Contact Energy Limited · NZX:CEN
Contact Energy — H1 FY2014 Earnings Presentation
42 slides from Contact Energy's earnings presentation, Feb 18, 2014
Slide 1: 2014 Interim Results Presentation
2014 Interim Results Presentation 18 February 2014 6 months ended 31 December 2013 Dennis Barnes, Chief Executive Officer Graham Cockroft, Chief Financial Officer
Slide 2: Disclaimer
Disclaimer 2 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 st
Slide 3: Agenda
Agenda 3 1 Performance Highlights Dennis Barnes 2 Operational review Dennis Barnes 3 Financial review Graham Cockroft 4 Prospects Dennis Barnes Supporting material Results for the 6 month period ended 31 December 2013
Slide 4: Performance Highlights
4 Performance Highlights Dennis Barnes Results for the 6 month period ended 31 December 2013
Slide 5: Improved safety performance reflects improving safety culture
Improved safety performance reflects improving safety 5 culture, proving zero harm is realistic and achievable • The health, safety and well-being of our people remains our number one priority • A strong focus on increasing visible and active leadership, through frontline coaching and sharing lesson
Slide 6: Results
Results 6 6 months ended Variance compared to 31 December 2013 31 December 2012 1 EBITDAF $264m up 4% from $253m Profit for the period $112m up 27% from $88m Earnings per share (cents) 15.3 cps up 25% from 12.2cps Net items excluded from underlying earnings after tax 1 $15m up from ($4m) Underlying
Slide 7: Reducing fuel costs and increasing electricity sales
Reducing fuel costs and increasing electricity sales 7 • Holding market share and customers in one of the most competitive retail electricity markets in the world » Commercial and industrial sales offset lower mass market demand » Increasing customer take-up of discounted products • Net purchase cos
Slide 8: EBITDAF Movement: 1H14 v 1H13
Reducing fuel costs and increasing electricity sales 8 EBITDAF Movement: 1H14 v 1H13 Integrated Energy segment EBITDAF: up $13m (6%) to $244m 1H13 253 Intergrated Energy $13m • Netback: unfavourable $9m (2%) Netback favourable -9 Net purchase cost 22 • Net purchase cost: favourable $22m (10%) LPG 5
Slide 9: Operational Review
9 Operational Review Dennis Barnes Results for the 6 month period ended 31 December 2013
Slide 10: National demand down 1.6% – impact of warmer weather on mass market demand
National demand down 1.6% – impact of warmer weather 10 on mass market demand 6 months ended 6 months ended Variance 31 December 2013 31 December 2012 GWh GWh GWh % North Island 11,823 12,170 (347) (2.9%) South Island ex Tiwai 4,485 4,526 (41) (0.9%) Tiwai 2,508 2,427 81 3.3% Total national demand 1
Slide 11: Above mean storage levels kept wholesale prices suppressed
Above mean storage levels kept wholesale prices suppressed 11 Price and national storage levels $200 4,000 $180 3,500 $160 3,000 7 day average price ($/MWh) $140 National storage (GWh) 2,500 $120 $100 2,000 $80 1,500 $60 1,000 $40 500 $20 $- 0 Jul Aug Sep Oct Nov Dec HAY price 1H13 HAY price 1H14 Hi
Slide 12: Netback – $9m lower (2%) to $443m
Netback – $9m lower (2%) to $443m 12 • Change in electricity sales mix; volume Netback movement increased 74 GWh to 4,334 GWh 1H13 452 » Mass market consumption down 178 C&I elec revenue 21 GWh with average temperatures 6% warmer MM elec revenue 19 » C&I sales up 252 GWh Elec pass through 8 costs •
Slide 13: Retail market remains highly competitive
Retail market remains highly competitive 13 Electricity market customer loss rate 45% 40% Contact Industry 35% 30% 25% 20% 15% 10% 5% 0% Mar 11 May 11 Mar 12 May 12 Mar 13 May 13 Jul 10 Jul 11 Jul 12 Jul 13 Jan 11 Jan 12 Jan 13 Nov 10 Nov 11 Nov 12 Nov 13 Sep 10 Sep 11 Sep 12 Sep 13 • Contact’s comp
Slide 14: Net purchase cost – favourable $22m (10%) to –$199m
Net purchase cost – favourable $22m (10%) to –$199m 14 Renewable generation moved from 63% to 68% of production • Wholesale spot market stable; price separation remained high during HVDC commissioning » GWAP down $9/MWh to $47/MWh, generation volumes down 23 GWh » LWAP down $11/MWh; purchases up 80
Slide 15: Flexible portfolio allows management of variable operating conditions
Flexible portfolio allows management of variable 15 operating conditions • More flexible fuel allows less thermal Generation by source generation while hydro volumes increase 5,000 4,738 4,761 » Hydro generation was up 281GWh (15%) 98 194 due to higher rainfall 4,000 1,424 » HVDC completion gives mo
Slide 16: Financial Review
16 Financial Review Graham Cockroft Results for the 6 month period ended 31 December 2013
Slide 17: Profit for the period up 27% to $112m
Profit for the period up 27% to $112m 17 Underlying earnings per share up 4% 6 months ended 6 months ended Variance 31 December 2013 31 December 2012 $m $m $m % Profit for the period 112 88 24 27% Earnings per share (cents) 15.3 12.2 3.1 25% Revenue and other income 1,148 1,213 (65) (5%) EBITDAF 264
Slide 18: Reconciliation of statutory profit to underlying earnings after tax
Reconciliation of statutory profit to underlying earnings 18 after tax 6 months ended 6 months ended 31 December 2013 31 December 2012 $m $m Profit for the period 112 88 Change in fair value of financial instruments (16) 1 Clutha land sales (3) (2) Asset impairments 3 3 Transition costs 2 3 Gain on
Slide 19: Profit for the period up 27% from $88m to $112m
Profit for the period up 27% from $88m to $112m 19 Underlying earnings after tax up 5% from $92m to $97m Contact's statutory profit movement 120 2 4 15 100 4 11 4 80 $m 60 112 97 88 92 40 20 0 1H13 Net items 1H13 UEAT EBITDAF Depreciation Net Tax 1H14 UEAT Net items 1H14 statutory excluded & financi
Slide 20: Improved EBITDAF offset by increased gas storage injections
Improved EBITDAF offset by increased gas storage 20 injections resulted in stable cash position 6 months ended 6 months ended Variance 31 December 2013 31 December 2012 $m $m $m % EBITDAF 264 253 11 4% Change in working capital (49) (15) (34) (227%) Tax paid (38) (39) 1 3% Other 13 5 8 160% Operatin
Slide 21: Financing costs increased by $6m due to higher average gross debt
Financing costs increased by $6m due to higher average 21 gross debt, partially offset by a reduction in the average cost of funds 6 months ended 6 months ended Variance 31 December 2013 31 December 2012 $m $m $m % Interest income 3 2 1 50% Interest expense (62) (56) (6) (11%) Financing costs (59) (
Slide 22: 2014 refinancing nearing completion with retail bond offer launched today
2014 refinancing nearing completion with retail bond 22 offer launched today • Balance sheet gearing level remains strong at 31 December 2013: » Net debt $1.4bn, down slightly on 31 December 2012; gearing ratio 28% » $600m total committed facilities (nil drawn); short term cash deposits of $196m » W
Slide 23: Fully imputed interim distribution – stable at 11 cps
Fully imputed interim distribution – stable at 11 cps 23 • Free cash flow including the purchase or sale of fixed assets in 1H14 was $85m compared with ($24) in 1H13 due to the sale of gas meters and reduced growth capex. Further improvements expected with the completion of major projects • Reductio
Slide 24: Prospects
24 Prospects Dennis Barnes Results for the 6 month period ended 31 December 2013
Slide 25: Further efficiencies to drive growth while lower capex increases free cashflow
Contact will target further efficiencies to drive growth 25 while lower capital expenditure will increase free cashflow • Leverage asset base Capital expenditure - projected 600 » Complete Te Mihi $70m decrease in FY14-18 capex • Reduction in resources following better than expected » Increase produ
Slide 26: Poor thermal returns require flexibility in fuel and maintenance commitments
Poor thermal returns require flexibility in fuel and 26 maintenance commitments • Historic thermal generation shows plant running below short run marginal cost of a CCGT more than 50% of the time » CCGT utilisation 41% 2011 – 2013, down from 47% 2008 – 2010 with the addition of new baseload renewabl
Slide 27: Average forward prices have fallen; generation mix impacting price profile
Average forward prices have fallen; however, there is 27 evidence the change in generation mix is impacting the price profile • Generation oversupply resulted in the average forward price falling $4-5/MWh for FY15 • However, there is early evidence that reduced must-run thermal capacity is resulting
Slide 28: The market value of capacity will drive gas contracting decisions
The market value of capacity will drive gas contracting 28 decisions Gas storage allows patient approach to contracting new gas • Contact has commissioned the 9km gas pipeline from Ahuroa gas storage (AGS) to the Taranaki generation assets. Removing reliance on the Waihapa processing station reduces
Slide 29: Te Mihi update
Te Mihi update 29 • Te Mihi is in the final stages of commissioning » Ran successfully at 159 MW during its four week reliability test in December 2013 • Commissioning tests revealed an issue with the hot well pumps » Solutions are being developed, which should see the plant operating at full capaci
Slide 30: Retail strategy
Retail strategy 30 Improved margins without compromising competitiveness • In parallel with the Retail Transformation programme we have completed building an advanced segmentation model which will leverage the data capabilities of SAP • This will provide opportunities to lower our cost to serve, all
Slide 31: NZ Power proposal
NZ Power proposal 31 • Energy affordability needs to be understood and addressed • Opposition parties want to remove the wholesale market to reduce electricity prices BUT » Wholesale electricity prices account for less than one third of retail electricity price and network transmission and distribut
Slide 32: Summary
Summary 32 • Solid Half Year result » Improvement in health and safety continues » Organisational restructure complete » Increased sales volume and stable customer numbers reflects focus on being competitive » Generation portfolio now able to take advantage of wetter conditions • Earnings and cashfl
Slide 33: Supporting material
33 Supporting material Results for the 6 month period ended 31 December 2013
Slide 34: Non-GAAP profit measures – EBITDAF
Non-GAAP profit measures – EBITDAF 34 • EBITDAF is Contact’s earnings before net interest expense, tax, depreciation, amortisation, change in fair value of financial instruments and other significant items • Management and directors monitor EBITDAF as a key indicator of Contact’s performance at segm
Slide 35: Explanation of reconciliation between EBITDAF and profit for the period
Explanation of reconciliation between EBITDAF and 35 profit for the period • The adjustments from EBITDAF to reported profit are as follows: » Depreciation and amortisation: Costs decreased by $2m (2%) driven by the sale of the gas meters business » Change in fair value of financial instruments: the
Slide 36: Non-GAAP profit measures – underlying earnings
Non-GAAP profit measures – underlying earnings 36 • Management and directors monitor underlying earnings as a basis for determining dividends and believe it assists investors to understand the ongoing performance of the business • Underlying earnings after tax is calculated by adjusting reported pro
Slide 37: Explanation of reconciliation from reported profit to underlying earnings
Non-GAAP profit measures – explanation of reconciliation 37 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 » Contact is not proceedi
Slide 38: Operating cashflow after tax (OCAT) and OCAT ratio
Operating cashflow after tax (OCAT) and OCAT ratio 38 • Contact uses OCAT and OCAT ratio as internal measures of the cash-generating performance of the business • Key difference between OCAT and statutory cash flows from operating activities is OCAT includes stay-in-business capex OCAT ratio • Measu
Slide 39: Financial results summary
Financial results summary 39 Key financial information 6 months ended 6 months ended Variance 31 December 2013 31 December 2012 $m $m $m % Revenue and other income 1,148 1,213 (65) (5%) (1) Operating expenses (884) (960) 76 8% (2) 264 253 11 4% EBITDAF Depreciation and amortisation (93) (95) 2 2% Ch
Slide 40: Integrated Energy segment result
Integrated Energy segment result 40 Integrated Energy Segment 6 months ended 6 months ended Variance 31 December 2013 31 December 2012 $m $m $m % Mass market electricity 496 515 (19) (4%) Commercial and industrial electricity 279 258 21 8% Retail gas 35 39 (4) (10%) Steam 11 11 - 0% Total Revenue 82
Slide 41: Net purchase cost
Net purchase cost 41 Net Purchase Cost 6 months ended 6 months ended Variance 31 December 2013 31 December 2012 $m $m $m % Wholesale electricity revenue 248 298 (50) (17%) Wholesale gas revenue 13 15 (2) (13%) Total wholesale revenue 261 313 (52) (17%) Electricity purchases (233) (274) 41 15% Other
Slide 42: Other segment result
Other segment result 42 Other Segment 6 months ended 6 months ended Variance 31 December 2013 31 December 2012 $m $m $m % LPG revenue 61 65 (4) (6%) Meter leases revenue 3 7 (4) (57%) Meter leases revenue - internal 20 17 3 18% Other revenue 2 5 (3) (60%) Total other segment revenue 86 94 (8) (9%) L