains • $30m inve
Slide 22: Contact's business and value drivers: Customer business
Contact’s business For personal use only and value drivers Customer business 21
Slide 23: Contact customer snapshot
CONTACT CUSTOMER SNAPSHOT For personal use only Retail electricity market share by customer connections Products by customer connection Other Nova 9% Genesis 3% Electricity 4% 24% 13% Gas TrustPower Broadband 12% ~480k Not including Rockgas connections LPG customers serviced 14% 19% Meridian Contact
Slide 24: Macro-economic environment
MACRO-ECONOMIC ENVIRONMENT For personal use only Capable Low barriers Ease of Readily regulator to entry switching available risk management The retail electricity market is highly competitive, resulting in pressure on retail margins. Contact Energy / International Roadshow / October 2019 23
Slide 25: Delivering customer strategy
DELIVERING CUSTOMER STRATEGY For personal use only Technology Operating model Brand Leverage advances in Simple and lean operating Brand and reputation technology to drive model centred on the customer repositioned from a strong efficiency with automated experience, reinventing key customer operatio
Slide 26: Customer capability assessment
CUSTOMER CAPABILITY ASSESSMENT For personal use only Reducing cost to serve Building customer advocacy Customer operating costs ($m) (Includes 50% corporate allocation) Net promoter score (Promoters less detractors) 113 >30 110 97 26 94 90 20 15 3 FY16 FY17 FY18 FY19 FY20 FY16 FY17 FY18 FY19 FY20 ta
Slide 27: Contact's business and value drivers: Value drivers
Contact’s business For personal use only and value drivers Value drivers 26
Slide 28: Short-term value drivers
SHORT-TERM VALUE DRIVERS Ability to manage three key levers delivers performance. For personal use only 1 3 Value drivers 2 Contact Energy / International Roadshow / October 2019 27 27
Slide 29: Fuel mix and risk management
SHORT TERM DRIVERS 1 FUEL MIX AND RISK MANAGEMENT For personal use only National demand and supply fluctuation Contact’s portfolio FY19 SRMC ¹ Contact advantage Annual Hydrology 2000 - 2018 • 33% of increase year-on-year due to cost of natural gas and carbon, and gas storage Thermal $107/MWh arrange
Slide 30: Pricing and channels
SHORT TERM DRIVERS 2 PRICING AND CHANNELS For personal use only Futures prices Pricing linkage Channel Channels to market Channel volumes Otahuhu, FY16-23 netbacks ($/MWh) FY19 9.6 TWh ($/MWh) Length + short-term CfDs FY18-19 delta (GWh) 1.4 TWh High correlation to 130 wholesale spot pricing 136 139
Slide 31: Operational and capital efficiency
SHORT TERM DRIVERS 3 OPERATIONAL AND CAPITAL EFFICIENCY For personal use only Contact ‘Totex’ discipline $m World-class geothermal technology introduced by Contact -11.4% CAGR • Use of coil tubing units and 391 proprietary technology for live 357 well work overs & maintenance 128 301 272 102 • Geo40
Slide 32: Long-term value drivers
LONG-TERM VALUE DRIVERS Contact sees a clear pathway For personal use only to long-term value creation. 1 Maintaining demand-supply balance key 2 Contact Energy / International Roadshow / October 2019 31 31
Slide 33: Decarbonisation growth opportunities
LONG DECARBONISATION GROWTH OPPORTUNITIES TERM DRIVERS 1 For personal use only 57 TWh 90 80 7 70 4 60 Pre-GFC, avg demand 0 50 6 growth ~2% p.a. 40 TWh 3 3 40 30 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Current Thermal EV uptake Dairy sector Electrification 2050 NZ Historical Demand MB
Slide 34: Investment in renewable energy
LONG INVESTMENT IN RENEWABLE ENERGY TERM DRIVERS 2 For personal use only Long-run marginal cost (LRMC) by technology ($/MWh) 125 Gas baseload 100 Tauhara (<$60/MWh) Wind Competitive 75 Geothermal base load 50 25 Hydro Geothermal Grid scale solar 0 0 2 4 6 8 10 12 14 16 18 20 22 24 cumulative new pro
Slide 35: Why invest in Contact: Our equity story
Why invest For personal use only in Contact: Our equity story 34
Slide 36: Strong investment case
STRONG INVESTMENT CASE For personal use only <IR> ESG Shares offer value and Strong cash flow generation CREDENTIALS liquidity when benchmarked and operational performance Dividend policy OPEN Latent potential provides certainty ECONOMY with world-class geothermal capability Contact Energy / Interna
Slide 37: Invest in New Zealand
INVEST IN NEW ZEALAND For personal use only Stable banking sector with Reserve Bank Comparatively supervision Ease of low-developed doing Strong country business international business transport costs links Safe, stable Modern and secure Simple telecommunications business tax system infrastructure e
Slide 38: Focus on delivering cash
FOCUS ON DELIVERING CASH For personal use only Segmental earnings (%) of FY19 EBITDAF Expected medium-term Operating Free Cash Flow ($m) Excludes corporate costs of $26m 285 2% 12% Wholesale Customer LPG (disposed Dec’18) EBITDAF 480 Key assumptions: $544m Hydro generation at 3,900 GWh (mean), geoth
Slide 39: Focus on operational improvement
FOCUS ON OPERATIONAL IMPROVEMENT For personal use only Maintaining financial discipline Rewarding shareholders Controllable OPEX and CAPEX costs ($m) Distributions ($m) 391 357 301 286 280 280 272 260 229 100 186 165 165 Buyback 136 107 107 Final dividend 79 79 93 115 115 Interim dividend FY16 FY17
Slide 40: Dividend policy certainty
DIVIDEND POLICY CERTAINTY For personal use only Balance sheet capacity Distribution Ordinary policy dividend 376 Headroom to BBB ($m) Ordinary S&P net debt ($m) 39 cps dividend of 2.8x Assuming EBITDAF of $480m Net debt to EBITDAF At the closing share 968 of expected Operating price on 11 October Fr
Slide 41: Geothermal potential
GEOTHERMAL POTENTIAL For personal use only Estimated total Operating free capital cost cash flow yield A world-class geothermal * Assumes debt expertise with funded at current consented = rates with an $75-85/MWh wholesale price. brownfield development potential. ~$1bn ~11 to 12 cps Opportunity in o
Slide 42: Offers value on expected earnings
OFFERS VALUE ON EXPECTED EARNINGS For personal use only EV / FY20 EBITDAF (x) Net debt to FY19 EBITDAF (x) Dividend yield and percentage payout of FY19 operating free cash flow 15 14 19.6 3.0 4.8% 13 Meridian 4.4% 12 4.1% Market Capitalisation ($bn) 11 2.3 10 0.9% 9 1.9 2.9% 8 1.7 17.9 Mercury 7 15.
Slide 43: Deep and liquid register
DEEP AND LIQUID REGISTER For personal use only Holder by type (%) Sum of register by % of issued share capital holding Holder by region (%) Institutional: >5% 4 - 5% Passive Rest of Europe Asia 0% 13% 3 - 4% United Kingdom 3% 9% 10% 5% Australia 4% 12% Institutional: 49% Active <1% 53% 14% 2 -3% 38%
Slide 44: Delivering for shareholders
DELIVERING FOR SHAREHOLDERS For personal use only 12 month share prices Dividends (cps) Share prices rebased to 100; bond yield absolute % Declared or target 160 0.0 Contact Peer group 39 39 150 NZX 50 NZ 10yr bond yield (inverted, RHS) 0.5 32 140 1.0 Final dividend Announced 26 26 23 23 Interim div
Slide 45: Appendix: The market in action FY19
For personal use only Appendix The market in action FY19 44
Slide 46: FY19 demand
FY19 DEMAND For personal use only Regional change (%) 1% National electricity demand (TWh) FY19 vs FY18 (1%) 0.2% 0% 41.1 41.2 40.9 41.3 41.4 1% North Island (1%) 25.9 26.1 South Island (ex NZAS) 25.9 25.9 26.1 NZAS 1% 10.2 10.2 10.0 10.1 10.1 Source: EMI, Contact (1%) 5.0 5.0 5.0 5.0 5.2 FY15 FY16
Slide 47: FY19 supply
FY19 SUPPLY For personal use only National hydro storage against mean storage (TWh) Mean storage 1926 – 2019 (source: NZX hydro) Mean South Island inflows normalized Actual 4.0 Extreme November 2018 rainfall added ~700GWh to national storage over a two week period after the traditional Spring inflow
Slide 48: FY19 wholesale prices
FY19 WHOLESALE PRICES For personal use only Monthly wholesale spot electricity prices ($/MWh) Generation weighted (source: Electricity Authority – Wholesale electricity prices) Hydro storage volatility and thermal 300 Min/Max (FY13-19) Mean fuel constraints increased spot prices 250 FY18 200 FY19 Wh
Slide 49: Appendix: FY19 result extracts
Appendix For personal use only FY19 result extracts 48
Slide 50: FY19 results: statutory profit
FY19 RESULTS For personal use only 345 STATUTORY PROFIT ($m) +56 14 175 24 170 10 166 4 132 56 20 112 110 2 FY18 profit Discontinued Profit on Items FY18 EBITDAF Depreciation Net interest Tax FY19 Items Profit on Discontinued FY19 profit operation continuing excluded underlying and costs underlying
Slide 51: FY19 results: EBITDAF by segment
FY19 RESULTS For personal use only WHOLESALE EBITDAF ($m) CUSTOMER EBITDAF ($m) CORPORATE / UNALLOCATED ($m) 67 -9 -2 464 Electricity 24 26 8 10 Networks, 76 meters, levies 60 4 397 -14 3 67 37 2 1 30 1 2 FY18 Staff FY19 Price recovery of cost inflation incentives Electricity gross margin (-$9m) FY1
Slide 52: FY19 results: electricity generated or acquired
FY19 RESULTS For personal use only Electricity generated or acquired (GWh) Electricity generated or acquired costs ($m) 9,625 +30 Hydro generation was up 752 GWh on FY18 (+21%), which 9,223 634 348 348 was 8% above what would be expected in a mean year. Acquired 519 Geothermal volumes were down 67 G
Slide 53: FY19 results: contracted revenue
FY19 RESULTS For personal use only Contracted revenue ($m) 37 • Fixed price variable volume electricity sales to Customer and C&I customers were 509 GWh lower than FY18 (-$42m), this 737 was partially offset by higher prices (+$12m) to the Customer 700 12 segment Other net income 26 Steam sales 25 2
Slide 54: FY19 results: trading EBITDAF
FY19 RESULTS For personal use only TRADING EBITDAF ($m) LONG / SHORT POSITION (GWh) • 266 GWh increase in merchant 973 +60 sales volumes (+$38m). The price received for this “long” generation 74 was up by $53.7/MWh (+$38m) 641 974 $142.7 / MWh • Strong generation volumes and 14 138 risk management s
Slide 55: FY19 results: customer
FY19 RESULTS For personal use only Revenue ($m) EBITDAF ($m) -9 -12 Electricity gross margin down by $9m, tariff increases 960 76 (+$8m) only partially recovered pass-through costs 67 4 Other income 1 4 948 Other income 6 • Electricity sales volume down 115 GWh (-3%) Gas 34 Broadband 5 35 due to low
Slide 56: FY19 results: electricity cost and pricing
FY19 RESULTS For personal use only Electricity cost and pricing development ($/MWh) Contact electricity retailing | industry headwinds EBIT $m Positioned to capture value +1% CAGR 248 Contact has developed key Average tariff 241 242 245 strengths with industry 238 6 (12%) % CAGR 9 10 8 -13% EBIT 9 l
Slide 57: FY19 results: other operating cost movement
FY19 RESULTS For personal use only OTHER OPERATING COST MOVEMENT ($m) Underlying movement Structural and performance Underlying Accelerated investment Learn and 223 movement Improve Delivered $8m of underlying operating cost improvement in line with FY19 target 9 2 $4m from ICT procurement savings 1
Slide 58: FY19 results: smart customer solutions and geothermal fuelling
FY19 RESULTS For personal use only Delivering smart customer solutions Geothermal fuelling Additional $2m investment in workovers of geothermal $3m investment in our brand, new product development and wells. R&D and capability continue to reduce costs promotion. Key journeys digitised. Introduced ne
Slide 59: FY19 results: cash flow comparison
FY19 RESULTS For personal use only 12 months 12 months Comparison SIB CAPEX ($m) ended ended 30 June against FY18 30 June 2019 2018 128 EBITDAF $518m $481m ↑ $37m Working capital changes ($7m) $7m ↓ ($14m) 102 Tax paid ($47m) ($33m) ↑ ($14m) Interest paid ($65m) ($78m) ↓ $13m ($78m) ↑ $18m SIB Capit
Slide 60: FY19 results: operating free cash flow, sources and uses
FY19 RESULTS For personal use only OPERATING FREE 341 SOURCES AND USES OF CASH ($m) CASH FLOW – OFCF 301 731 731 ($m) 8 3 Growth investment 44 Investment in associates Cash change 481 518 EBITDAF 390 425 Net debt repayment Working capital changes Share based payments 3 7 4 -7 311 311 Shares issued 6
Slide 61: FY19 results: closing net debt and maturities
FY19 RESULTS For personal use only CLOSING NET DEBT ($m) BORROWING MATURITIES ($m) NET DEBT TO EBITDAF (x) Face value of borrowings less cash Average tenor of 3.8 years as at 30 June 2019 Includes S&P adjustments (in FY19 AGS was treated as a lease) 312 1,698 3.4 3.2 3.2 1,626 1,539 232 3.1 1,416 25