Contact Energy Limited · NZX:CEN
Contact Energy — 1H16 Earnings Presentation
40 slides from Contact Energy's earnings presentation, Feb 15, 2016
Slide 1: 2016 Interim Results Presentation
2016 Interim Results Presentation Six months ended 31 December 2015 Dennis Barnes, Chief Executive Officer Graham Cockroft, Chief Financial Officer 15 February 2016
Slide 2: Disclaimer
Disclaimer This presentation may contain projections or forward-looking statements EBITDAF, underlying profit and free cash flow are non-GAAP (generally regarding a variety of items. Such forward-looking statements are based accepted accounting practice) measures. Information regarding the upon curr
Slide 3: Agenda
Agenda Strategy » Leverage integrated customer and generation business to deliver strong cash flows for distribution to shareholders • Deliver value to our customers by providing choice, control and certainty • Build customer centric offers in-house and with partners to improve customer life time va
Slide 4: Statutory loss $116m due to Otahuhu and Taheke impairments
Statutory loss $116m due to Otahuhu and Taheke impairments Underlying profit per share down 4%; Free cash flow per share up 24% Six months ended 31 December 2015 1 EBITDAF $254m down 1% from $257m Profit/(loss) ($116m) down 327% from $51m Earnings per share (cents) (15.9) cps down 330% from 6.9 cps
Slide 5: Progress continues across the business
Progress continues across the business FY16 outlook statement at FY15 results presentation Progress Up 24% with distributions to shareholders via share buyback and stable Continued strong free cash flow dividends Retail competition higher than expected and ‘cost out’ slower but gaining Lower cost to
Slide 6: Market dynamics and strategy
Market dynamics and strategy Dennis Barnes 1H16 Results 15 February 2016 Presentation Contact Energy Limited
Slide 7: Demand growth, particularly in agriculture, has continued
Demand growth, particularly in agriculture, has continued 12 month change in electricity consumption Year on year demand growth continued in 1H16 with a Source: MBIE; 12 months ended 30 September 1% increase Source: Transpower/ Contact Residential 2% Commercial 0% Industrial 1% 0% 4% Agriculture/ Fo
Slide 8: Recent market trends
Recent market trends Year on year quarterly change in electricity prices Mass market Source: MBIE Quarterly Survey of Domestic Electricity Prices » Retail competition remains intense with new retailers and service offerings 8% entering the market Year on year quarterly change 6% • 27 retail brands t
Slide 9: Contact's response – becoming truly customer inspired
Contact’s response – becoming truly customer inspired Deliver value to our customers by providing choice, control Customer strategy continues to develop across three horizons and certainty » Contact’s historical pricing construct is changing, improving competitiveness and customer life time value •
Slide 10: Leveraging SAP benefits and simplifying IT systems to reduce cost
Contact is leveraging its SAP benefits and simplifying its IT systems to reduce cost and improve customer capability Current systems simplification programme on track to deliver $9m reduction in FY17 operating expenses from the peak in FY15 » Decisions made in past 6 months to reduce cost and enhanc
Slide 11: Lower cost fuel and improved energy and capacity balance
Contact has switched to lower cost fuel and has improved New Zealand’s energy and capacity balance Contact’s actions have contributed to a competitive, reliable Thermal plant closures have restored balance following a and sustainable electricity supply period of reduced risk as new renewable generat
Slide 12: Industry will resolve North Island capacity uncertainty
Contact is confident that the industry will resolve North Island capacity uncertainty If Huntly closes, North Island capacity is required irrespective North Island supply and demand currently balanced with additional capacity required of Tiwai plans Source: Transpower 5,500 Excess » North Island cap
Slide 13: Regulatory momentum focuses on correct incentives
Regulatory momentum continues to focus on ensuring the correct incentives are in place » Transmission pricing appears to be approaching a sensible “beneficiary” pays outcome » Distribution charging consultation commenced • Current pricing principles approach to distribution pricing is not working •
Slide 14: Safety, agility and efficiency will define Contact's culture
Safety, agility and efficiency will define Contact’s culture and competitive advantage Increasing our capacity to fail safely Building capability for a changing market » We continue to advance our cultural journey towards “generative”, » New Customer structure reflecting our customer value chain com
Slide 15: 1H16 performance
1H16 performance Graham Cockroft 1H16 Results 15 February 2016 Presentation Contact Energy Limited
Slide 16: 1H16 performance highlights
1H16 performance highlights ($116m) 24% $62m Loss for the period down from $51m Improvement in free cash flow Share buyback completed profit predominantly due to impairments at Otahuhu and Taheke $254m $82/MWh $33/MWh EBITDAF, down 1% from $257m Netback down $2/MWh with Cost of energy improved $4/MW
Slide 17: Statutory loss $116m due to Otahuhu and Taheke impairments
Statutory loss $116m due to Otahuhu and Taheke impairments Underlying profit down 4% from $76m to $73m Contact’s statutory profit 80 (3) 4 (3) (1) 60 25 40 76 73 51 20 - (189) $m (20) (40) (60) (116) (80) (100) (120) 1H15 Net items 1H15 EBITDAF Depreciation & Net Tax 1H16 Net items 1H16 statutory ex
Slide 18: 1H16 profit negatively impacted by $257m of impairments
1H16 profit is negatively impacted by $257m of impairments Otahuhu thermal power station closure Taheke geothermal resource impaired » At the end of September 2015, the Otahuhu thermal power station was » Between 2010 and 2014 Contact spent $35 million assessing the Taheke closed geothermal resource
Slide 19: Margin pressure in mass market and lower C&I sales reduce EBITDAF
Margin pressure in mass market and lower C&I sales reduce EBITDAF Integrated energy segment EBITDAF down $4m (2%) to $234m EBITDAF Movement » Netback unfavourable $33m (8%) to $392m • Volumes lower due primarily to reduced C&I sales (-$27m) 1H15 257 Intergrated Energy $4m • Netback down driven by in
Slide 20: Lower C&I sales and continued discounting in mass market
Netback down $33m (8%) to $392m 4,026 GWh Electricity sales volume, down 7% due to lower C&I sales Lower C&I sales and continued discounting in mass market » 1H16 sales volume down 291GWh to 4,026 GWh $82/MWh • MM volumes reasonably stable, although average customer Netback down $2/MWh due to number
Slide 21: Improvements are being sought across all retail metrics
Improvements are being sought across all retail metrics 49% Increase in saves and win backs Improving acquisitions and service but churn remains above market 1H15 2H15 1H16 76% Of residential electricity Net promoter score n/a -2% -4% customers on non-standard prompt payment discounts Average time t
Slide 22: Cost of energy improved $29m to -$158m
Cost of energy improved $29m (16%) to -$158m 78% Renewable generation up from 76% in 1H15 Lower purchase volumes and improved gas costs reduced cost of energy by $4/MWh » Wholesale spot market up $19m • Retail purchases down 324 GWh on the back of lower retail volumes, 4,189 GWh resulting in an addi
Slide 23: Focus on allocation of operating and capital expenditure
Focus continues across the business on allocation of both operating and capital expenditure Other operating expenses Capital expenditure 140 140 120 120 100 100 80 80 $m $m 60 60 40 40 20 20 0 1H12 1H13 1H14 1H15 1H16 - Generation operating costs Electricity and gas cost to serve LPG and other FY15
Slide 24: Free cash flow up 24%
Free cash flow up 24% Lower tax paid is partially offset by higher stay in business capex » Free cash flow measures the cash generating performance of the business and represents cash available to fund distributions to shareholders and growth capital expenditure 6 months ended 6 months ended Varianc
Slide 25: Efficient return of free cash flow to shareholders remains a priority
The efficient return of free cash flow to shareholders remains a priority $62m share buyback completed in 1H16 Uses of free cash flow » 15 cps dividend paid in September 2015 » Share buyback programme announced 15 October to acquire up to 200 $100m of shares • 12.5m shares purchased to date at a cos
Slide 26: Summary
Summary Dennis Barnes 1H16 Results 15 February 2016 Presentation Contact Energy Limited
Slide 27: Outlook
Outlook » Strong cash flow expected to continue » Second half earnings expected to be similar to prior year » Expect to complete remainder of current $100m share buyback programme in FY16 » No change in distribution policy with dividends to be imputed dependent on the availability of imputation cred
Slide 28: Summary
Summary Strategy » Leverage integrated customer and generation business to deliver strong cash flows for distribution to shareholders • Deliver value to our customers by providing choice, control and certainty • Build customer centric offers in-house and with partners to improve customer life time v
Slide 29: Supporting material
Supporting material 1H16 Results 15 February 2016 Presentation Contact Energy Limited
Slide 30: Electricity market conditions
Electricity market conditions Price and national storage levels 160 4000 Otahuhu futures settlement price (ASX settlement) 140 3500 85 31/12/2014 30/06/2015 31/12/2015 7 day average price ($/MWh) 120 3000 80 100 2500 National storage (GWh) 80 2000 75 $/MWh 60 1500 70 40 1000 20 500 65 0 0 Jan -15 Fe
Slide 31: Thermal generation continues to decline with improved geothermal availability
Thermal generation continues to decline supported by improved geothermal availability in 1H16 Gross Plant availability1 Capacity Electricity Pool revenue Generation by source output 1H16 1H15 factor output 6,000 $60 (MW) (%) (%) (%) (GWh) ($/MWh) ($m) Hydro 752 84% 89% 61% 2,010 56 112 5,000 $50 Geo
Slide 32: No change in contracted gas volumes with gas storage support
No change in contracted gas volumes with support provided by gas storage Contracted gas volumes Ahuroa gas storage monthly injections and extractions 1000 4000 25 Other Maui (max) Maui (min) 900 Monthly Gas Injected TJ's Monthly Gas Withdrawn TJ's 3500 Swap Genesis Gas Injected cumulative TJ's Gas W
Slide 33: Balance sheet supported by a robust funding portfolio
Contact’s balance sheet is supported by a robust funding portfolio Funding Sources Funding maturity profile 6% 500 Bank Domestic USPP NEXI 10% 400 34% 300 18% $m 200 4% 100 28% 0 2016 2017 2018 2019 2020 2021 to 2025 to Bank debt $680m NEXI $90m USPP $560m 2025 2030 Retail bond $372m Wholesale bonds
Slide 34: 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 35: 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 decreased by $4m (4%) reflecting the closure of Otahuhu power station • Change in fair value of financial instruments: the balance
Slide 36: Non-GAAP profit measure – underlying profit
Non-GAAP profit measure – underlying profit » The CEO monitors underlying profit and believes it assists investors to understand the ongoing performance of the business » Underlying profit is calculated by adjusting reported profit/(loss) for the year for significant items that do not reflect Contac
Slide 37: Explanation of reconciliation from reported profit to underlying profit
Explanation of reconciliation from reported profit to underlying profit » The adjustments from reported profit to underlying profit are as follows: • Change in fair value of financial instruments: Movements in the valuation of interest rate derivatives and electricity price derivatives that are not
Slide 38: Integrated Energy segment
Integrated Energy segment Integrated energy segment 6 months ended 6 months ended Variance $m 31 December 2015 31 December 2014 $m % Mass market electricity 481 503 (22) (4%) Commercial and industrial electricity 249 276 (27) (10%) Retail gas 35 34 1 3% Steam 16 12 4 33% Total revenue 781 825 (44) (
Slide 39: Cost of Energy
Cost of Energy Cost of energy 6 months ended 6 months ended Variance $m 31 December 2015 31 December 2014 $m % Wholesale electricity revenue 276 335 (59) (18%) Wholesale gas revenue 1 12 (11) (92%) Te Mihi compensation 2 1 1 100% Total wholesale revenue 279 348 (69) (20%) Electricity purchases (262)
Slide 40: Other segment
Other segment Other segment 6 months ended 6 months ended Variance $m 31 December 2015 31 December 2014 $m % LPG revenue 63 63 - 0% Meter leases revenue 2 2 - 0% Other revenue - 2 (2) (100%) Total other segment revenue 65 67 (2) (3%) LPG purchases (38) (40) 2 (5%) Total direct costs (38) (40) 2 (5%)