Contact Energy Limited · NZX:CEN
Contact Energy — FY2006 Earnings Presentation
43 slides from Contact Energy's earnings presentation, Aug 25, 2006
Slide 1: 2005/06 Annual Financial Result
2005/06 Annual Financial Result For the twelve months ended 30 June 2006 25 August 2006
Slide 2: Disclaimer
Disclaimer 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 materially from those stated in any forward-looking stat
Slide 3: Technical Note - NZIFRS
Technical Note - NZIFRS This result presents Contact’s first annual financial result since the adoption of New Zealand equivalents of International Financial Reporting Standards (NZIFRS). Contact implemented NZIFRS with effect from 1 July 2005. Contact's date of transition to NZIFRS was 1 October 20
Slide 4: Highlights for the Year
Contact achieved a solid result, highlighting the benefit of the integrated energy business model in managing energy market risks and the strength of its diversified generation portfolio. Highlights for the Year • Earnings Before Net Interest, Tax, Depreciation, Amoritisation and Financial Instrumen
Slide 5: Financial Overview
Financial Overview ce contract
Slide 6: Financial Result Summary
EBITDAF increased by 14% with profit being positively impacted by a one-off gain on the sale of Valley Power, IFRS treatment of derivatives, and a lower effective tax rate. Financial Result Summary 12 Months 12 Months Variance ended 30 Jun 06 ended 30 Jun 05 2006 vs. 2005 $m $m $m % NZIFRS Previous
Slide 7: EBITDAF segment contribution
The 2005/06 result highlights the benefits of the integrated energy business model in managing energy market risks. EBITDAF • EBITDAF of $557.0 million, compared with $489.3 million EBITDAF: Segment Contribution for the 12 month period 850 750 ended 30 June 2005. 650 • This represents an increase 55
Slide 8: Dividends
The Board has resolved to pay a fully imputed final dividend of 16 cents per share for the six months ended 30 June 2006 on 21 September 2006, taking the fully imputed full dividend for the year to 26 cents per share. Dividends 30 25 cents per share 20 15 10 5 0 1999 2000 2001 2002 2003 2004 2005* 2
Slide 9: Wholesale Segment
Wholesale Segment contract
Slide 10: Wholesale Electricity Revenue
Wholesale electricity revenues were higher than the previous comparable period - reflecting higher wholesale electricity prices and higher levels of generation. Wholesale Electricity Revenue • Wholesale electricity revenue rose to $1,046.2 Wholesale Revenue million for the 12 months to 1,150 30 June
Slide 11: Price and South Island Storage
Wholesale price received in the 12 months to 30 June 2006 averaged $92.84/MWh, compared with $48.58/MWh in the 12 months to 30 June 2005, primarily as a result of lower hydro inflows and storage levels. Price and South Island Storage 3,000 350 300 2,500 250 2,000 200 1,500 150 1,000 100 500 50 0 0 1
Slide 12: Generation Volumes
Contact’s generation responded to higher wholesale prices with significant increases in thermal generation more than offsetting the reduction in hydro generation. Generation Volumes • Total generation was 11,534 GWh for 12 months ended 30 June 2006. Contact Generation 14,000 • An increase in thermal
Slide 13: Wholesale Operating Expenses
Wholesale operating expenses were primarily driven by gas use for generation, which in the 12 months ended 30 June 2006 increased by 37% compared with the same period in 2005. Wholesale Operating Expenses • Total operating expenses in the wholesale segment increased from $268.6 million for the perio
Slide 14: Retail Segment
contract Retail Segment 14
Slide 15: Change in Customer Numbers
Contact has consolidated its retail position, though gas customer numbers have continued to decline, reflecting the increased value of gas and high levels of competition. Change in Customer Numbers 20,000 15,000 10,000 Customer numbers 5,000 0 -5,000 -10,000 -15,000 -20,000 Jun-04 Sep-04 Dec-04 Mar-
Slide 16: Electricity Retail Revenue
Gross retail electricity revenue was 7% higher in 2006 at $1,080.4m, compared to last year when it was $1,014.1m. Electricity Retail Revenue • Gross retail electricity revenue was $1080.4 million for the 12 months ended 30 June 2006 reflecting the increases in retail tariffs over the Electricity Ret
Slide 17: Retail and Wholesale Gas Revenue
Sales to wholesale gas customers made a solid contribution to the result, while gas sales to retail customers fell reflecting a loss of market share in this segment. Retail and Wholesale Gas Revenue • Revenue from wholesale gas customers increased to $76.5 million for the 12 months to Retail and Who
Slide 18: Retail Operating Expenses
Retail segment operating expenses increased for the 12 months ended 30 June 2006, reflecting higher gas purchase and transmission costs and electricity transmission and distribution costs. Retail Operating Expenses • Gas purchase and transmission costs were $131.0 million for the 12 months to 30 Jun
Slide 19: Financial Summary
ce contract Financial Summary 19
Slide 20: Monthly EBITDAF and wholesale price
Historically, Contact has benefited from dry hydrological conditions due to its diversified generation portfolio. This can also be seen by looking at Contact’s monthly EBITDAF in a dry year when it is correlated to the wholesale electricity price. 70.00 $180.00 $160.00 60.00 $140.00 50.00 $120.00 Pr
Slide 21: Normalised EBITDAF
It is important to note that the solid financial result for FY05/06 was supported by favourable wholesale conditions. As the flexibility of Maui 367 gas diminishes, the company’s ability to benefit from such conditions reduces. Gas purchase costs Operating costs adjusted for Normalised EBITDAF adjus
Slide 22: Contact's future operating environment
Contact’s future operating environment 22
Slide 23: Key challenges and uncertainties
Looking forward, Contact faces key strategic challenges and opportunities, all within an uncertain environment. Key challenges and uncertainties • Fuel position • the company needs to secure its long-term fuel position beyond 2010 to support its existing thermal generation stations, retail business
Slide 24: Fuel position
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Slide 25: Contact Gas Supply as at 30 June 2006
Contact’s recent gas acquisitions have been short-term ROFR gas. Looking ahead, FY06/07 represents the first financial year in which Contact will take significant volumes from its higher priced and less flexible contracts. • ROFR gas purchases at current market prices has enabled the Contact Gas Sup
Slide 26: Gas Flexibility Requirements
Contact’s gas requirements depend both on seasonal demand for electricity and gas, and on the impact of hydrology on thermal generation. Gas Flexibility Requirements D a ily G a s Us e TJs 1/07/2005 1/08/2005 1/09/2005 1/10/2005 1/11/2005 1/12/2005 1/01/2006 1/02/2006 1/03/2006 1/04/2006 1/05/2006 1
Slide 27: Gas - Supply and Demand Outlook
Physical supply of gas is unlikely to be a significant strategic issue in the short term. In the longer term, Contact has growing confidence about its ability to secure physical supply. Focus remains on obtaining competitive price and acceptable commercial terms. Gas - Supply and Demand Outlook NZ G
Slide 28: Fuel Strategy
Contact’s fuel strategy is informed by growing confidence in the company’s ability to secure domestic gas in the short to medium term. Fuel Strategy • In March, Maui Developments Limited advised that the further gas available for sale was assessed to be in excess of 200 PJ. • Contact is currently ev
Slide 29: Wairakei Reconsenting
Geothermal offers a renewable baseload generation option. Contact’s resource consents for its Wairakei field are under appeal. Depending on the outcome, there is a risk that the full potential of the company’s geothermal assets may not be realised. • Contact has an extensive geothermal Wairakei Reco
Slide 30: Generation Development
ce contract Generation Development 30
Slide 31: New entrant pricing
Wholesale electricity prices have risen in response to the increased cost of fuel making new generation options more competitive. New entrant pricing 16 14 Assumptions: 12 Long-Run Marginal Costs US/NZ Exchange Rate 0.6 (NZ cents/kWh) 10 Coal Fuel Cost $4.00 per GJ 8 Gas Fuel Cost 6 $7.75 per GJ 4 S
Slide 32: Generation development options
Contact is currently the most diversified generator of electricity in New Zealand, by location and by fuel type. Contact is well positioned to execute significant growth in its thermal portfolio, advance incremental growth in geothermal and hydro, and is moving forward on wind. • Thermal – Otahuhu C
Slide 33: Otahuhu C
Otahuhu C is a key development option. Close to Auckland, its development is a compelling commercial opportunity and of national security of supply significance. As long as fuel is secured. Otahuhu C • Contact is seeking to contract for gas for supply into the middle of the next decade and beyond Ot
Slide 34: Transmission
Otahuhu C is not an alternative to transmission investment. Transmission • A strong grid and a long-term planning horizon, would provide confidence and certainty to market participants and other investors: – transmission grid is part of the market infrastructure; strong infrastructure can enable eco
Slide 35: Retail margins
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Slide 36: Retail operating environment
Contact occupies a strong market position in the retailing of electricity and gas. Retail operating environment • Contact currently has a 28% share Retail Electricity Market Share of the retail electricity market and (12 Months ended 30 June 2006) 35% of the retail gas market of New Contact Energy 2
Slide 37: Market conditions
Retail electricity prices have increased, and continue to increase as input costs rise. This is having an impact on churn and placing pressure on costs to serve. Market conditions • Average retail electricity tariffs increased by around 4% for the Market Churn (Annualised Monthly) period ended 30 Ju
Slide 38: Retail pricing strategy
Contact’s tariff setting strategy takes into account a number of variables. As wholesale electricity prices and network charges increase, tariff setting in the competitive retail environment becomes more complex, particularly across the different network charging structures. Retail pricing strategy
Slide 39: Regulation
ce contract Regulation 39
Slide 40: Current Regulatory Issues
Government is a key stakeholder for Contact. Investors should be aware of uncertainty arising from key public policy processes that the company is engaged in. Current Regulatory Issues • Commerce Commission – The Commerce Commission has commenced an investigation under part II of the Commerce Act 19
Slide 41: Conclusion
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Slide 42: Conclusion
2005/06 was another solid year for Contact, however the company now faces a number of strategic pressures that will require focus in 2006/07. Conclusion • Contact’s solid financial result was heavily influenced by dry hydrological conditions, wholesale gas sales at good margins and tariffs adjusting
Slide 43: Questions
ce contract Questions 43