Contact Energy Limited · NZX:CEN
Contact Energy — FY2017 Earnings Presentation
46 slides from Contact Energy's earnings presentation, Aug 14, 2017
Slide 1: 2017 Full Year Results Presentation
2017 Full Year Results Presentation Dennis Barnes, Chief Executive Officer Graham Cockroft, Chief Financial Officer Year ended 30 June 2017 14 August 2017 Contact Energy Annual meeting of shareholders October 2016
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 Strategy and market dynamics 6 - 18 3 Operational and financial performance 19 - 28 4 Outlook 29 - 33 5 Appendix – Supporting materials 34 - 46 FY17 Results Contact Energy October 2016 Presentation Annual 14 August meeting 2017of shareholders Contact Energy Limited 3
Slide 4: Resilient cash flow despite rare hydrology sequences
Resilient cash flow despite rare hydrology sequences Summary of key financial performance measures » Contact changed the classification of Ahuroa Year ended gas storage facility costs3 and refined some non-GAAP cash flow definitions to assist 30 June 2017 Comparison against FY16 with the focus on ca
Slide 5: Highlights for the year
Highlights for the year Sound improvements to leading performance indicators on the back of operational focus Comparison against FY16 MAINTAINING FINANCIAL DISCIPLINE Strong cost control with other operating costs flat, $11m reduction in ongoing operating costs. Capital expenditure down 20%. $106m i
Slide 6: Strategy and market dynamics
Strategy and market dynamics Dennis Barnes FY17 Results Contact Energy 14 Augustmeeting Annual 2017 of shareholders Presentation October 2016 Contact Energy Limited
Slide 7: Contact's strategy is to optimise the Customer and Generation businesses
Contact’s strategy is to optimise the Customer and Generation businesses to deliver strong cash flows Customer Generation Will deliver value by providing customers A low cost, long life and flexible generation with choice, certainty and control while portfolio with a continuous improvement reducing
Slide 8: Retail electricity market remains competitive with tier 2 retailers capturing market share
Retail electricity market remains competitive with tier 2 retailers capturing market share Year on year quarterly change in residential electricity prices Electricity pricing up in a competitive retail market Source: MBIE Quarterly Survey of Domestic Electricity Prices 8% Lines component Energy and
Slide 9: National electricity supply influenced by disparate hydrology sequences
National electricity supply was influenced by the disparate hydrology sequences in the year Strong hydro generation was a feature of the first 9 months National hydro storage against mean storage of the year Source: NZX hydro 4500 » National hydro generation for the first 9 months of the 4000 Mean s
Slide 10: National electricity demand only marginally down on FY16
National electricity demand only marginally down on FY16 after reversion to average temperatures National electricity demand National electricity demand was down 2% over the first 9 Source: EA reconciled demand data months compared to FY16, on warmer, wetter weather 43,000 +2.6% +0.3% -1.7% -0.6% 41
Slide 11: Wholesale electricity prices impacted by excess hydro generation and muted demand
Wholesale electricity prices in the year impacted by excess hydro generation and muted demand Generation weighted monthly wholesale electricity prices Tighter market supply and demand balance saw wholesale Source: EA – Wholesale energy prices prices rise in June 2017 FY13 - FY16 range FY13 - FY16 av
Slide 12: Contact managed hydrological variability using portfolio flexibility
Contact managed the variability in hydrological conditions using portfolio flexibility Value of Ahuroa gas storage evident in FY17 Contact hydro generation by quarter for FY15 – FY17 » While the market was oversupplied with hydro generation, Contact’s flexible gas contracting strategy and gas storag
Slide 13: Contact seeks to maximise the value of its renewable assets
Contact seeks to maximise the value of its renewable assets Contact’s mean renewable energy and purchase position By selling all renewable generation at a fixed price Source: Contact, NZX hydro Average geothermal generation 45 Mean hydro inflows » Contact’s hydro inflows typically peak during summer
Slide 14: Internalised risk management delivers stable cash flows
Strong internalised risk management delivers stable cash flows despite hydrological variation Demand-weighted average wholesale energy prices by trading period While lower hydro generation increases the cost of generation (FY15 – FY17) in the short-term, Contact has appropriate risk mitigations to S
Slide 15: Portfolio flexibility positions Contact to manage short-term adverse outcomes
Portfolio flexibility positions Contact to manage short-term adverse market outcomes With strong internalised risk management and by delivering operational performance improvements Environment Choice 520 4 510 Unfavourable Favourable 27 500 490 5 3 523 11 $m 7 5 480 20 9 7 470 2 4 494 2 460 450 FY16
Slide 16: Operationalisation of CLV allows focus on value of an individual customer
Operationalisation of CLV allows focus on the value of an individual customer Reduction in SME sales volumes driven by consideration of CLV rather than purely competing on price or volume Distribution of customer base by CLV segment Source: Contact, electricity and gas customers » Across this distri
Slide 17: Contact executed significant changes to energy product and reward offers
Contact seamlessly executed on significant changes to energy product and reward offers Contact delivered products and services that customers While maintaining focus on the key drivers of value in the want and value Customer business » Fresh customer-centric products, enabled by SAP, » Mass market e
Slide 18: Operational efficiency and transparency reducing ongoing operating costs
Operational efficiency and transparency leading to a reduction in ongoing operating costs Transparency of performance is driving focus FY17 operating efficiency cost gains 260 » Fixed costs to operate Ahuroa gas storage have also now been included under other operating costs from FY17, this improves
Slide 19: Operational and financial review
Operational and financial review Graham Cockroft FY17 Results Contact Energy 14 Augustmeeting Annual 2017 of shareholders Presentation October 2016 Contact Energy Limited
Slide 20: Statutory profit of $150m, up $216m
Statutory profit of $150m, up $216m with prior period impairments not repeated Underlying profit down 10% from $157m in FY16 to $141m Financial performance compared Contact’s statutory profit to FY16 » Underlying profit of $141m, was 170 down $16m (10%), reflecting the 9 $29m reduction in EBITDAF, w
Slide 21: Transfers of value between the two segments 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 22: EBITDAF down $29m due to unfavourable hydrology
EBITDAF down $29m due to unfavourable hydrology Customer segment » Customer EBITDAF was $3m (4%) higher than FY16 as the EBITDAF movement Customer business expanded retail margins in a competitive market 540 • Electricity and gas netback was down $13m (2%) to $730m with reduced sales to SME customer
Slide 23: Customer EBITDAF up $3m on margin expansion
Customer EBITDAF up $3m on margin expansion across key sales channels EBITDAF from electricity sales totaled $64m in FY17, up Customer segment EBITDAF movements $4m (6%) from the prior period 90 » Mass market electricity sales EBITDAF increased by $7m in the period despite a 90 GWh decrease in sales
Slide 24: Strong increases in gas and LPG sales volumes
Strong increases in gas and LPG sales volumes, meters revenue continues to decline EBITDAF from gas, LPG and meters totaled $47m in Customer segment EBITDAF movements continued FY17, down $1m on declining meters revenue 51 » Retail gas sales EBITDAF of $11m was flat on the prior period - +$1m » Resi
Slide 25: Renewable generation volumes and energy price impacted Generation EBITDAF
Renewable generation volumes and energy price impacted Generation EBITDAF Generation EBITDAF down by $32m (8%). Led by a Generation segment EBITDAF movement $14m (6%) increase in the cost of energy and a $20m (3%) reduction in electricity sales revenue from Customer 420 » Fuel mix unfavourable by $2
Slide 26: Focus on reduction of operating and capital expenditure
Focus continues on the reduction of both operating and capital expenditure Other operating expenses Capital expenditure and targets » FY17 other operating expenses were in line with FY16 but » FY17 capex $102m, $26m lower than FY16 down $11m on a like-for-like basis (after excluding Ahuroa gas stora
Slide 27: Operating free cash flow per share down 14%
Operating free cash flow per share down 14% Following the normalisation of tax paid and lower operating earnings compared to the prior year » The definition of stay in business capital expenditure was refined during the year to include spend on restoration / environmental rehabilitation and capital
Slide 28: Strong free cash flow directed to debt repayment
Strong free cash flow directed to debt repayment ensures robust balance sheet Debt reduced by $106m in FY17 Uses of free cash flow » Face value of net borrowings reduced by $106m to $1,523m as surplus cash was applied to debt repayment 400 » Gearing reduced to 36% at 30 June 2017, down from 38% 360
Slide 29: Outlook
Outlook Dennis Barnes FY17 Results Contact Energy 14 Augustmeeting Annual 2017 of shareholders Presentation October 2016 Contact Energy Limited
Slide 30: Strongly positioned in a competitive market
Strongly positioned in a competitive market Customer Generation » High-performing, efficient retailer with the lowest CTS and » Focusing on operational excellence and investment in best customer experience of the tier 1 retailers in New digital approaches with clear payback will accelerate Zealand,
Slide 31: Short-term performance impacts and opportunities
Short-term performance impacts and opportunities C&I load contracting profile Mass market price changes effective from 1 01 August 2017 4,500 4,000 C&I load to be re-contracted at higher futures 660 02 prices 3,500 3,000 1,118 1,300 GWh 2,500 C&I load contracted during the summer of 03 FY16 reflecti
Slide 32: Continue to improve operating free cash flow by driving cost efficiency
Continue to improve operating free cash flow by driving cost efficiency 450 27% 400 2% 8% 350 FY15 FY16 FY17 FY18 13-18% Other operating $263m $247m $247m $225 - 235m 300 costs Costs excluded 250 $24m $10m $12m - from underlying $m 200 AGS operating $5m $6m - - costs 150 Capital $105m $128m $102m $7
Slide 33: New distribution policy reflects confidence in cash flow generation
New distribution policy reflects confidence in the strength of cash flow generation Contact will target distributions of between 80 – 90% of operating free cash flow as an ordinary dividend, on average over time, once the S&P net debt / EBITDAF 26 cps up 32 cps FY17 declared dividend +23% FY18 divid
Slide 34: Supporting material
Supporting material FY17 Results Contact Energy 14 Augustmeeting Annual 2017 of shareholders Presentation October 2016 Contact Energy Limited
Slide 35: Electricity market conditions
Electricity market conditions Otahuhu futures settlement price (ASX settlement) Price and national storage levels 160 4500 80 140 4000 70 3500 7 day average price ($/MWh) 120 60 3000 100 National storage (GWh) 2500 50 80 $/MWh 2000 40 60 1500 40 30 1000 20 500 20 0 0 Jul -16 Aug -16 Sep -16 Oct -16
Slide 36: Plant availability improved in FY17
Plant availability improved in FY17 Generation by sources Plant reliability and generation revenue Gross Plant availability1 Capacity Electricity Pool revenue $60 output FY17 FY16 factor output (MW) (%) (%) (%) (GWh) ($/MWh) ($m) 5,000 Hydro 784 92% 89% 52% 47 169 3,562 $50 Geothermal 429 91% 93% 86
Slide 37: No change in contracted gas volumes with support from gas storage
No change in contracted gas volumes with support provided by gas storage Contracted gas volumes Ahuroa gas storage monthly injections and extractions 30 3.0 Genesis Swap Maui Other 2.5 25 2.0 20 1.5 Extractions (PJ) 1.0 PJ 15 0.5 10 0.0 -0.5 5 -1.0 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun FY1
Slide 38: Contact's Green Borrowing Programme
Contact’s Green Borrowing Programme is aligned with its commitment to a low carbon future Contact’s funding portfolio has been certified as “Green” based on the Green Bond Principles and the current Climate Bonds Standard V2.1 » Contact has adopted an innovative approach to Green certification, prov
Slide 39: Balance sheet supported by a robust funding portfolio
Contact’s balance sheet is supported by a robust funding portfolio Funding maturity profile Funding sources 450 NEXI USPP Domestic bonds Bank Cancelled post year end 4% 400 350 30% 300 28% 250 $m 200 150 100 9% 50 29% - FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25-FY29 Bank Debt Domestic bonds CP USPP NE
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/(loss) are as follows: • Depreciation and amortisation: Costs increased by $3m (1%) due to higher depreciation on TCC resulting from higher thermal generation • Change in fair value of financia
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 / (loss). Significant items are determined based on principles approved by the Board of Dir
Slide 43: Explanation of reconciliation from reported profit to underlying profit
Explanation of reconciliation from reported profit to underlying profit » The adjustments from reported profit / (loss) 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 acc
Slide 44: Costs to operate Ahuroa gas storage, accounting treatment change
Costs to operate Ahuroa gas storage, reconciliation of accounting treatment change » Contact changed the accounting treatment for the costs incurred in operating the Ahuroa Gas Storage (AGS) facility. While there are no cash implications, this change reduced FY17 EBITDAF by $4m with other operating
Slide 45: Customer segment
Customer segment Customer segment Year ended Year ended Variance $m 30 June 2017 30 June 2016 $m % Mass market electricity 893 903 (10) (1%) Commercial and industrial electricity 510 520 (10) (2%) Gas 66 62 4 6% LPG 122 117 5 4% Other income 3 5 (2) (40%) Total revenue and other income 1,594 1,607 (
Slide 46: Generation segment
Generation segment Generation segment Year ended Year ended Variance $m 30 June 2017 30 June 2016 $m % Wholesale electricity 483 539 (56) (10%) Inter-segment electricity sales 641 661 (20) (3%) Gas - 1 (1) (100%) Steam 25 25 - 0% Te Mihi compensation 6 6 - 0% Total revenue and other income 1,155 1,2