Contact Energy Limited · NZX:CEN
Contact Energy — FY2015 Earnings Presentation
37 slides from Contact Energy's earnings presentation, Aug 17, 2015
Slide 1: 2015 Results Presentation
2015 Results Presentation 17 August 2015 Year ended 30 June 2015 Dennis Barnes, Chief Executive Officer 1 Graham Cockroft, Chief Financial Officer
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: Performance highlights
Performance highlights 3
Slide 4: Key themes for today
Key themes for today Increased • Free cash flow improvement cash flow » Sales volumes stable » Strong retail competition continues to impact margins » Transition phase following investment in new systems and plant complete Distribution of • 15 cps final dividend (76 cps distributed to shareholders)
Slide 5: Safety culture and performance improvement continues
Safety culture and performance improvement continues • Safety is our number one priority and we continue to advance our cultural journey towards “generative”, to realise our goal of zero harm • 55% reduction in TRIFR in FY15 • Over 9,000 safety conversations – eligible employees receive an award of
Slide 6: Statutory profit down 43% to $133m, free cash flow up 21%
Statutory profit down 43% to $133m Underlying earnings per share down 29% Year ended 30 June 2015 EBITDAF1 $525m down 11% from $587m Profit $133m down 43% from $234m Earnings per share (cents) 18.2 cps down 43% from 32.0 cps 1 Underlying earnings after tax $161m down 29% from $227m Underlying earnin
Slide 7: Margin pressure in mass market and C&I reduces EBITDAF
Margin pressure in mass market and C&I reduces EBITDAF Integrated Energy segment EBITDAF: down $67m (12%) to $484m EBITDAF Movement • Netback: unfavourable $61m (7%) FY14 587 » Volumes remained stable despite Intergrated Energy $67m lower customer numbers and Retail netback (61) reduced C&I sales ad
Slide 8: Netback – $61m lower (7%) to $826m
Netback – $61m lower (7%) to $826m Mass market discounting prevents full recovery of rising distribution costs • Electricity sales in line with FY14 at 8,392 GWh Retail Netback Movement » Mass market sales up 44 GWh (2%) due to additional small business customers FY14 887 offsetting residential loss
Slide 9: Cost of energy – unfavourable $6m (2%) to $342m
Cost of energy – unfavourable $6m (2%) to $342m Renewable generation increased from 69% to 76% of total generation • Wholesale spot market down $6m due to Cost of Energy Movement higher electricity purchases (up 200 GWh) being partially offset by increased generation (336) FY14 • Wholesale financial
Slide 10: Other segment – favourable $5m (14%) to $41m
Other segment – favourable $5m (14%) to $41m • LPG margin up $9m Other segment movements » LPG sales up 4,864 tonnes (7%) with reticulated demand responding to cooler weather and additional FY14 36 wholesale sales » Profit margin up $103/tonne (32%) with continued margin pressure LPG margin 9 offset
Slide 11: Other operating expenses increased by $10m during transitional year
Other operating expenses increased by $10m during transitional year • Labour costs increased $2m Other Operating Expenses 300 » Return of project resources to business as usual 250 » Partially offset by reduced incentive 102 104 accruals reflecting FY15 performance 200 98 105 100 83 $m 150 • Other o
Slide 12: Financial Review – Graham Cockroft
Financial Review – Graham Cockroft 12
Slide 13: Statutory profit down 43% to $133m
Statutory profit down 43% to $133m Underlying earnings per share down 29% Year ended Year ended Variance 30 June 2015 30 June 2014 $m $m $m % Profit 133 234 (101) (43%) Earnings per share (cents) 18.2 32.0 (13.8) (43%) Revenue and other income 2,443 2,446 (3) (0%) EBITDAF1 525 587 (62) (11%) Underly
Slide 14: Statutory profit down 43% from $234m to $133m
Statutory profit down 43% from $234m to $133m Underlying earnings after tax down 29% from $227m to $161m Contact's statutory profit movement 250 (7) 200 (62) (14) 150 (28) (21) 31 $m 234 227 100 161 133 50 0 FY14 Net items FY14 EBITDAF Depreciation Net financing Tax FY15 UEAT Net items FY15 statutor
Slide 15: Free cash flow up 21%
Free cash flow up 21% Year ended Year ended Variance Free cash flow 30 June 2015 30 June 2014 400 $m $m $m % 363 EBITDAF 525 587 (62) (11%) 350 312 Change in working capital 20 (103) 123 119% 299 300 Tax paid (45) (53) 8 15% 265 Other 15 21 (6) (29%) 250 Underlying operating cash flows 515 452 64 14
Slide 16: Timing of special dividend increased year end gearing ratio
Timing of special dividend increased year end gearing ratio Considering retail bond offer; expected to open 24 August Funding maturity profile Funding Diversity 350 6% NEXI 300 USPP 12% Domestic Bank 36% Funding Maturity ($ million) 250 200 14% 150 100 6% 26% 50 0 Bank Facilities $600m NEXI $90m 201
Slide 17: Net financing costs increased by $21m due to reduction in capitalised interest
Net financing costs increased by $21m due to the reduction in capitalised interest Year ended Year ended Variance 30 June 2015 30 June 2014 $m $m $m % Interest income 1 6 (5) (83%) Interest expense (99) (120) 21 18% Financing costs (98) (114) 16 14% Financing costs capitalised - 37 (37) (100%) Net f
Slide 18: FY15 declared dividends 76 cents per share
FY15 declared dividends 76 cents per share Unimputed final dividend 15 cents per share Share buyback programme to commence in FY16 • Dividend policy revised in May to target Free cash flow and allocations 700 average ordinary dividends of 100% of UEAT » In the event that free cash flow exceeds 600 o
Slide 19: Prospects
Prospects 19
Slide 20: Transition update
Transition update • Dennis Barnes confirmed as CEO, employed by Contact • Contact has commenced the process of finding suitable replacements for departing directors including Bruce Beeren who will retire at the next AGM » The permanent chairman will be one of the new directors » AGM will be later th
Slide 21: Contact's capital investments have positioned it well for the New Zealand market
Contact’s capital investments have positioned it well for the New Zealand market … Upstream FuelFuel Generation Wholesale/Retail Retailer Generator Largely renewable fuel Flexible generation portfolio Significant customer base • Renewable generation increased • Peakers and gas storage provide • Reta
Slide 22: Cost of energy continues to track down with minimal capital requirements
Contact’s cost of energy continues to track down with minimal capital requirements to support cash flow Cost of energy • FY16 cost of energy expected to continue to $50 12,000 improve $45 10,000 » Improved plant availability following $40 8,000 maintenance programme in FY15 $/MWh $35 6,000 GWh » Geo
Slide 23: Continued wholesale oversupply despite dry conditions and some demand growth
Continued wholesale oversupply despite dry conditions and some demand growth Price and national storage levels National demand 160 4,000 FY15 demand increased 2.1% from 4% 140 3,500 FY14 4% 120 3,000 3% 7 day average price ($/MWh) 2% National storage (GWh) 100 2,500 3% 0% 80 2,000 2% 60 1,500 (4%) (
Slide 24: Contact to close Otahuhu power station from September 2015
Contact to close Otahuhu power station from September 2015 Continued oversupply makes hold costs uneconomic • Market currently oversupplied System Operator North Island security » Capacity factor of Contact’s CCGTs of supply assessment 6,500 has averaged 24% over past year Otahuhu despite periods of
Slide 25: 2018 Huntly closure too long dated to support hold costs
2018 Huntly closure too long dated to support hold costs Cost reduction outweighs revenue uncertainty • Alternative to closing is to put Otahuhu into storage until Huntly closes » Otahuhu expected to have ~8,000 operating hours at the end of September 2015 providing ~2,400 GWh, or ~2 winters » Not e
Slide 26: TCC will be refurbished to gain 24,000 additional operating hours
TCC will be refurbished to gain 24,000 additional operating hours • Capex cost of $45m over FY16/17 • 377 MW but can operate down to 140 MW with limited heat rate degradation. Potential to operate down to 100MW • Consolidated operation with Stratford Peakers and Ahuroa gas storage • Portfolio no lon
Slide 27: From 2019 the market will likely require additional flexible capacity
From 2019 the market will likely require additional flexible capacity not energy Contact well positioned to support flexible development when it is needed • Ahuroa gas storage provides 45TJ/day gas extraction and 27TJ/day of gas injection » Two options to expand injection and extraction capacity at
Slide 28: Retail Transformation provides a platform for efficiency and innovation
Retail Transformation provides a platform for efficiency and innovation in a highly competitive market Stabilise Optimise Sustain Data • Stabilise Insight driven using SMART, customer & customer • Target customers demographic data numbers Lower cost by region and to acquire value Digital channels •
Slide 29: Retail stabilisation substantially complete
Retail stabilisation substantially complete Customer service metrics all now close to pre go-live levels • Key front and back office metrics now at, or close Customer satisfaction survey to, pre go-live levels 10 CEM (3 month rolling average) » Customer satisfaction survey now back at pre 8 go-live
Slide 30: Outlook
Outlook • Continued strong free cash flow • Lower cost to serve to offset continued intense retail competition • C&I load reduced following the non-renewal of the Fonterra electricity contract • Customer business begins to move beyond stabilisation to optimisation • No repeat of 1H15 one-off network
Slide 31: Key themes from today
Key themes from today Increased • Free cash flow improvement cash flow » Sales volumes stable » Strong retail competition continues to impact margins » Transition phase following investment in new systems and plant complete Distribution of • 15 cps final dividend (76 cps distributed to shareholders)
Slide 32: Supporting material
Supporting material 32
Slide 33: 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 34: 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: Costs increased by $14m (7%) reflecting commissioning of Te Mihi and go-live of the Retail Transformation in 2H14. This is partially offset by a
Slide 35: Non-GAAP profit measure – underlying earnings
Non-GAAP profit measure – underlying earnings • The CEO monitors underlying earnings and believes it assists investors to understand the ongoing performance of the business • Underlying earnings after tax is calculated by adjusting reported profit for the year for significant items that do not refle
Slide 36: Explanation of reconciliation from reported profit to underlying earnings
Explanation of reconciliation from reported profit to underlying earnings • The adjustments from reported profit to underlying earnings are as follows: » The change in fair value of financial instruments that do not qualify for hedge accounting » Transition costs are those costs incurred on the Reta
Slide 37: OCAT, OCAT ratio and free cash flow
OCAT, OCAT ratio and free cash flow Free cash flow • Free cash flow measures the cash generating performance of the business and represents cash available to fund distributions to shareholders and growth capital expenditure. Free cash flow is equal to cash flows from operating activities less stay i