International roadshow October 2019
Putting our energy where it matters Disclaimer and important information
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 Furthermore, while all reasonable care has been stated in any forward-looking statement based taken in compiling this presentation, Contact on a number of important factors and risks. accepts no responsibility for any errors or omissions. Although management may indicate and believe that the assumptions underlying the forward- This presentation does not constitute investment looking statements are reasonable, any of the advice. assumptions could prove inaccurate or incorrect and, therefore, there can be no assurance that Numbers in the presentation have not all been the results contemplated in the forward-looking rounded and might not appear to add. statements will be realised. All logos and brands are property of their EBITDAF, underlying profit, free cash flow and respective owners. All company, product and operating free cash flow are non-GAAP service names used in this presentation are for (generally accepted accounting practice) identification purposes only. measures. Information regarding the All references to $ are New Zealand dollars usefulness, calculation and reconciliation of these measures is provided in the supporting material.
Contact Energy / International Roadshow / October 2019 2 Dennis Barnes / Chief Executive Officer
Dennis has been Chief Executive Officer of Contact since 2011.
Dennis has completed Contact’s $2bn investment programme in renewable energy, flexible generation and companywide systems. He has provided industry leadership on topics as wide ranging as wholesale electricity market structures and health and safety reform.
During 2015, Dennis successfully led Contact as its majority shareholder exited and Contact diversified its shareholding base and listed on the ASX.
Prior to joining Contact, he was General Manager Energy Risk Management at Origin Energy where he oversaw Origin's significant and expanding operations in wholesale markets. Prior to Origin, Dennis held a number of positions operating in international energy markets; including managerial roles at Scottish and English electricity companies. Dennis' career began as a metallurgist with Alcan and he holds a BSc (Hons), GradDip (Marketing) and MBA.
Contact Energy / International Roadshow / October 2019 3 Dorian Devers / Chief Financial Officer
Dorian joined Contact in December 2018 as Contact’s Chief Financial Officer.
Dorian has 20 years of financial and operational experience in industrial businesses. He is experienced in business transformations, having led successful turnarounds of businesses in both the UK and South Africa, and has successfully delivered a number of acquisitions, including ones in the Australian and New Zealand energy sector.
He has governance experience having served on the Board of Afrox a publicly listed company and the largest industrial gases business in Africa, as well as being a previous Board member of Liquigas, a New Zealand LPG infrastructure business.
Contact Energy / International Roadshow / October 2019 4 AGENDA
1 New Zealand electricity market 6-11
2 Contact’s business and value drivers 12-33
3 Why invest in Contact 34-43
4 Appendix 44-61 – Market in action, FY19 results extracts
Contact Energy / International Roadshow / October 2019 5 New Zealand electricity market
6 NEW ZEALAND ELECTRICITY MARKET
Spot Retailers Major electricity State-owned national Distribution Million generators pool transmission grid businesses (50 brands) consumers operator
COMPETITIVE REGULATED MONOPOLIES COMPETITIVE
“New Zealand serves as a model for effective energy markets and secure power system operation.” International Energy Agency (IEA) New Zealand 2017 Review
Contact Energy / International Roadshow / October 2019 7 DEMAND
National electricity demand (TWh) Annual consumption per household (kWh)
0.2% -0.6%
41.1 41.2 40.9 41.3 41.4 7,263 7,187 7,165 7,068 7,102
FY15 FY16 FY17 FY18 FY19 FY15 FY16 FY17 FY18 FY19 Source: EMI Source: MBIE electricity statistics
Agriculture Electricity consumption breakdown 6% While demand is Forestry/agriculture, food processing and Residential at a similar level to commercial have grown since the GFC. 32% 2008, there are Industrial This growth has been offset by ongoing encouraging signs of 38% reductions in demand from the pulp and paper sector as well as residential efficiency. demand growth in Source: MBIE electricity statistics some key sectors Commercial 24%
Contact Energy / International Roadshow / October 2019 8 SUPPLY FUNDAMENTALS
Clutha Waitaki Manapouri Taupo
. Average annual generation of 3,900 GWh . Average annual generation of 7,000 GWh . Average annual generation of 4,800 GWh . Average annual generation of 4,000 GWh . Max storage of ~300 GWh . Max storage of ~2,500 GWh . Max storage of ~800 GWh . Max storage of ~500 GWh . Summer inflows . Shared between Genesis (Lake Tekapo) and . Highest inflow intra year volatility of all . Winter inflows . Wet to dry range of 1,000 GWh Meridian (all lakes downstream of Lake Tekapo) catchments . Wet to dry range of 1,300 GWh . Summer inflows . Wet to dry range of 2,000 GWh . Wet to dry range of 3,000 GWh
National controlled storage (GWh) 4,000
3,000 2,677 Average 2,000 South Island 1,000 North Island 0 Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- 10 11 12 13 14 15 16 17 18 19 Source: NZX hydro
Hydro storage is crucial, but limited; Maximum controlled storage of ~4 TWh spread across four key catchments, ~10% of annual demand of 41TWh.
Contact Energy / International Roadshow / October 2019 9 SUPPLY FUNDAMENTALS
National annual supply (TWh) Major Sources 43 thermal of generators flexibility Flexible thermal 8 production is required 2 Contact: “Dry year”: 2 gas and diesel Genesis’s coal with 15 year stock pile (extendable) contract for Daily and seasonal: 21 gas storage Gas storage
-5 Genesis: “Wet year”: per annum of 10 coal and gas Gas storage seasonal renewables 5 5 Nova/Todd Winter peaks/ outages: firming required Energy: Diesel gas FY19 Geothermal Wind Co- Minimum Maximum Hydro Minimum Contingent/ emergency generation generation hydro thermal swing thermal (including hydro storage losses)
Thermal generation is currently the most economic swing fuel to manage the seasonal supply and demand mismatch.
Contact Energy / International Roadshow / October 2019 10 WHOLESALE PRICING
Short-term external Wholesale and futures electricity pricing ($/MWh) factors that can influence the market 300 200 Long-dated futures (>12 months) Short-dated futures (<12 months)
Monthly average spot price Aluminium 150
Wholesale electricity 100 Long-term prices average spot price = $80.16/MWh 50
0 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20
Long-term pricing is linked to the long-run marginal costs of new renewable projects Long-dated futures have jumped +30% in last 12 months. to meet demand plus costs associated with firming renewable intermittency Average spot prices remain well above long-term average. Source: EMI wholesale pricing
The market quickly responds to changes in supply and demand by sending price signals.
Contact Energy / International Roadshow / October 2019 11 Contact’s business and value drivers Wholesale business
12 CONTACT WHOLESALE SNAPSHOT
84% Renewable generation
5 Geothermal stations Contact is an owner and 2 Hydro stations / 1 controlled storage lake operator of low-cost, long-life renewable generation assets and is developing its consented 4 Thermal stations geothermal development options. 8.9TWh FY19 generation
15 year contract for gas storage
Contact Energy / International Roadshow / October 2019 13 CONTACT WHOLESALE SNAPSHOT
• Operational experience on the world’s We have maintained a dedicated, internationally-recognised, subsurface team to: second longest electricity producing • Lower the cost of operations significantly – comfortably New Zealand’s geothermal field (Wairakei, since 1958). lowest cost geothermal operator. • Capability in construction management, • Investigate options to extend and improve generation at Wairakei consenting and stakeholder engagement. at the 2026 resource consent renewal. • Provide geothermal consultancy services internationally.
Most recent geothermal developments
Te Huka (2010) 28MW Bioreactor (2012) Te Mihi (2014) 166MW Tauhara (Pre-FID)
Contact’s geothermal operations are significant in a global context with consents to expand production by ~67%
Contact Energy / International Roadshow / October 2019 14 MACRO-ECONOMIC ENVIRONMENT
Government policy
Quality, long-life renewable assets
Historically low cost of capital New Zealand is in the early stages of a decades-long transformation from Climate change reliance on fossil fuels to renewable electricity.
Contact Energy / International Roadshow / October 2019 15 CLIMATE CHANGE AND REGULATION
Potential electricity demand impact Potential renewable generation impact Potential wider electricity The New Zealand regulatory framework is being sector impact adapted to deliver on this societal imperative. Coal Net zero Climate phase out Electricity NZ carbon Transport Freshwater Change for electricity Pricing emissions policies reform Commission generation Review² by 2050 by 2030¹
Current Ban on Emission Tiwai Productivity Zero Transmission offshore Trading contract Commission Carbon Pricing oil and gas Scheme ends review Bill Methodology exploration review 2030 Announced
In progress
Society is demanding action on climate change, with clear progress expected.
¹ A commitment made by the Government when New Zealand joined the Powering Past Coal Alliance. ² Review complete, findings announced and into implementation.
Contact Energy / International Roadshow / October 2019 16 CARBON REDUCTION OPPORTUNITY
With high renewable penetration, electricity is the solution to reducing carbon emissions, not the problem.
Meaningful reductions in carbon emissions are possible with renewable electricity displacing carbon intensive fuels.
Sources: Productivity Commission's Low Emissions Economy Issues Paper, August 2017 and New Zealand's Action on Climate Change, September 2016
Contact Energy / International Roadshow / October 2019 17 QUALITY, LONG-LIFE RENEWABLE ASSETS
New Zealand electricity supply mix FY07, 11, 15, 19 New Zealand electricity generation mix for FY19
100% 1% 1% 2% 2% 2% 12% 90% 19% 15% 12% 22% Hydro Coal 5% 80% 5% Wind Gas 4% 5% 10% 18% Geothermal Other 70% 13% 17% 60% 8% 4% 5% 83% 2% 5% renewable 50% 18% Contact generation mix 59% for FY19 40%
30% 57% 59% 56% 59% 16% 5% 20% 84% 47% 10% renewable 0% 37% FY07 FY11 FY15 FY19
Source: MBIE electricity statistics
Contact Energy / International Roadshow / October 2019 18 DELIVERING WHOLESALE STRATEGY
Thermal generation Renewable development Customer solutions Develop options to enable the Potential to develop Tauhara, Leveraging capability to expand economic substitution of New Zealand’s best new C&I products and services; Contact’s thermal generation renewable generation option: underpinned by our investment in with renewables. Simply Energy. Prepare a range of development options for a final investment decision (FID). Partner with customers on mutually beneficial decarbonisation Deploy capital to enabling works opportunities. – including pre-FID drilling.
Contact Energy / International Roadshow / October 2019 19 CAPITAL DEPLOYMENT OPPORTUNITY
Contact Geothermal +67% Tauhara – >250MW consented generation (TWh) 5.4 • New Zealand’s pre-eminent scale renewable development 0.3 • Baseload renewable generation option
2.3 • Close proximity to the transmission grid Operational gains • $30m investment in pre-FID drilling (August-December 2019) 3.3 3.1 • FID early 2020 0.3 Wairakei 0.3 0.2 2.3 0.2 Tauhara
0.4 Ohaaki 0.2 2.8 2.5 2.8 1.7
FY11 FY15 FY19 Consented
Contact Energy / International Roadshow / October 2019 20 Contact’s business and value drivers Customer business
21 CONTACT CUSTOMER SNAPSHOT
Retail electricity market share by customer connections Products by customer connection
Other
Nova 3% 9% Genesis Electricity 4% 13% 24% Gas
TrustPower 12% Broadband
~480k Not including Rockgas connections LPG customers serviced 14% 19% Meridian Contact 84% 17%
Mercury
LPG is sold through a partnership with Rockgas. Source: Electricity Authority as at 31 August 2019
Contact’s Customer business is a service-obsessed retailer of electricity, gas and broadband for the mass market.
Contact Energy / International Roadshow / October 2019 22 MACRO-ECONOMIC ENVIRONMENT
Capable Low barriers Ease of Readily regulator to entry switching available risk management
The retail electricity market is highly competitive, resulting in pressure on retail margins.
Contact Energy / International Roadshow / October 2019 23 DELIVERING CUSTOMER STRATEGY
Technology Operating model Brand Leverage advances in Simple and lean operating Brand and reputation technology to drive model centred on the customer repositioned from a strong efficiency with automated experience, reinventing key customer operational retailer to a customer experiences. experiences and processes. smart customer solutions provider. Capable employees identifying and driving performance initiatives with ownership and accountability.
Contact’s Customer business has a solid foundation on which to capture further scale efficiencies.
Contact Energy / International Roadshow / October 2019 24 CUSTOMER CAPABILITY ASSESSMENT
Reducing cost to serve Building customer advocacy Customer operating costs ($m) (Includes 50% corporate allocation) Net promoter score (Promoters less detractors) 113 110 >30
97 94 26 90
20
15
3
FY16 FY17 FY18 FY19 FY20 FY16 FY17 FY18 FY19 FY20 target target
Targeting the lowest cost to serve and to be the most advocated for retailer.
Contact Energy / International Roadshow / October 2019 25 Contact’s business and value drivers Value drivers
26 SHORT-TERM VALUE DRIVERS
Ability to manage three key levers delivers performance.
1
3 Value drivers
2
Contact Energy / International Roadshow / October 2019 27 27 SHORT TERM 1 FUEL MIX AND RISK MANAGEMENT DRIVERS
National demand and supply fluctuation Contact’s portfolio
FY19 SRMC ¹ Contact advantage Annual Hydrology 2000 - 2018 • 33% of increase year-on-year due to cost of natural gas and carbon, and gas storage Thermal $107/MWh arrangements • 83% renewables is hedge against rising costs. • Gas storage allows for opportunistic gas purchases. Min 22.7 TWh | Mean 25.3 TWh | Max 27.7 TWh Hydro $14/MWh • Strong operational efficiency focus. • Seasonal variation smoothed with lake storage. Seasonal demand TWh
+16.7% • World-leading geothermal expertise delivering Geothermal $18/MWh innovative cost reductions and improving the cost of production. 9.5 11.1 Mar Jun Sep Dec FY18 - Q3 FY19 - Q1 Sources of portfolio flexibility – most diverse risk management tools within the industry Daily demand (MWh)
62% Virtual Virtual Hawea Whirinaki generator II AGS contract generator I 286 GWh storage, 155 MW Demand Flex + gas peakers Huntly swaption ~500 GWh p.a. diesel peaker platform – 3 MW 0-200 MW Winter – 100 MW throughput and growing Summer
Short-run marginal cost: Fuel and carbon costs, direct operating ¹ Contact Energy / International Roadshow / October 2019 costs (inc. gas storage) 28 SHORT TERM 2 PRICING AND CHANNELS DRIVERS
Futures prices Pricing linkage Channel Channels to market Channel volumes Otahuhu, FY16-23 netbacks ($/MWh) FY19 9.6 TWh ($/MWh) Length + short-term CfDs FY18-19 delta (GWh) 1.4 TWh
High correlation to 130 wholesale spot pricing 139 +293 Transfer of longer term C&I 136 C&I 3.0 TWh volume to short term CFDs Temporarily low linkage to demonstrates the risk 114 112 futures, as C&I not being -274 management processes 103 recontracted due to risk 82 101 management; normally strong futures linkage Long-term CfDs 1.4 TWh 78 Key long-term contract (Tiwai support) is CPI linked, other CfDs are 64 Tiwai fourth potline coming online 60 Averaged spot +176 Futures forecast futures linked Mass market Low short-term futures 3.8 TWh linkage; stronger long- 97 -152 In line with customer numbers term linkage expected.
FY19
Contact Energy / International Roadshow / October 2019 29 SHORT TERM 3 OPERATIONAL AND CAPITAL EFFICIENCY DRIVERS
Contact ‘Totex’ discipline $m World-class geothermal technology introduced by Contact
-11.4% CAGR • Use of coil tubing units and 391 357 proprietary technology for live 301 well work overs & maintenance 128 102 272 78 60 • Geo40 – relationship to extract SIB capex silica from geothermal 263 255 223 212 Direct opex reinjection systems • Increasing direct heat customer base FY16 FY17 FY18 FY19
Initiatives driving opex down – FY16-19
• $6m reduction in ICT costs • $7m reduction in cost of bad debt partly driven by introduction of products offering payment flexibility • Leaner organisation implemented with FTE reducing by 66 (exc. Rockgas) • Some savings reinvested in product development and digital transition - Investment in digital journey's switching customers to cheaper channels • $5m reduction in FY19 due to business disposals • More opportunities going forwards – FY20 targets further $13m reduction
Contact Energy / International Roadshow / October 2019 30 LONG-TERM VALUE DRIVERS
Contact sees a clear pathway to long-term value creation.
1 Maintaining demand-supply balance key
2
Contact Energy / International Roadshow / October 2019 31 31 LONG DECARBONISATION GROWTH OPPORTUNITIES TERM 1 DRIVERS
57 TWh 90 80 7 70 4 60 0 Pre-GFC, avg demand 6 50 growth ~2% p.a. 40 TWh 3 3 40 30 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Current Thermal EV uptake Dairy sector Electrification 2050 NZ Historical Demand MBIE - midpoint Meridian - midpoint demand substitution boiler conversion other Transpower Productivity Comm. - midpoint
Thermal plant substitution Electric vehicle uptake Electrification of process heat
• New renewable generation will continue to • There are currently 16,000 EVs and • Dairy conversion has already started by major participants. displace base-load thermal generation. there are 4m light vehicles in NZ. • Contact is working with a customer on a 13MW boiler. • Rising carbon prices – cap of $25/tCO2 to • The Government’s new EV “feebate” be reviewed prior to the end of 2022. scheme starts in 2021. • Converting all South Island dairy factories from coal to electricity will increase peak demand by 600MW; equivalent to NZAS’s demand. • Uncertainty about the price and availability • EV demand growth is likely to be off- of base-load gas will accelerate this peak. • Multi-year, periodic capex and maintenance cycles with upcoming renewals. conversion. • Conservative forecast, fleet • Food processing sector utilises cool storage and this creates a link to our “demand flex” • Gas-peaking to provide firming. proportion (2050): ~50 – 75% platform. • Base-load thermal shifting to winter-only • EV fleet size (2050): 1.7m – 2.7m role. • Emissions Trading Scheme expected to incentivise electrification
Contact Energy / International Roadshow / October 2019 32 LONG INVESTMENT IN RENEWABLE ENERGY TERM 2 DRIVERS
Long-run marginal cost (LRMC) by technology ($/MWh) 125 Gas baseload 100 Tauhara (<$60/MWh) Competitive 75 Wind base load 50 Geothermal Hydro Geothermal 25 0 Grid scale solar 0 2 4 6 8 10 12 14 16 18 20 22 24 cumulative new project generation (TWh) Source: Energy Efficiency and Conservation Authority, 2018
2008-18 Contact generation mix
5 Space and 3 +1.6 TWh ability to substitute gas 1 2 4 Thermal Renewables 2008 2010 2012 2014 2016 2018 1. AGS purchased | 2. Te Huka commissioned | 3. Peakers commissioned | 4. Te Mihi commissioned | 5. Otahuhu B closed
Gas plant fuel cost ($/MWh) Increasing 76 65 59 62 cost of Carbon thermal Gas generation FY16 FY17 FY18 FY19 Volume 1,614 1,742 1,812 1,421 (GWh)
Contact Energy / International Roadshow / October 2019 33 Why invest in Contact: Our equity story
34 STRONG INVESTMENT CASE
Dividend policy OPEN Latent potential provides certainty ECONOMY with world-class geothermal capability
Contact Energy / International Roadshow / October 2019 35 INVEST IN NEW ZEALAND
Stable banking sector with Reserve Bank Comparatively supervision Ease of low-developed Strong doing country international business business transport costs links
Safe, stable Modern and secure Simple telecommunications business tax system infrastructure environment
Most applicable to an investment in Contact
A stable economy and political system with a reputation for innovation make New Zealand an attractive place to invest
Contact Energy / International Roadshow / October 2019 36 FOCUS ON DELIVERING CASH
Segmental earnings (%) of FY19 EBITDAF Expected medium-term Operating Free Cash Flow ($m) Excludes corporate costs of $26m 285
2%
12% Wholesale Customer LPG (disposed Dec’18) EBITDAF 480 Key assumptions: $544m Hydro generation at 3,900 GWh (mean), geothermal generation at 3,300 GWh (average).
Cash interest -60 ASX electricity futures and electricity retail 85% Cash tax -70 margins stable. Stay-in-business -65 Excludes working (SIB) cash capex capital movements.
Delivery of strong, stable operating cash flows for distribution to shareholders.
Contact Energy / International Roadshow / October 2019 37 FOCUS ON OPERATIONAL IMPROVEMENT
Maintaining financial discipline Rewarding shareholders Controllable OPEX and CAPEX costs ($m) Distributions ($m) 391 357 301 272 286 280 280 260 229 100 186 165 165 Buyback 136 107 107 Final dividend 115 115 79 79 93 Interim dividend FY16 FY17 FY18 FY19 FY20 FY16 FY17 FY18 FY19 FY20 target target Safe and engaged employees Total recordable injury frequency rate (Recordable injuries per million hours worked) Employee engagement (%) 5.2 >82% 77% 75% 68% 3.3 3.2 56% 1.9 1.3
FY15 FY16 FY17 FY18 FY19 FY16 FY17 FY18 FY19 FY20 target
The focus on continuous improvement, in a period of flat demand, has seen operational performance metrics improve.
Contact Energy / International Roadshow / October 2019 38 DIVIDEND POLICY CERTAINTY
Balance sheet capacity Distribution Ordinary policy dividend
376 Headroom to BBB ($m) S&P net debt ($m) Ordinary 39 cps dividend of 2.8x Assuming EBITDAF of $480m Net debt to EBITDAF 968 of expected Operating At the closing share price on 11 October Free Cash Flow* 2019 of $8.96 per share
* Operating Cash Flow less stay-in-business capex and net interest costs after adjusting for expected With a new long-term user contracted to access medium-term stay-in-business capital expenditure, mean hydrology and appropriate Board consideration AGS, S&P will no longer capitalise the of a sustainable financial structure including targeting the long-term credit rating of BBB from S&P. storage service payments from FY20.
Contact Energy / International Roadshow / October 2019 39 GEOTHERMAL POTENTIAL
Estimated total Operating free capital cost cash flow yield A world-class geothermal expertise with * Assumes debt funded at current consented rates with an $75-85/MWh brownfield wholesale price. = development potential. ~$1bn ~11 to 12 cps
Opportunity in operating free cash flow from capital Possible staging timing dependent on results of appraisal drilling, demand deployment into an asset that we have growth and economic thermal substitution. a 60 year track record of managing.
Contact Energy / International Roadshow / October 2019 40 OFFERS VALUE ON EXPECTED EARNINGS
EV / FY20 EBITDAF (x) Net debt to FY19 EBITDAF (x) Dividend yield and percentage payout of FY19 operating free cash flow 15 14 19.6 3.0 4.8% 13 4.4% 12 Meridian 4.1% 11 2.3 10 0.9% 9 1.9 2.9% 8 1.7 17.9 Mercury 7 15.4 6 5 Contact
Market Capitalisation ($bn) MarketCapitalisation 3.2% 4 13.1 Genesis 3 2 1 0.8 1.0 1.2 1.4 1.6 1.8 Contact Mercury Meridian Genesis Contact Mercury Meridian Genesis Face value of net borrowings ($bn) 82% 89% 93% 106% % of OpFCF Net debt / EBITDAF as reported by the each company at their FY19 full year results. Consistency of the Meridian has a capital management plan in place until application of the definitions cannot be confirmed FY22 – distributed as a special dividend
FY20 EBITDAF multiples: Expected medium term Contact EBITDAF of $480m, peers at mid-point of guidance or analyst consensus if guidance has not been issued as at 11 October. Net borrowings is calculated as Borrowings less cash on hand at 30 June 2019; sourced from company financial statements. Share prices as at 11 October 2019. Operating free cash flow (OpFCF) is calculated as: Operating cash flow less SIB capex less cash interest (if not already included in the calculation of Operating cash flow).
Contact Energy / International Roadshow / October 2019 41 DEEP AND LIQUID REGISTER
Holder by type (%) Sum of register by % of issued share capital holding Holder by region (%)
Institutional: >5% 4 - 5% Rest of Europe Asia Passive 0% United Kingdom 13% 9% 3 - 4% 3% 10% 5% Australia 4% 12% Institutional: 49% Active <1% 53% 14% 2 -3% 38% 13% Retail North America 64% 14% New Zealand 1 -2%
No holders above 5% of issued share capital 36% of register is held outside of New Zealand
Daily trading – last 6 months ($m/day) 8.0 6.5 Contact Mercury 3.0 Meridian 2.0 Genesis
Contact Energy / International Roadshow / October 2019 42 DELIVERING FOR SHAREHOLDERS
12 month share prices Dividends (cps) Share prices rebased to 100; bond yield absolute % Declared or target 160 0.0 Contact Peer group 39 39 150 NZX 50 NZ 10yr bond yield (inverted, RHS) 0.5 32 140 1.0 Final dividend Announced 26 26 23 23 Interim dividend 130 Completed change to 19 the sale of dividend policy 1.5 Rockgas LPG 120 15 15
2.0 110
16 16 2.5 13 100 11 11
90 3.0 Oct- Dec Feb Apr- Jun Aug Oct- FY16 FY17 FY18 FY19 FY20 18 -18 -19 19 -19 -19 19 target
Contact Energy / International Roadshow / October 2019 43 Appendix The market in action FY19
44 FY19 DEMAND
Regional change (%) 1% National electricity demand (TWh) FY19 vs FY18 (1%)
0.2% 0% 41.1 41.2 40.9 41.3 41.4 1% (1%) North Island 25.9 25.9 25.9 26.1 26.1 South Island (ex NZAS) NZAS
1% (1%) 10.2 10.2 10.0 10.1 10.1 Source: EMI, Contact 5.0 5.0 5.0 5.0 5.2 FY15 FY16 FY17 FY18 FY19
0% 1% The NZAS gradual re-commissioning of the 4th potline (50MW) from October 2018, 0% contributed to a 4.1% increase in NZAS electricity consumption (12.6% of national demand). National electricity demand has remained at about 41TWh since 2008: (2%) 1% • Forestry/agriculture, food processing and commercial have grown since the GFC.
4% • This growth has been offset by ongoing reductions in demand from the pulp and paper sector as well as residential efficiency. Source: EMI, Contact
Contact Energy / International Roadshow / October 2019 45 FY19 SUPPLY
National hydro storage against mean storage (TWh) South Island inflows normalized Mean storage 1926 – 2019 (source: NZX hydro) Mean 4.0 Actual Extreme November 2018 rainfall added ~700GWh to national storage over a two week period after the traditional Spring inflows 3.5 failed to materialise 3.0
A large March event provided an additional ~700GWh, largely in the 2.5 SI catchments, including Contact’s Clutha catchment 2.0
North Island hydro storage was below mean during FY19 after 1.5 favourable conditions in the two years prior Jul Jan Jul Jan Jun 2017 2018 2018 2019 2019
Average monthly storage vs mean by island (TWh) Clutha hydro storage against mean storage (TWh) Mean storage 1926 – 2019 (source: NZX hydro) Mean storage 2000 – 2019 (source: NZX hydro) North Island Mean 1.0 South Island 0.5 Actual 0.8 0.6 0.4 0.4 0.2 0.3 0.0 0.2 -0.2 -0.4 0.1 -0.6 -0.8 0.0 -1.0 Jul Jan Jul Jan Jun Jul Jan Jul Jan Jun 2017 2018 2018 2019 2019 2017 2018 2018 2019 2019
Contact Energy / International Roadshow / October 2019 46 FY19 WHOLESALE PRICES
Monthly wholesale spot electricity prices ($/MWh) Generation weighted (source: Electricity Authority – Wholesale electricity prices) Hydro storage volatility and thermal 300 Min/Max (FY13-19) fuel constraints increased spot prices Mean 250 FY18 200 FY19 While volatile hydrology is a well-known feature of electricity supply in New Zealand, normally 150 reliable gas production significantly constrained 100 generation from thermal assets. 50 The elevated spot price environment has led to 0 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun sharp increases in short-dated forwards (i.e. for contracts maturing less than six months ahead). Electricity forward price curves ($/MWh) Generation weighted (source: Electricity Authority – Wholesale electricity prices) • Short dated market movements are usually 500 predominantly impacted by hydrology. 450 Long-dated 400 Long-dated forward prices ($97/MWh as at July 350 Short-dated 19) have increased by over $21/MWh (28%) in 300 Simple daily average spot price the last year. 250 200 • While gas availability continues to improve, 150 100 thermal costs including gas and carbon 50 input costs have risen. 0 Jul Jan Jul Jan Jun 2017 2018 2018 2019 2019
Contact Energy / International Roadshow / October 2019 47 Appendix FY19 result extracts
48 FY19 RESULTS
345 STATUTORY PROFIT ($m) +56 14 175 24 170 10 166 4
132 56 20 112 110 2
FY18 profit Discontinued Profit on Items FY18 EBITDAF Depreciation Net interest Tax FY19 Items Profit on Discontinued FY19 profit operation continuing excluded underlying and costs underlying excluded continuing operations operations from profit amortisation profit from operations underlying underlying
Contact Energy / International Roadshow / October 2019 49 FY19 RESULTS
WHOLESALE EBITDAF ($m) CUSTOMER EBITDAF ($m) CORPORATE / UNALLOCATED ($m) 67 -9 -2 464 Electricity 24 26 8 10 76 Networks, meters, levies 60 4 397 -14 3 67 1 37 2 1 30 2 FY18 Staff FY19 Price recovery of cost inflation incentives
Electricity gross margin (-$9m)
FY18 Generation Total Trading, FY19 FY18 Price Cost Volume Gas Broadband Opex FY19 costs contracted merchant inflation Gross Gross (including revenue revenue Margin Margin acquired and losses generation)
Contact Energy / International Roadshow / October 2019 50 FY19 RESULTS
Electricity generated or acquired (GWh) Electricity generated or acquired costs ($m)
9,625 +30 Hydro generation was up 752 GWh on FY18 (+21%), which 9,223 634 348 348 was 8% above what would be expected in a mean year. Acquired 519 Geothermal volumes were down 67 GWh (-2%) 318 318 1,504 68 68 • Renewable generation costs are predominantly fixed. Thermal 1,902 Acquired 49 49 Geothermal carbon costs were up $1m. 1 17 Gas storage 15 21 Carbon costs Thermal generation costs were up $8m despite lower generation volumes (-21%) 103 161 4,231 Thermal 153 96 Gas and diesel • Gas and carbon costs up from $60/MWh in FY18 to Hydro 3,479 $74/MWh (-23%)
Electricity and • Fixed costs, led by the new gas storage contract (since 48 48 gas transmission December 18) which was up by $12m (net of other and levies operating costs) on the prior year
Renewable 116 118 Other operating Gas supply restrictions saw risk management costs up by 101 98 costs $19m with acquired generation volume up 22% Geothermal 3,323 3,256 • Acquired generation costs up from $94/MWh in FY18 to Generation Cost Generation Cost $108/MWh (-23%). type type type type FY18 FY19 FY18 FY19
Contact Energy / International Roadshow / October 2019 51 FY19 RESULTS
Contracted revenue ($m)
37 • Fixed price variable volume electricity sales to Customer and C&I customers were 509 GWh lower than FY18 (-$42m), this 737 was partially offset by higher prices (+$12m) to the Customer 700 12 Other net income segment 2 26 Steam sales 25 1,266 GWh +579 GWh • Increased CFD sales to support NZAS, which was up by 104 CFD sales 81 136 $64.2/ MWh +$9.7 / MWh GWh on FY18 contributed to higher long-term CFD electricity sales in FY19 (+$13m). Contact prioritised short term CFD sales (+403 GWh) which were mostly executed to capture favourable short-term pricing (+$35m). 3,376 GWh -357 GWh C&I netback 278 $82.2 / MWh 248 -$0.1 / MWh • Higher pricing was achieved on both long-term CFDs (+$2m) and short-term CFD sales to other generators (+$7m)
• Steam revenue was up by $1m on FY18 on a reduction in volumes but increased tariffs on rising carbon costs with customers not taking the minimum volume under their take-or- pay contracts 3,941 GWh -152 GWh • Other income was up by $10m, predominantly due to Customer sales 314 $79.7 / MWh 314 +$3.2 / MWh improvements made to market trading processes following FY18 market making losses of $2m
FY18 FY19
Contact Energy / International Roadshow / October 2019 52 FY19 RESULTS
TRADING EBITDAF ($m) LONG / SHORT POSITION (GWh) • 266 GWh increase in merchant 973 +60 sales volumes (+$38m). The price received for this “long” generation 74 was up by $53.7/MWh (+$38m) 641 $142.7 / MWh • Strong generation volumes and 14 974 138 risk management saw limited price 63 708 exposure to unhedged spot market $88.9 / MWh -4 0 purchases during higher wholesale -44 -64 price periods Contact managed price separation FY18 FY19 • 8,569 well in the period, as a significant TRADING REVENUE increase in South Island 8,492 generation only increased relative Merchant sales: short-term sales channel 6.7% 6.9% locational losses by 0.2%. available when the spot prices exceed the -$5.2 / MWh -$7.4 / MWh However, higher wholesale prices opportunity cost on Contact generation -8,492 saw absolute LWAP/GWAP up by $20m Pool purchase: short-term opportunistic -8,569 purchases from the spot electricity market -67 ($63.7 / MWh) ($115.8 / MWh) when better value than alternatives (adjusted -2 for volatility and volume) FY18 FY19 Merchant generation Pool purchases LWAP / GWAP losses: locational price Spot sales and buy CFD settlement differences between where electricity is generated and purchased Spot purchases and sell CFD settlement
Contact Energy / International Roadshow / October 2019 53 FY19 RESULTS
Revenue ($m) EBITDAF ($m) -12 -9 Electricity gross margin down by $9m, tariff increases 76 (+$8m) only partially recovered pass-through costs 960 67 4 Other income 1 4 Other income 6 948 34 • Electricity sales volume down 115 GWh (-3%) Broadband 5 Gas 35 7 due to lower customer numbers (-2%) and lower 806 GWh +55 GWh usage per customer, offset by higher gas sales $87.9 / MWh -$2.9 / MWh to SME customers Gas 71 Revenue less network costs +$1.1 / MWh Electricity revenue 452 442 $124.2 / MWh • Customer numbers up by 4,200 ICPs over 2H19 73 less pass-through with new propositions in market. Broadband costs offer attractive with 10,000 new customers
Energy costs higher with unit electricity prices up 3% following a sustained period of higher wholesale -314 -314 prices, carbon costs rising 3,648 GWh -115 GWh Electricity costs -$86.1 / MWh -$2.8 / MWh Other operating expenses down by $1m despite $242.3 / MWh +$2.1 / MWh Electricity 884 accelerated investment in digital, brand and new products Other 863 operating -82 -81 expenses Gas and carbon costs -18 -21 FY18 FY19 FY18 FY19
Contact Energy / International Roadshow / October 2019 54 FY19 RESULTS
Electricity cost and pricing development ($/MWh) Contact electricity retailing | industry headwinds EBIT $m Positioned to capture value +1% CAGR Contact has developed key 245 248 Average tariff 238 241 242 % CAGR strengths with industry 8 6 (12%) -13% EBIT 9 9 10 leading cost to serve and a 34 35 35 flexible IT platform 94 +2% 29 Electricity costs 86 85 86 89 19 Leaving us well 3.8% 3.9% 4.0% 3.3% 2.2% % margin positioned to capture scale efficiencies FY16 FY17 FY18 FY19 FY20(f) Networks, meters 113 116 118 119 120 +2% and levies Pricing + 1% p.a. Intense competition means Depreciation unable to recover rising costs 5 6 6 6 6 4% Operating costs 25 25 22 22 22 (3%) • Network costs +2% p.a. Move to increased scale FY16 FY17 FY18 FY19 FY20(f) and cross-industry • Energy costs +2% p.a. convergence Annual 2,152 2,131 2,122 2,116 2,112 (1%) $/customer • Operating costs -3% p.a.
Key assumptions for FY20(f): » Tariff increases, change in usage per customer in line with history » Corporate operating costs and depreciation 50% allocated to Customer » Operating costs and depreciation allocated by number of customer connections Contact Energy / International Roadshow / October 2019 55 FY19 RESULTS
OTHER OPERATING COST MOVEMENT ($m) Underlying movement Structural and performance Underlying Accelerated investment Learn and 223 movement Improve Delivered $8m of underlying operating cost improvement in line with FY19 target 9 2 $4m from ICT procurement savings 1 5 212 1 1 • Configuration management database 3 10 optimised applications 2 • Rightsizing of application support -8 leveraging internal maturity with systems Target = $8m $3m leaner Wholesale operations FY18 Asset disposals Incentives Net cost savings Investments Digital savings Broadband FY19 $3m reduction in the cost of bad debt
CONTROLLABLE OPEX ($m)
-5%
263 247 243 223 212
FY15 FY16 FY17 FY18 FY19
Contact Energy / International Roadshow / October 2019 56 FY19 RESULTS
Delivering smart customer solutions Geothermal fuelling Additional $2m investment in workovers of geothermal $3m investment in our brand, new product development and wells. R&D and capability continue to reduce costs promotion. Key journeys digitised.
Introduced new payment methods with PrePay and weekly/fortnightly billing to help customers • Delivered 30 GWh p.a. of additional geothermal generation valued at $3m manage their bills p.a. in FY19 • Fewer customers in arrears, customers who would previously have been declined on • Our internationally-recognised, subsurface team continues credit grounds can now be on-boarded to lower the cost of operations significantly – comfortably New Zealand’s lowest cost geothermal operator New products launched to deliver customer choice and innovative rewards including “free-bill”, “promise plan”, “broadband bundle” and “basic plan” with no PPD • This improves the economics of geothermal development at Tauhara Increased digitisation improving NPS and lowering servicing and acquisition costs Average workover costs per well ($m) • 11% reduction in call centre volumes
• 15% increase in web traffic and 7% increase in digital sales 0.81
-28.6% 0.50
0.25 0.20 0.13 0.15
FY14 FY15 FY16 FY17 FY18 FY19
Contact Energy / International Roadshow / October 2019 58 FY19 RESULTS
12 months 12 months Comparison SIB CAPEX ($m) ended ended 30 June against FY18 30 June 2019 2018 128 EBITDAF $518m $481m ↑ $37m Working capital changes ($7m) $7m ↓ ($14m) 102 Tax paid ($47m) ($33m) ↑ ($14m) Interest paid ($65m) ($78m) ↓ $13m 78 SIB Capital ($60m) ($78m) ↑ $18m Non-cash share based compensation $1m $4m $3m ↑ 60 Significant items ($2m) ($1m) ↓ ($1m) Operating free cash flow $341m $301m ↑ $40m Operating free cash flow per share 47.5 cps 42.0 cps ↑ 5.5 cps Proceeds from sale of assets/operations $390m $6m ↑ $384m Free cash flow $731m $307m ↑ $424m » EBITDAF up on strong Wholesale performance FY16 FY17 FY18 FY19 » Working capital changes $14m lower as NZX receivables were higher on strong June merchant sales position » Capital expenditure on continuing operations of $58m in FY19
Contact Energy / International Roadshow / October 2019 59 FY19 RESULTS
OPERATING FREE 341 SOURCES AND USES OF CASH ($m) CASH FLOW – OFCF 301 731 731 ($m) 8 3 Growth investment 44 Investment in associates Cash change 481 518 EBITDAF 390
425 Net debt repayment Working capital changes Share based payments 7 3 -7 4 Shares issued 311 311 6 1 4 Cash interest -78 -65 Net sales proceeds 7 99 341 Cash tax -33 -47 OFCF 301 251 Dividends paid 201 SIB cash capex -78 -60 3 Significant items -2 Sources Uses Sources Uses -1 FY18 Gas sale FY19 FY18 FY19 and repurchase
Contact Energy / International Roadshow / October 2019 60 FY19 RESULTS
CLOSING NET DEBT ($m) BORROWING MATURITIES ($m) NET DEBT TO EBITDAF (x) Face value of borrowings less cash Average tenor of 3.8 years as at 30 June 2019 Includes S&P adjustments (in FY19 AGS was treated as a lease) 312 1,698 3.4 3.2 3.2 1,626 1,539 232 3.1 1,416 25 23 1,445 207 41 38 219 3.1 2.5 2.4 27 50 160 3.1 3.0 968 125 150 2.7 25 107 2.3 1,677 1,608 92 2.1 1,401 1,504 1,410 57 16 150 153 136 990 100 100 88 50 7 70 7 7 7 7 7 14 4 -12 -4 -5 -6 -3 -47 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26- FY28- FY15 FY16 FY17 FY18 FY19 FY20 FY27 FY29 Undrawn bank facilities Domestic NEXI forecast Lease obligations Borrowings Cash on hand Smoothed Snapshot Drawn bank facilities USPP
INTEREST RATE (%) Weighed average interest rate on average net debt • Face value of borrowings net of cash reduced by $464m to $943m following the completion of the asset sales and strong 7.55% operating cash flow which exceeded dividend payments. Net debt has reduced by $730m since the end of FY15. 6.06% Gearing reduced to 28.3% at 30 June 2019, down from 35.4% at 30 June 2018 5.53% 5.25% 5.01% 5.59% • $50m wholesale domestic bond maturity in May 2020, funded through existing facilities
• Weighted average interest rate increased by 58bp on FY18 as more flexible, lower cost floating rate debt was repaid FY14 FY15 FY16 FY17 FY18 FY19 with the asset sales proceeds
1,372 1,425 1,672 1,593 1,506 1,105 • Contact continues to target a credit rating of BBB (net debt / EBITDAF <2.8x)
Average net debt ($m)
Contact Energy / International Roadshow / October 2019 61