Moteur pompe piscine : test – commande – comment choisir – Edited Transcript of CEN.NZ earnings conference call or presentation 9-Aug-20 10:00pm GMT

The customer advocacy or Net Promoter Score, this is a fantastic result given COVID and other challenges around, but that has continued to rise year-on-year. And the resilience of that customer business, I think, given the uncertain future in front of us, becomes a key strategic strength. Combined with that is the incredible employee engagement, which has remained at very strong levels. And of course, which Dorian will talk to, we’re maintaining our dividend payment. We’re keeping our promise that we have made to our shareholders.

Moving on. It’s not just about the bottom line in this day and age. There is a strong move to increased emphasis on sustainability. You’ll see our report is very much aligned to the GRI, the Global Reporting Initiative. And so emissions, you can see there, continue the downward trend, which we’re very proud of. Our percentage renewable generation is 83% and mirrors exactly what almost a New Zealand position is. With the products we now have, we’re actually able to take on far more customers with impaired credit than we were able to do previously while maintaining our bad debt levels. Our diversity is strong both from a gender perspective but also an ethnicity perspective.

And moving to the next slide. In the market, look, it’s best to say it’s flat. Electricity demand hasn’t grown. And this is an important slide about — in terms of setting the context of what is ahead of us given we see significant supply challenges coming up.

Going to the next slide. Natural gas production has recovered after 2 years of impaired deliverability. I have a personal view on that, and that impaired deliverability was due to underinvestment and critical maintenance. And I think that is going to be a challenge for the gas market going forward.

I would invite you to look at that right-hand side, demand of 163 petajoules because that number is going to become very important when setting the context of what Tiwai means for the country and the industry, the energy industry going forward.

If we go to the next slide. Hydrology, an average year. There were high inflows in November and December. We’re slightly down on last year in that we got a lot of water in November and December and, as a result, from a safety perspective, had to spill a bit. But overall, hydrology has been lower than last year but closer to average.

Moving to the next slide. It’s important to go through what influence the wholesale electricity prices because it’s multiple factors. And it’s not just the macroeconomics but all the — also the dynamics that are going on to the market and the volatility that, that introduces. So at the top there, you’ve got the impact of the aluminum smelter with the forecast closure in 2021. And effectively, the aluminum smelter since the start of the Maui gas field has been a means of exporting excess gas through thermal generation that it supported. The other way of exporting gas is through methanol. And obviously, the price for methanol has come down significantly.

There is increasing, obviously, rising carbon costs. There is the impact of COVID-19 on demand. Look, we were obviously delighted the way that demand has held up through the COVID crisis. There’s always question marks given it’s tied to GDP about how that will be sustained into the future. And behind that, there’s also coal with prices. All that adds up to, on the right-hand side, you can see the volatility in the market particularly in the last quarter that’s been introduced. And even with the Tiwai announcement, you see that crushing down and then coming back again.

We move to the next slide and retail. Competition is intense. So despite that wholesale volatility, which I talked about before, customers, the competition in retail is intense. Notwithstanding our acquisition of energyclub customer base at the end of the year, on a year-on-year basis over 2 years, we’re down 2%. The tariff changes, despite that volatility, have effectively been flat year-on-year-on-year. And that to me is indicative of a very healthy retail market as, number one, the customers are protected from that volatility; and number two, you can see a thriving Tier 2 market there behind us despite that volatility. And so the market — the retail competition is good. It’s intense. We’re happy to play hard and play well. We’ll talk about that coming as we go through the presentation about the resilience in that business, but we see a market which is thriving.

We move to the next one, just regulatory matters. Look, you had the UTS decision that came out a couple of months ago — oh, sorry, last month. We were cleared. We couldn’t understand why it was raised initially. We don’t necessarily agree with the EA’s overall finding. The EA doesn’t have responsibility for dam safety. I do and the Board do. And when there is a flood coming down the Clutha, my first obligation is to the communities downstream and to my own staff and to ensure the safety of those structures. And in that regard, I can tell you that the right and prudent way to operate a hydro scheme is to have your generators backed off slightly from maximum and your spill gates open, just slightly more than you need because you don’t actually know what you’re dealing with, whether it’s a 50-year flood or a 100-year flood. And prudence is always the right way to go because at 3:00 in the morning, you want your operators to make the right decision. And I will stand by that position very strongly.

The other one is around market making. We play our role in this, and we’re very strong on this.

Okay. If we move to the next slide. Look, our strategy, we strive — we are striving for a better New Zealand. We are striving both in customer and wholesale to supporting the decarbonization of this market. Decarbonization requires a stable investment environment where people can invest with confidence in new technologies and large-scale capital projects. We will play our role in this.

In terms of our customer business, slide, there are 3 areas that we’re looking at, and we’re playing hard. Technology, and we’re looking to leverage advances in technology. You’ll have seen our app has moved from being middle of the pack to absolutely top-rated app in the New Zealand electricity market. We’re looking at a very lean operating model in terms of our customer experience and the way we operate. And the brand and reputation, you’ll have seen that growing. We have moved beyond electricity and energy. As we sit today, I think we are at 27,000 broadband connections. We can see the stickiness that, that is delivering, and we intend to continue to grow that and explore other adjacencies.

Should we go to the next slide? I’ve probably talked to a number of these already. I will point out that digital self-service interactions are up 450%. And we believe that, that is giving us a distinct advantage in terms of our cost to serve, which all the indications are we’re certainly the lowest in all the Tier 1s.

We see further opportunity from automation. It’s worth pointing out that, that energyclub transaction was a good trial for us and that the transfer was done within a week of all the customers and all their billing with strong support from our robotic applications. It was a good outcome.

Brand. You can see the broadband connections there but also awards which are picking up. And go back to when I started the presentation, we see our NPS, our Net Promoter Score continuing to grow.

In wholesale, 3: thermal, renewable and customer solutions. Thermal, we continue to develop options where thermal plays that support role for decarbonization. We are looking to improve the economic return on our thermal assets, and we’re delighted with the improvement and the uptimes that those thermal assets have delivered in the last couple of years.

Renewable development. There is always a potential to develop Tauhara. We’ll talk about that a bit later. It remains the premier renewable low-carbon development in New Zealand. It is very important to understand that. We are flexible around that. We don’t have to do it straight away, but it is a significant resource.

In customer solutions, you’ll have seen today that we announced the acquisition of 100% of Simply Energy. We’ll stay in the pack — sorry, Matt, you’re a bit out of date, that we’ve got 7 megawatt on Demand Flex product. The last month, that’s — or the last 2 weeks, that’s grown to 9 megawatts contracted on that virtual generator, which is called [C].

Moving on to Tauhara. We’ve completed the $40 million appraisal program. We have 90 megawatts developed under the wellhead ready to go. And there, it’s still a — it supports a 150-megawatt power station development. It’s really for execution when conditions allow, but we certainly won’t be making that decision prematurely.

If we go to the last slide here, COVID-19. Look, I was — as I said when I opened, I was absolutely delighted with the way the company responded. We set up straight away an enterprise-wide program management office to ensure that our CapEx and discretionary OpEx was brought back to the absolute minimum and preparing for tough times. And you can see that in the results that have been delivered on the controllables. Dorian and the team went out and got an additional liquidity of $200 million for 18 months to make sure that we are well protected, and we had good insurance against the credit markets locking up.

We provide support to our employees. We enabled them to work from home. We provided support to the community through our donations to St John’s and Women’s Refuge.

Our credit collection during that time was well managed in accordance with our principles, our Tikanga. And actually, over that period, as I said, NPS actually went up very significantly. The nice thing about it is it showed us a new way of working that we think we can leverage to both increase our customer engagement, to increase our employee engagement and deliver cost savings through accelerated technology investment. And so that transformed way of working, we see as a differentiator of Contact against our competitors going forward. And we intend to adopt that apace.

And at that point, I’ll hand over to Dorian.

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Dorian Kevin Thomas Devers, Contact Energy Limited – CFO [3]

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Thanks, Mike.

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Michael Fuge, Contact Energy Limited – CEO [4]

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Okay.

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Dorian Kevin Thomas Devers, Contact Energy Limited – CFO [5]

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I just wanted to start by summarizing the key themes that are going to come out as we go through the operational and financial review.

The first thing, just to give you a recap on the first half of the year, risk management was a sort of key topic because we had relatively, for us, low levels of contracted and stored natural gas. So our mitigation of choice was reducing our C&I volume down, which you saw in our numbers. That had a detrimental impact on our EBITDAF. Two reasons. Obviously, sell less, you make less money, but also because we weren’t recontracting, therefore repricing C&I, we weren’t able to recover those higher thermal fuel costs.

So in the first half of the year, our EBITDAF was down about $25 million from what you’d normally expect Contact to deliver in a normal first half of the year. If you roll forward to the second half of the year, though, a far stronger position actually built on a better fuel position. And what that meant is in Q4, when we have those high wholesale prices because you had a 1 in 100-year dry sequence in the North Island, we were able to get some length into that. And that supported $230 million of EBITDAF in the second half of the year, which, relative to a normal second half of the year for Contact, is about $4 million shy of where you’d expect it to be. So I’m positioning an adverse spirit as being a good performance. And that’s because it was delivered against the backdrop of the HVDC being constrained to just 400 megawatts for the whole of Q3. And obviously, Mike has mentioned it, COVID and the impact that has to demand, wholesale pricing and just disruption that it caused for everyone. So we’re pleased with our results in the second half of the year.

Feeding into that, I guess, how we’ve reacted to COVID, we are very happy with. You could see, I mean, in the short term, all the business can really do is control the controllables, and you can see that in our numbers. Our stay-in-business CapEx and our OpEx have come down considerably. And that’s all feeding into a strong operating free cash flow for the year of $0.40 per share.

And the other thing, hopefully, it’s certainly given us confidence as a team and hopefully it gives all of the stakeholders here confidence, is our ability to deal with a crisis and execute into that, which obviously becomes very topical when you’re looking at a Tiwai exit and transformational change that will go with that.

Operational performance has been strong. You’ll see when we get into the pack, the — our assets have performed very well, which we’re extremely happy with. And also, our retail business is starting to see a slight improvement in its net price towards the end of the financial year, which is good to see. It’s been a long time coming. And it means we’re starting to recover some of those higher thermal fuel costs and risk management costs that Contact and, in fact, the entire industry has been seeing over the last couple of years.

And then just a sort of a key point to finish off on is just the disclosures around UTS. So Mike talked about the UTS and the preliminary findings. Contact’s been cleared. We haven’t provided for anything. We think as a remedy, if one’s actually required, resetting the price is practically impossible. The ETS related to a 2-week period. All prices have been finalized. We just can’t get our heads around how you don’t unravel that. So we’ve provided for nothing associated with that.

And needless to say, you heard Rio’s announcement on the 9th of July. That’s what we call a post-balance sheet non-adjusting event. So we haven’t changed our financial statements to reflect that, but we have given quite a wholesome subsequent event note, Note E14. I’ve been very focused on the Note E14 over the last couple of weeks. But that overlays what we can see in the marketplace now and what the impact that would have had on our financial statements.

Big health warning with that, though. Obviously, it’s unprecedented times, and therefore, you should take that into account when you’re looking at those numbers.

So on to the financials. The profit for the year after tax, $125 million. That is a reduction on a continuing basis of $45 million on the prior year. And as we did at the half year, we’ve got a waterfall chart that explains the biggest component of that, which is EBITDAF, which is down by $54 million.

Pricing is a big topic because remember, wholesale prices were very high last year because of the Pohokura unplanned gas field outage and the sort of risk that was then built into the wholesale price. That’s a nonrecurring event, and therefore, our pricing has dropped accordingly year-on-year. We’ve also seen geo — hydro volumes down year-on-year. We’d normally replace that by running our thermal kit higher at a higher thermal fuel cost of about $30 million. We haven’t been able to do that this year because of gas availability issues. So instead, we’ve had to flex the amount we sell down.

Also, the gas producers don’t miss a trick. When there’s gas availability issues, they will push up their price. And we’ve seen wholesale gas prices go up as well, which has fed into higher thermal costs, but it’s also fed through into lower retail gas margins because the retail gas price hasn’t aligned to the wholesale gas price. And all of that sort of stuff coupled together under the banner of gas — natural gas availability, it’s worth about $10 million adverse for us year-on-year.

Market making is $10 million adverse. And that’s more about the strong performance we had in FY ’19. And then the final part of EBITDAF was our fixed cost, which is coming $13 million lower year-on-year. And that’s about the response to COVID from an OpEx perspective, but also, we’re seeing lower transmission costs year-on-year, which we’ll talk about a bit later on.

Now just finishing off the rest of the P&L. Depreciation is coming in $15 million higher. Now that represents the accelerated depreciation on TCC, which we announced at the half year, that’s worth $18 million. Interest costs are coming in lower, $15 million. We can’t take credit for all of that. $6 million of that is just capitalized interest on Tauhara. Underlying interest is down by $9 million, and that’s a function of our effective interest rates dropping 50 basis points. And on average, our net debt has dropped by $53 million year-on-year.

We’re seeing lower tax, which is the natural hedge we’ve got at the lower profit. And we’re seeing our significant items go against this $10 million. And that represents the fact that we had the $5 million of profit on the disposal of AGS in the prior year. And this year, we’ve made a $5 million provision associated with the Holiday Act. And I don’t know if you guys have seen the recent metric, last case findings, where the ruling is that even though bonus costs are discretionary, they still have to be paid on holiday pay. So we’re being prudent and aligning to that ruling. We believe it is being appealed, and we’ll stay close to that and adjust our numbers accordingly.

So if we now look at the performance across our 3 segments. The first thing to say, second half of the year performance was strong. Both customer and wholesale were up in the second half of the year relative to the prior corresponding period. Both showed very good cost control across the COVID situation. Wholesale business leveraging that asset footprint, it’s got strong asset footprint. It’s got to get some lev into Q4. And the retail business, like I said, starting to eke out some net price improvement towards the end of the financial year. However, bearing in mind the change in hydro generation year-on-year, the headwinds faced in the first half of the year due to gas availability and just the exceptional performance we saw from a financial perspective in FY ’19, we are still down across both those businesses for the full year.

So now getting into our review of the wholesale business that we normally do. So generation costs have come down by $44 million year-on-year, $30 million reduction in acquired generation cost. We haven’t needed quite so much risk management this year as we needed last year. And also last year, with the high wholesale price, there was a positive spread on the swaption. So we had it called a bit more.

We also are seeing those lower OpEx feeding through into the generation costs here. And the good thing, and Mike mentioned it, our assets have performed exceptionally well. So even though you’re seeing less operating expenditure on them, the uptime and reliability has been fabulous this year, which is great.

Transmission costs are down. One of those is easy to explain. Lower WACC, lower price [powers], which you’ll be familiar with, kicking in from the 1st of April. The other one is a bit more tricky. It’s about rental rebates that we get. So we got $4 million back. That often happens when you’ve got decoupling of prices between the islands. That — so the difference between the sell into the grid and the buy into the grid becomes quite big. It’s used to fund FTRs. The balance left over gets distributed back to the generators. That isn’t upside. It just goes to offset the high location losses that we had when the prices decoupled. And then the other component of our costs is gas storage. We’ve got the full year impact of — now of having not owning gas storage and actually having to pay for it. And that’s $5 million coming through there.

And if you now reflect on the actual performance of our different generation types. Hydro, very interesting year. Our hydro generation was down by 479 gigs, but our actual inflows were up by 290 gigs. So you’re probably asking how that can be. And it’s just about the timing of the water, really wet in the second half of December, really wet in February. The inflows that came through at those points were significantly higher than we had generating capacity to deal with. And as you know, we don’t have huge amounts of lake storage to naturally get more spill. With the HVDC being constrained to 400 megawatts, that means naturally a bit more spill. And we were running our lakes a bit higher in the first half of the year to counter that risk around natural gas availability as well, which leads naturally to a little bit more spill. So still was about 975 gigs for the year, which is considerably higher than the 150-odd that we normally have. The only silver lining actually around the HVDC being constrained was we hit Q4 with relatively high lakes, which then allowed us to release into those high wholesale prices that we saw.

Geothermal volumes, a record for us, 3,333. So really happy with that. Some of that was the fact that we had to defer a statutory maintenance into FY ’21. And so you will see our geothermal volumes drop in FY ’21. We are guiding to that later on in the pack.

Thermal volume, 65 gigs down year-on-year, conserving fuel in the first half of the year. Second half of the year, level 4 lockdown, that means electricity demand across New Zealand dropped. Thermal generation therefore drops as the highest marginal fuel cost generation type. The good thing actually for us during that time is there were some good buying opportunities for gas and the benefit of having gas storage, which we’re able to put that in to our storage facility. And then when we hit Q4 when things sort of reverted more back to normal, we’re able to run all of our thermal assets hard and get some length into those high Q4 prices. And Mike mentioned it, the good thing is all of those thermal assets performed really well. So you know we’ve had — over the last couple of years, we’ve had a — been spending a bit of money on them. We have some downtime whilst we fix them. Really good to see them all running well.

The next slide. Next slide talks about the contracted wholesale revenue, down by $48 million. If you strip out the transfer price increase from wholesale to customer, the left pocket/right pocket stuff, it’s actually $70 million down on a third-party perspective. And this is just all about the fact that we’ve generated less. So less hydro generation, less thermal generation means you’ve got less electricities to sell. So it’s natural that your revenue there is lower. So of that $70 million, $56 million of it relates to lower volume, and you can see that in our C&I numbers. We haven’t seen our pricing change materially year-on-year. And remember, that’s because we weren’t recontracting, therefore repricing. C&I and the other income is down $10 million, and that represents the market making.

You wouldn’t normally expect this level of volatility, but there’s been 3 major events which have impacted the ASX futures over the last 24 months. You obviously had the Pohokura gas field outage in FY ’19. And then this year, you’ve had that decoupling of prices between the islands when the HVDC was constrained. And then obviously, you’ve had COVID-19 and the impact that’s had on ASX futures. So that’s why you’ve got such a big shift year-on-year for us.

The last piece of the wholesale business is about trading. Naturally, that’s dropped down. The EBITDAF dropped by $34 million. And that’s about the fact that FY ’19 wholesale prices were very high because of the risk that was built into that because of the worry about natural gas supply that year on the back of what happened at Poho. The prices on length has dropped from $142 per megawatt hour last year to a more normal level of $104 per megawatt. And that’s what’s causing that material reduction. Actual location losses offset that slightly because if you’ve got lower wholesale prices, your location losses are lower in absolute terms. So that’s a whistle stop to the wholesale business.

On to the customer business, we’ve kept the same format of slide that we used at the half year, gives you clarity on the breakdown of our revenue between the cash costs and the accounting topics. I think it’s important. You’ve got that as a reference. As I said at the half year, I use analysis like this. And if I didn’t have an analysis like this, I wouldn’t be able to understand how the business was performing, so I think it’s important you get it.

I’ll keep it more high level and just talk about the EBITDAF, which is down by $17 million. Biggest component of that is pricing not aligning to energy cost inflation. You can see that in terms of natural gas costs have gone up by $6 million, but the revenue has only gone up by $2 million. And actually, we think what’s happening here is, while the retail prices hasn’t — haven’t changed, and we think what’s happening here, it’s the vertically integrated nature of some of the participants. So they are pricing — potentially pricing off a different cost base to the players that aren’t vertically integrated like us and therefore sacrificing some return upstream to keep the same return downstream. So there’s a bit of a structural issue there potentially.

In terms of electricity, a couple of wholesale — a couple of headwinds we’re having to deal with this year. There wasn’t much in terms of electricity price increases put through in FY ’19, meaning you don’t get much in terms of flow-through. And that was quite deliberate. We thought it wise to wait and see and what we could learn from the output of the electricity pricing review. One of the things we did learn was the recommendation to get rid of prompt payment discounts, and we’ve duly started to phase that out. And you can see on the slide that the value of the prompt payment discount not taken has come down by $2 million year-on-year. So that’s causing a bit of a headwind for us.

What we have actually done in FY ’20 has been really positive. Half of our customers have received a price increase, which is what you’d expect based on the contracted nature of customers in the retail space, and you are starting to see those network cost reductions flow through into the number.

And I stick by what I said at the half year, if you pretend Tiwai hadn’t announced that they were leaving, was that we’ve just sort of CPI-type tariff increases over the medium to short term, we should be able to recover those higher thermal fuel costs and therefore buffer our customers, our retail customers from that volatility in the wholesale price, which is what they want. They want that certainty. Obviously, now with the most recent announcement from Rio about Tiwai, we need to see what impact that’s going to have on the retail market.

In terms of our broadband business, I mean, Mike mentioned that, great performance there. We’ve gone from 12,000 connections up to 26,000 connections in a year, which is great. Still — we’re still suboptimal in that regard and making a small loss. One of the things that will help in terms of profitability, we have changed our fulfillment provider, who’s got very transparent end-to-end processes, which we actually think will make it easier for our call center staff to deal with customer queries. And therefore, we should be more efficient running that going forward. We’ve also got some very nice volume breaks in that contract as well, which incentivizes us to grow that business quickly. So we’d expect to be breakeven from an EBITDAF perspective by FY ’22 on that product. But in the meantime, we continue to get the value of the bundle and the lower churn that we’ve previously talked about.

Last topic is about OpEx. Customer business has done a great job regarding that, $2 million of OpEx reduction. And that’s a headline. Remember, they’ve had some headwinds because we’ve had higher bad debt costs due to COVID-19, and they also got that higher OpEx investing in broadband. And we are convinced we’ve got the lowest cost to serve of all the Tier 1s in the industry. When we do our benchmarking for FY ’19, we’re coming at about $165 per ICP per year. And you can see that’s going to come down in FY ’20 borrowing because OpEx has come down, and we’ve got more ICPs. When we look at the rest of the pack, we calculate there are about $185 to $240. So there’s clear daylight between us and everyone else.

And whilst I talk about that is — there’s a lot of focus on pricing, which isn’t really a differentiator. Anyone can change their pricing. What is a differentiator and will be difficult to copy is having the lowest cost to serve. And that will drive value for us into the longer term.

That segue is quite neatly on to OpEx for Contact in total, down from $212 million to $196 million. So it’s good to see we’ve continued that trajectory ever since FY ’16 of getting it down every year. On average, it’s coming down by about 6% in nominal terms, which is 8%, remember, in around — in real terms if you assume inflation a couple of percent. We’ve continued to be quite transparent about what’s driving it down. So some of it you get for free, reductions due to portfolio changes. There’s an element of the financial performance is lower. Therefore, bonus costs are lower. There’s a couple of million dollars of reduction due to COVID, which is onetime in nature. So that will flip back in, in FY ’21. And that’s things like when you’re in a level 4 lockdown, it didn’t seem appropriate to keep all guns going in terms of marketing and promotion and all that sort of stuff, so we flex that down. Clearly, travel drops down. And whilst we did all critical essential maintenance, some maintenance had to be deferred.

What you can see on the chart is the $6 million of underlying cost savings offset by a bit of inflation. I call those high-quality cost savings because they’re the ones that I can sit down with the people in the business, actually trace the value of those through the P&L into the cash flow. So I know they’ve been delivered. And then you’ve got a bit of on cost there around investment in broadband. And as I said earlier, that’s going to get more efficient going forward based on that new fulfillment provider.

The next slide is our famous reconciliation to the $480 million of expected and normalized EBITDAF. Again, let’s park Tiwai for 1 second and pretend that announcement hadn’t happened. We are absolutely comfortable that, that is the right level that we would have repriced thermal fuel costs. And you can actually see OpEx is coming and transmission costs are actually coming in lower than that, giving us a little bit of a buffer. However, the world has moved on, and Tiwai and Rio have announced that they are leaving. So in that situation, the market structure will change significantly, and the $480 million won’t be relevant for us anymore, unfortunately.

In terms of cash flow, $290 million of operating free cash flow, which is $0.40 per share. We see that as a very strong performance. We always look at actually our cash conversion. So how does EBITDAF convert to operating free cash flow? And it’s 64%, which is roughly what it’s been over the last couple of years for us.

Now one thing that might surprise you, it certainly surprises us when we do our benchmarking analysis. Again, that’s the best in class for the Tier 1. It shouldn’t be because we’ve got thermal assets, which generally have higher stay-in-business CapEx. So 100% renewable generators should have a better cash conversion than us. And as we are largely capital market people in the room and on the call, yes, I’d expect that we all realize that it’s cash flows that drive dividends and share price is not EBITDAF. So just putting that out there as to are we getting the appropriate credit for our outstanding cash conversion, which isn’t a onetime. It’s been like that for a few years now.

Balance sheet. Now balance sheet is really important. When you’re going into a period of uncertainty and with the Tiwai announcement, that’s definitely having — where we say we are, having a robust and relatively strong balance sheet is critical, and we feel we’ve got that. One other point to point out is we don’t have any hybrids on our balance sheet as well, which is another option in terms of providing more balance sheet flexibility for us and protecting our S&P credit rating.

I talked about interest costs being lower, 50 basis points. That’s driven by the fact that as we roll off some of the — our legacy fixed interest rate swaps, we’re then letting that flow into the variable interest environment, which is really favorable at the moment. We’ve seen the BKBM 3-month drop from 200 basis points in 2018 down to just 30 basis points now. And whilst our credit swaps did widen quite a bit, as did everyone’s during the height of COVID, they’ve actually come back now to almost pre-COVID levels. So actually, the interest environment is looking really nice. It would have been a great environment to have built Tauhara in. Hopefully, it still will be at some point when the market tells us. So a relatively strong balance sheet, and you’ll see the interest rates continue to fall based on what I’ve just said.

You can see our net debt to EBITDAF at 2.4 is well within that sort of limit of 2.8 that we set ourselves to maintain our BBB rating with S&P. We’ve got a bit of refinancing to do. $70 million of USPP matures. Actually, we don’t refinance that. We’ve got enough facilities in place already. And you can see our bank maturities in FY ’22 do look big, but that’s that $200 million of syndicated facility that we took out at the height of COVID. Actually, it wasn’t so much to protect us because we’re worried about ourselves. We’re actually just worried about the debt capital markets continuing to function and therefore wanted to give ourselves an extra layer of insurance just in case that actually turned out. And luckily, it hasn’t.

A couple of ESG-type things to mention here. We’re the first company in New Zealand to do a sustainability-linked loan. We’ve done that with Westpac. And therefore, our interest rate on that loan shifts up and down based on the results by RobecoSAM. So they — and also, we’ve just joined the Nasdaq Sustainability Bond Network (sic) [Nasdaq Sustainable Bond Network]. I don’t often post on LinkedIn, but I posted this because of the big picture of Contact on Times Square. So it’s not usual for that to happen. And it’s a great network based on connecting ESG investors and ESG issuers. So another first for New Zealand there.

I guess the last slide is just to reconfirm what Mike said around the dividend. Dividend — full dividend for FY ’20, $0.39, keeping our promise that we’ve made to the capital markets and because Tiwai events happened post-FY ’20, and therefore, we align to what happened before. And I think that’s important. We want the capital markets to know that when we make a promise, we can deliver on it. So we take our time to work out what those promises are going to be. The final dividend therefore is $0.23, and it’s imputed by $0.15. And you can see the details a bit on the slide.

I’ll hand back to Mike.

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Michael Fuge, Contact Energy Limited – CEO [6]

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Okay. Now for the interesting bit. So let’s go straight to the next slide. And our base assumption is what is being announced to market. 31st of August 2021, smelter closes. It is a disorderly exit. And that, combined with the economic uncertainty that’s been created by COVID, I think it’s fair to say that the market is looking at a black swan event.

From this part of the presentation, which Dorian and I are going to give you, I want you to take away 3 things. One is the market structure is going to fundamentally change. That is inevitable, yes? That does not mean the market design is not appropriate and designed to take us through that, but it means that there will be disruption, and there will be winners and losers.

In that, baseload in flexible thermal generation will be profoundly challenged. As well, wind generation, particularly in the central and not lower North Island, where we see the basis for us moving from $5 to $10 a megawatt hour to something more akin to $40 to $50 a megawatt hour. And we have good international analogies for that, whether you take what happened in Germany, what is happening in Australia now with overinvestment in solar or indeed what happened in the Chilean market in the same network where there was overinvestment in solar and prices for significant periods either went negative or to 0.

The third thing which I want you to take away from this part of the presentation is Contact Energy, with its portfolio and its retail business in good shape, is well positioned to come through this period of market disruption in a much stronger position. That being said, as the slide says, it is a disorderly exit. It is going to impact multiple stakeholders. It is going to reduce return on thermal assets and lower natural gas demand. Between the smelter closing, the refinery changing its modus operandi, New Zealand still changing its modus operandi and over 1 terawatt hour of wind coming into market, we see a very much 7 terawatt hours potentially floating around the North Island with no place to go within the next 2 years. That equates to 60 petajoules of gas on an average conversion factor, which if you take a market, which I said before, 163 petajoules, that is a big number, yes, which will have an impact.

We do see a strong impact on Southland, the Taranaki economies with a loss of regional jobs. We do see carbon leakage from a low-carbon aluminum to aluminum smelters overseas supported 100% by coal generation. We do see inefficient capital investment decisions, which are happening and already have happened. And we do see the government losing tax revenue.

For the communities, it’s tough. There’s large closing costs with uncertain remediation time lines. The infrastructure and supply chain to support and cope with the transition, you’ve obviously seen the Transpower announcement, but we’re all scrambling to make that up. And you can see the impact on the communities in terms of retooling and reskilling. That takes time and investment, which the base scenario at the moment is we have neither of those in place.

So we do need joined-up thinking. It does require that everyone understands the risk to everyone of a disorderly exit. We do need a competitive short-term electricity contract to be negotiated to facilitate a staged exit. We think it’s 5 years as the ideal time frame. And you’ll have seen Meridian’s commentary on that earlier this morning into the market.

Fair transmission pricing is an absolute necessity. And the fact that it’s taken over a decade to get this sorted is a black mark on the industry and the regulator. And we do need to work with the Southland community to understand what does this mean for a just transition.

And with that, I’ll get — hand over to Dorian to take you through what this means in detail.

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Dorian Kevin Thomas Devers, Contact Energy Limited – CFO [7]

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Yes. So I just wanted to start by just talking about what we know. So 572 baseload demand will disappear out the market if Tiwai exits and obviously causing a supply and demand imbalance. Now for us, that means in the lower South Island, until the lower South Island transmission upgrade happens, we will have 600 gigs per year of spill. But the good news about that is you saw the announcement from Transpower last week. That’s going to be completed at the latest by May 2022. So that actually means for Contact, we only have 600 gigs per year of spill for just 9 months. We don’t expect to spill at the HVDC.

If we then look at the HVDC, and I — really, I think, have said this as well, over the course of a year, on average, actually only 275 megawatts of the capacity on the HVDC is actually used, and it can be run up to 900 safely. So the HVDC can actually accommodate all of the Tiwai volume especially if lakes are managed appropriately. So the actual bottleneck or the uncertainty is North Island demand net of North Island must-run generation. And I’ve got a slide here just to sort of take you through some of the causes of that uncertainty.

So clearly, the weather as always plays an important role. Hydrology on the North Island, if it’s wet, they’re going to need less from the HVDC. If it’s dry, they’re going to need more. But also, is it cold? Is it mild? That’s going to impact seasonal peak demand. It’s going to impact daily peak demand.

The wind is going to play more of an important part. If it’s windy, they’re going to need less. One of our frustrations, you can probably hear us, is coming out, as we’re talking, is the fact that there is $1 billion being spent on wind farms in the North Island at the moment that just aren’t needed and potentially block water coming across the HVDC. So that increases the uncertainty because of the increased wind in the North Island.

The other component is take-or-pay gas contracts because you’ve got — when you’ve got — and very rapidly, you’re going to have 4 to 5 terawatt hours in a mean year of water heading across the HVDC. There’s no requirement for baseload thermal. And we’ll talk a bit about that in the next few slides. So if you’ve got no requirement for baseload thermal, what happens to take-or-pay gas contracts? You’ve got the M&M field, which I think is — has got some flexibility within it, and also Todd’s have got gas storage available to them. So you can sort of see that, that might be to work its way out. One of the fields that we worry about is Kupe because that field doesn’t appear to be flexible. You’ve got 26 PJs of gas coming off that field whether you like it or not, and the offtaker doesn’t have access to gas storage.

So what happens to all of that gas? To us, the only solution is Methanex, but the issue is methanol prices at the moment, when you do a netback, they can only pay $3 a gigajoule for that gas. And you saw BP’s announcement. They say oil prices, between now and 2050, are going to average $55. So I don’t think you’re going to see oil or methanol prices improving anytime soon. So in that part, that uncertain topic, we think Methanex hold all the cards.

Next slide just talks about how much thermal generation is actually needed in the North Island. At the moment, in a mean year, 5.6 terawatt hours of thermal generation is required. As soon as Tiwai leaves, you get 3.2 terawatt hours of additional water coming across the HVDC. And then just 9 months later, when the lower South Island upgrade is completed, you get another 1.2 going across the HVDC in a mean year. So at that point, which is just 9 months after Tiwai leaves, you actually only got a requirement for 1.2 terawatt hours of thermal generation in the North Island in a mean year, which is actually a relatively low level of generation required, which is why our view is it’s going to be flexible thermal assets that are going to win the day. There’s no need for baseload thermal anymore. And I guess — and we have another slide to sort of take you through that.

On the right-hand side of the slide, we’ve got a chart, which is a demand duration curve. And then what we’ve done there is we’ve actually overlaid North Island generating capacity in merit order, with the cheapest must-run stuff at the bottom and then the most expensive inflexible stuff at the top. And if you look at the demand curve, in the — on the right-hand side, when demand’s at its lowest, you can see, at some points, it cuts across that 900 megawatts of energy that’s available from the HVDC. And it’s at those low demand points, probably when there’s a bit of wind blowing, that you get the spill on the HVDC. We calculate that’s about 600 gigs a year, and I think a lot of other commentators have calculated the same number.

Then when it gets really interesting, you follow the demand curve up, it actually only hits a point where thermal generating capacity is needed in 5% of the time when the demand is highest. So you look at that, and you go, well, it’s only thermal generation that’s actually only going to be needed on the North Island 5% of the time. And more importantly, thermal fuel is only going to be needed 5% of the time. So what are people going to do with their thermal fuel, the other 95% of the time? And that’s why we come to the conclusion, gas storage becomes incredibly important. We think coal has got an important part to play because it’s obviously stored energy as well.

And that then feeds into things like the volatility that we’ve talked about because if your thermal assets are only being dispatched 5% of the time, you’ve got to recover all of those fixed costs in a very short time period. But also because there’s less requirement from gas, it means I suspect there’ll be less investment going into those fields as well. And therefore, the reliability of the fields may not be as good as what we’ve seen historically. And again, that gets priced up into the volatility of the wholesale prices, too.

On the left-hand side, we’ve got a capacity margin slide, which shows Transpower’s view of capacity margins at the moment is 1,100 megawatts, I think, that said, which is well above what they consider a safety minimum, which is the yellow line on the chart, which is about 700 megawatts. And if you work through what’s happening, the Meridian talking about batteries, we’re looking at batteries, you could get a couple of hundred megawatts of batteries added. We’re looking at Demand Flex. We’ve already got 9 megawatts of Demand Flex. So this is where the — our customers offer up their demand as reserves. We are confident we could grow that quite easily to 50 megawatts. And then you’ve got additional capacity that’s already in the pipeline being commissioned at the moment like those wind projects.

The balancing number is you can take out both combined-cycle gas-generating turbines. You can take that capacity out of the market and still be in line with Transpower’s minimum capacity margins. So I think that sort of backs up the analysis and what we’re saying around why we think there’s no need for baseload thermal anymore.

The next one is just a — our view on the merit order of thermal in the North Island. We’ve talked about this largely, so I won’t go through it in detail. But what I will say about TCC because based on what I’ve just said, the market doesn’t need TCC. But TCC does have access to flexible thermal fuel through gas storage, and we do still have 2.5 hours — 2.5 years of operating hours on that plant going forward. So although the market might not need it, we may keep it going for a bit to see if there’s any tactical advantage for Contact in actually keeping it there.

Back to you with this one.

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Michael Fuge, Contact Energy Limited – CEO [8]

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Yes. And just to build on that context, strength and mitigations, is that flexibility in the portfolio, if you think about TCC alone, we can keep it going. We run it or we run it over winter or we can put it into cold storage or we can retire it. And we will make that decision to make sure that we do it in the best interest of our shareholders.

In terms of other mitigations and strengths that we have, look, our short-term position has limited price exposure with fixed-price sales contracts. We have unique expertise to drive to carbonization and that Demand Flex product. Remember, a year ago, that was 0. It’s gone to 5, at the time of writing the annual report at 7. Today, it’s 9 megawatts. So it’s growing. There’s the deals we’ve done on Dairy conversion electrification, and we’ve increased our shareholding in Simply Energy. So that innovation on the demand side and James’ new role, you will see that play hard going into the future.

We have a strong customer proposition. You’ve seen that in both the cost to serve. You’ve seen that with the rapidity at which we have grown broadband. And the way we have pivoted as we have learned through that experience to a new deployment provider. The broadband bundle is valued by our customers, and we do see lower churn rates.

As I said, we’ve talked about the flexibility we have around our thermal position and our generation unit there. We have good uptimes. We have storage. We have 3 peakers that can play into that volatility and play hard.

The portfolio is flexible. We have the North Island reserves to increase the HVDC flow. That virtual peaker is a key part of that, and we’re also looking actively at battery investment so we can pool — we can increase the amount of pool of electricity coming across the HVDC.

The low-cost renewable assets, Dorian talked to that. We have some of the best-in-class cost structure per megawatt hour, including our geothermal. And we have flexibility on both the development program and the renewal program going forward on Wairakei and the geothermal fields around that.

And look, most important of all, we’ve got a track record of delivering operational cost improvement year-on-year-on-year, and we will continue to do that. There are stormy times ahead of this company and — but — for the whole market. But you can rest assured that we believe we are best placed to navigate through those choppy waters as they come on hither.

If we go to the next slide. The value of flexibility will increase post-Tiwai. We’ve got storage in Hawea. We’ve got the contract, and we’ve got our gas facility, the contract and the gas peakers, which means we can go from 0 to 200 megawatt hours in a very short period of time. We’ve got the peaker plant at Whirinaki. And as I said, we’ve got — the number there is wrong, the virtual generator. We’re at 9 megawatt hours.

Hold it back. Go back one. There you go. And we’re looking at investment in North Island battery because we can see 50,100 megawatts would add incredible value of being able to provide reserves to pull more electricity to flow north.

Behind all that, if we go to the next slide, the team are forming up a transformation program. You can see its foundations there will be based around the operating model. We believe there are significant gains in the way we do contract and procurement going forward. Operational excellence is already delivered for us in the high uptimes you’ve seen in the last year, but we see further gains to be made. And COVID has added transformed ways of working where we think we can materially lower the cost of offices and the way we do business as well as improving the productivity of our staff.

Above that, that leads to an increased focus on decarbonization and creating new demand, both through electrification of industrial process heat but also production of industrial hydrogen and optimizing the way we do our sales with the new purchase of Simply.

Simply Energy, deal’s done and — or will be done.

The investment in digital transformation, you’ve already seen the benefits there and the take-up of our app and the — maintaining that optionality around generation development. So at the right time, be it in 3 months or be it in 3 years or be it in 5 years, we will make decisions around when to deploy the best renewable development options which exist in the New Zealand market today. That very much will form how our transformation goes forward.

Our priority areas. Obviously, moving, if we can, to an orderly exit of New Zealand aluminum smelters. Sailing through carefully the market volatility, that is inevitable. Delivering value, we’re controlling our cost inputs as much as we are able and implementing the mitigations for the exit of New Zealand aluminum smelters. Whether it’s 1 year or 5 years, it’s clear the smelter is going to close in all of New Zealand. And we have to be prepared for that day, and we will be working hard to do that.

We’re looking to capture scale efficiencies in the customer business. That is the benefit of having such a rapidly growing broadband position as we have the platform to leverage across that. And we are looking at low-capital options for the extension of the Wairakei field when the consent expires in 2026. So we have flexibility around that.

And on decarbonization, look, it’s getting alongside the customers and partnering with them about how we decarbonize — do decarbonize. And the Demand Flex product is a key illustration of what is possible in that space.

Now going to the next slide. The uncertainty means that the distribution policy has to be under review, yes? It would be dishonest if we said, hey, here is certainty around how we’re going to do dividends going forward given the uncertainty of the market because we have a base case, Rio exits August next year. As we pointed out to you, that’s going to be a very interesting time if it materializes. If it ends up being extended for a period, that changes the game materially as well. So it’s predicated on a stable environment. That’s no longer appropriate. We will — we have to get an idea of what our forward expected earnings will be. We have to get an idea around what our forward-looking stay-in-business capital will be, which will depend on the decisions around thermal assets. We will maintain our balanced strength under all circumstances. The framework principles are unchanged because we believe that a disciplined management and appropriate management of cash flows is absolutely vital to get through this period and to maximize returns for shareholders.

So as soon as we are able, we’ll provide the guidance to shareholders, which will depend on the NZAS exit time line, shorter-term impacts on market pricing, capital risk management, how we maintain that balance sheet and the value and cost of those mitigations, which we’re going to have to implement.

Look, it’s a tough message in uncertain times, but I would come back to the resilience of the company as it stands today and the fact we’re prepared for those tough times. We have a strong record on operating costs. You can see a guidance we gave last year, $200 million to $205 million, we came in under. Stay-in-business CapEx, we gave guidance of $55 million to $60 million. $51 million, we came in under. Our total cash spend was well under. Depreciation, we were within guidance. Net interest, again, we came at the bottom end. Cash interest, again, we came below. We delivered on our promise on dividend, absolutely. And you can see those geothermal volumes with the year-on-year improvement in operational excellence as those have gone up. We’ve given you guidance on all those numbers that there is continued improvement except for the geothermal volumes where we have a shutdown program to deliver. But we’re looking forward to the team under Jacqui delivering improvement upon that if we possibly can.

And on that, I am open for questions as is Dorian.

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Questions and Answers

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Matthew Forbes, Contact Energy Limited – IR Manager [1]

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Excellent. Thank you very much, Mike, and thanks, Dorian. We might start with questions in the room first up.

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Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division – Director & Senior Analyst of New Zealand Equities [2]

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Yes indeed, interesting times. And you’ve got a super number (inaudible) First question, I guess, from me was, you talked about the 5-year staged exit as being your period of solutioning. Why 5 years versus, say, 2 years? Because that’s where you get past the last [stockpile]? What’s the advantage of going a little bit longer?

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Michael Fuge, Contact Energy Limited – CEO [3]

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Because quite frankly, despite everyone talking a good game, the practical implementation of capital-intensive alternative uses of the energy will take between 2 and 4 years to implement. It’s a simple — it’s simply about the capability within New Zealand to formulate, develop and execute those replacement — the process heat replacements, industrial hydrogen. And so for any major capital-intensive project, it takes time to get all the stakeholders across the line. And so 5 years we see as optimal.

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Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division – Director & Senior Analyst of New Zealand Equities [4]

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And second question related, following the Transpower announcement last week, I’m assuming you guys are supporting Meridian and the state gets a new offer. Is that offer going to change given the Transpower announcement last week and given the position you have in [the Board]?

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Michael Fuge, Contact Energy Limited – CEO [5]

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No. I mean it’s — we regard it as it’s mitigation upon mitigation. It would complicate things too much.

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Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division – Director & Senior Analyst of New Zealand Equities [6]

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Yes, yes. Next question is just around, I guess, the thermal outlook. And commenting, I guess, just looking at 100-megawatt battery for yourself, and obviously, Rio’s already talked about that as well. I’m assuming a gas peaker is something that you haven’t — what you — it’s not your preference because of uncertainty around gas in essence long term even though you did have the storage facilities.

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Dorian Kevin Thomas Devers, Contact Energy Limited – CFO [7]

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Yes.

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Michael Fuge, Contact Energy Limited – CEO [8]

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We’re looking at all options. And it would be we — obviously, we’re looking at battery technology because that — the beauty of that is you can put it where you want. That doesn’t mean we’re precluding gas peakers.

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Dorian Kevin Thomas Devers, Contact Energy Limited – CFO [9]

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There’s also the uncertainty around Onslow because obviously, the big battery that is Onslow that’s being talked about as well needs to be taken into consideration when you’re making those types of decisions as well. Yes.

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Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division – Director & Senior Analyst of New Zealand Equities [10]

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Next question I just had, I guess, was on the retail side of things. And if you guys had closed TCC in due course, I mean then it does change your sort of business proposition, adds up to your retail load. What was your sort of current thinking, I guess, around how you might shape that retail book sort of medium term?

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Michael Fuge, Contact Energy Limited – CEO [11]

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We’d take that decision at the time. Obviously, that’s also dependent on the whole — it depends again what’s happening on Tiwai. It depends what’s coming across the HVDC. It depends on the wholesale — long-term wholesale contracts that you’re then able to put in place, which would be a natural outcome of the closure of TCC. So we’ll take that decision at the time.

It’s also a function of the Tiwai replacement options around process heat conversion and the like and the degree to which those get off the ground.

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Dorian Kevin Thomas Devers, Contact Energy Limited – CFO [12]

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And we see this as being one of our strengths, that we have flexible thermal capacity that we’ll be able to cover our positions. So therefore, it protects us when — the volatility that we’ve talked about happened in the North Island pricing. And then other times, when the pricing is quite low, then we might not run those assets and therefore just buy — keep it a short buy for the grid. We have that flexibility. I think the most important thing is making sure, to your point, that you have coverage of your position from flexible thermal assets. And we really do have strength in that area, which we’ve outlined in — today in the presentation.

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Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division – Director & Senior Analyst of New Zealand Equities [13]

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Okay. And last sort of couple of questions just around the dividend. One is just really walking back, just following back on the FY ’20 dividend, just given the uncertainty and given you’d want to preserve a little bit of cash for the next 2 to 3 years.

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Michael Fuge, Contact Energy Limited – CEO [14]

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I think it’s fair to say, given what an unusual year 2020 has already transpired, that every possible option was actively considered by both the executive and by the Board. And I think what we arrived at was it’s very much justified by the cash flow. And at the end of the day, that was the telling factor.

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Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division – Director & Senior Analyst of New Zealand Equities [15]

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And in terms of when you’re going to be able to provide FY ’21 guidance, what was the key thing here? Is it the smelter making the call on whether it closes in 1 year or 3 or 4 or 5 years? Or I guess is it you, I guess, undertaking the analysis? Because I guess we do have a worst-case scenario that you could actually provide us some sort of benchmark against and then being better than that [I guess is an upside surprise].

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Michael Fuge, Contact Energy Limited – CEO [16]

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I think the finalization of the smelter decision is obviously the key, but it’s also potential other mitigations that you’re able to get in place. So what my undertaking is we’ll get that done as soon as we possibly can and get it back to market. Yes, Dorian, next.

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Dorian Kevin Thomas Devers, Contact Energy Limited – CFO [17]

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Yes. I mean that’s exactly right. I mean that’s the key thing. You’ll find out at the appropriate time, but we know how important certainty is to the market, so we will do it as quickly as possible. I mean the sort of things that we’re considering is going into an uncertain environment, what sort of — what’s prudent from a capital management perspective, we need to understand that. We have a whole list of mitigations that we’re considering. Some of them require investment, so we actually need to understand that. We don’t understand actually what’s going to happen from pricing in the short term. Obviously, a lot of the customers are all contracted up with fixed contracts and things like that. But we don’t know what’s going to happen with other players in the market and how they’re going to act. So we need to start thinking about that and seeing how that plays into this as well. So all — and as Mike says, we don’t know when Tiwai are going to go either, which is — and we’d hope to get more clarity on that sooner rather than later.

So those are all the things that are sort of playing into this. Plus, and this was the key thing about doing the $0.39, we made a promise, and we wanted to deliver on that to the capital markets. And we do want that to be a key thing for Contact. It has been for the last couple of years at least. And we want it to be that going forward, that when we make a promise, and dividend is obviously a key one, we want to make sure we can definitely deliver on that.

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Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division – Director & Senior Analyst of New Zealand Equities [18]

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Yes. Okay. So I think reasonably hopeful that we before the net (inaudible).

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Dorian Kevin Thomas Devers, Contact Energy Limited – CFO [19]

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It’ll be as soon as appropriate and as quickly as possible. Thanks, Andrew.

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Matthew Forbes, Contact Energy Limited – IR Manager [20]

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We might go to the lines. We’ve got Grant Swanepoel from Jarden. Grant?

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Grant Swanepoel, Jarden Limited, Research Division – Research Analyst [21]

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Can you hear me?

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Matthew Forbes, Contact Energy Limited – IR Manager [22]

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Yes.

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Michael Fuge, Contact Energy Limited – CEO [23]

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Yes, we can.

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Grant Swanepoel, Jarden Limited, Research Division – Research Analyst [24]

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Fantastic. First question, if this extension, I know it’s hard to talk about the actual — what you guys are contributing towards that deal. But would you guys be supportive of a deal that Rio requires an option to continue post that extension, so you have no certainty that they’re going to go?

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Michael Fuge, Contact Energy Limited – CEO [25]

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Look, I — that would be speculation. I think what New Zealand has to prepare for, and that’s great to see the Transpower response, is that we all have to operate on the assumption that they will go. And I think what’s also emergent is that there are opportunities as we decarbonize in the longer term for process heat conversion and the like.

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Grant Swanepoel, Jarden Limited, Research Division – Research Analyst [26]

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Mike, I’m looking for a deal/no deal-type answer in terms of if they came back and they said, « Yes, I want 3 years, but then I want to have an option to extend for a further 3 years, » I’m saying is that something you guys would find palatable or if you actually want to be able to react to a Tiwai exit now?

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Michael Fuge, Contact Energy Limited – CEO [27]

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Look, I think the right assumption is that we want to be able to react to an orderly Tiwai exit. That we see is the best outcome for us at the moment that we go into this transition.

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Dorian Kevin Thomas Devers, Contact Energy Limited – CFO [28]

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Yes. We haven’t been [afraid of that] if you think about…

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Michael Fuge, Contact Energy Limited – CEO [29]

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They haven’t asked us, so it’s speculation to answer that.

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Dorian Kevin Thomas Devers, Contact Energy Limited – CFO [30]

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Yes. But obviously, if — anything that comes to us, obviously, we’ll give it due care and attention. And then obviously, some formula will be there.

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Grant Swanepoel, Jarden Limited, Research Division – Research Analyst [31]

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Staying on that trend, if you do get a 3- to 4-year extension, would you guys consider going with a Tauhara commitment early because if you don’t, the others are just going to jump in ahead of the queue and Tauhara gets deferred indefinitely?

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Michael Fuge, Contact Energy Limited – CEO [32]

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I think the best comment that we have on that is there is 90 megawatts of steam underneath the wellhead developed and ready to go. And we will make the decision on Tauhara as soon as market conditions indicate that it’s favorable to do so. We won’t be idle, but we won’t be premature.

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Dorian Kevin Thomas Devers, Contact Energy Limited – CFO [33]

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Yes. We’re very mindful of that comment, though, Grant, that you just made.

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Grant Swanepoel, Jarden Limited, Research Division – Research Analyst [34]

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And then in terms of that comment, your balance sheet probably wouldn’t be able to handle it at the trough for a couple of years. Would you guys consider an equity raise at that point? Or is that something you would see as you wouldn’t be wanting to go in that direction?

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Michael Fuge, Contact Energy Limited – CEO [35]

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It’s fair to say, Dorian, given the last few months and given the disruption is looking at all options around capital raisings.

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Dorian Kevin Thomas Devers, Contact Energy Limited – CFO [36]

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Yes.

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Michael Fuge, Contact Energy Limited – CEO [37]

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And obviously, as we go through the scenario planning, we — what scenarios eventuate, 1, 3 or 5, development investment, all options are on the table.

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Dorian Kevin Thomas Devers, Contact Energy Limited – CFO [38]

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Yes. Your comment is right, though, Grant. And things like we — I mentioned when I was talking about the balance sheet, we don’t have any hybrids, which others do have. That’s another proposition around maintaining balance sheet capacity and your credit rating if your EBITDAF drops.

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Grant Swanepoel, Jarden Limited, Research Division – Research Analyst [39]

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And then on your dividend reset, I know it’s hard to talk about it, but is the Board thinking about trying to set a dividend that is sustainable through the cycle as opposed to one that pays a fair cash flow number in FY ’21, so when you do set, you set with — it in mind for 3 years out as opposed to this year only?

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Dorian Kevin Thomas Devers, Contact Energy Limited – CFO [40]

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They’re looking at all options basically. I don’t want to preempt their policy review, but it will be a wholesome process that we will go through looking at all options.

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Michael Fuge, Contact Energy Limited – CEO [41]

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And it depends how the market develops. If it’s a period of disruption followed by recovery, sustainable recovery, that will lead you to one outcome. If it’s a period of disruption that then becomes cyclical where you have demand growth — oversupply, demand growth, that will lead to another outcome. So we have to put our thinking caps on and actually work out, as the market develops as these scenarios develop, what’s appropriate to that scenario.

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Dorian Kevin Thomas Devers, Contact Energy Limited – CFO [42]

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Yes.

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Michael Fuge, Contact Energy Limited – CEO [43]

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Okay?

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Dorian Kevin Thomas Devers, Contact Energy Limited – CFO [44]

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Yes.

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Grant Swanepoel, Jarden Limited, Research Division – Research Analyst [45]

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And then on your commentary around TCC being really functional for what the future might hold, are you also thinking about how your competitors are positioned in that they have the inability to really get out of your way? Or is it just what’s in the best interest of short-term Contact outcomes?

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Michael Fuge, Contact Energy Limited – CEO [46]

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The — our focus is always on short-, medium- and long-term best outcomes for Contact investors. And that means in what I regard is a highly sophisticated market design, we play hard, and we play to win. And whether that leads to planned exits or disruptive exits of other generation in the market, that’s not my concern as long as Contact shareholders are protected and rewarded for the investments they’ve already made in a very diversified portfolio of generation assets and a highly nimble and agile customer team.

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Grant Swanepoel, Jarden Limited, Research Division – Research Analyst [47]

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And then my final question, are you contracting C&I at the moment? And are those prices holding up now that you have a bit of length to do that?

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Michael Fuge, Contact Energy Limited – CEO [48]

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We are contracting C&I at the moment. And as far as we can see, prices are holding up.

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Dorian Kevin Thomas Devers, Contact Energy Limited – CFO [49]

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Yes, that’s right.

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Matthew Forbes, Contact Energy Limited – IR Manager [50]

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We’ve got a couple of questions on the line from Stephen Hudson from Macquarie, so I might just read those out to you guys. The first one is, can you talk about your hybrid capital bond capacity?

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Michael Fuge, Contact Energy Limited – CEO [51]

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I’ll leave that one to you, Dorian.

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Dorian Kevin Thomas Devers, Contact Energy Limited – CFO [52]

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Yes. Yes, I mean we’ve got a lot of capacity to do hybrids because we haven’t got any at the moment, as I said, I think you probably — I mean we could do $400 million, $500 million of hybrids quite easily if you needed to. And then with a 50% equity contribution on those hybrids, no problem. I mean you look at what others have done as a benchmark, so yes. And that’s why I’m saying that’s something that we’ve got in our armory, which maybe others don’t have quite so much because they’ve already used it.

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Matthew Forbes, Contact Energy Limited – IR Manager [53]

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The second question is around Transpower and why they have such confidence in their timing around the lower South Island upgrade project.

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Michael Fuge, Contact Energy Limited – CEO [54]

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That’s probably better for Transpower to comment on rather than me.

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Dorian Kevin Thomas Devers, Contact Energy Limited – CFO [55]

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I suspect they’ve got a buffer built into it.

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Michael Fuge, Contact Energy Limited – CEO [56]

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Look, as far as I understand, they have had significant challenge on the scope, and they have looked at very practical ways of improving in terms of getting early camps established and reprioritizing other works. So all the external indications are is that they’ve been through a robust process, and they’ve challenged it well, and it looks a good forecast.

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Matthew Forbes, Contact Energy Limited – IR Manager [57]

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Yes. And the final question is a point of detail, Stephen was asking if there is any more information around some of the assumptions on regional pricing that are maintained within the post-balance sheet date note. We might have to get back to you on that one.

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Michael Fuge, Contact Energy Limited – CEO [58]

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We might have to get back to you on that one. That’s a good question, but yes.

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Matthew Forbes, Contact Energy Limited – IR Manager [59]

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We’re already decently deep into the conversation, so I’ll get back to you that one. In the room, any questions in the room? We’ve got Nevill from Jarden.

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Nevill Gluyas, Jarden Limited, Research Division – Director of Equity Research [60]

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The first one on timing around knowing. Do you have any idea on timing about when you’re going to get [one] from Transpower — sorry, from Tiwai?

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Michael Fuge, Contact Energy Limited – CEO [61]

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From Tiwai. No, everything at the moment is speculation. There are different dates that people are talking about. You saw rumors in the media. After 4 months of this game, I know Dennis had 4 years of this game, I’m not going to rely on those rumors. We’ll know when we know. And — yes.

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Nevill Gluyas, Jarden Limited, Research Division – Director of Equity Research [62]

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Would you regard as orderly exit a delay but still some decline, so a few years and then they leave? Is this…

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Michael Fuge, Contact Energy Limited – CEO [63]

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That’s more orderly than you have now. The market, all it gives you is more runway to implement solutions. And then what’s important is the capacity of using an inc to implement those solutions. And that means getting through the planning and the capital allocation and the design and then getting it up and running.

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Nevill Gluyas, Jarden Limited, Research Division – Director of Equity Research [64]

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Progress with industrial heat conversion, I assume you talk to things at Fonterra. What’s your level of confidence that sort of a regionally large-scale conversion in South Island could commence within a short time frame?

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Michael Fuge, Contact Energy Limited – CEO [65]

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Look, we’ve already done Open Country Dairy, 15 megawatts, and you’ve seen Synlait make moves in that regard. So — and of course, I think Fonterra are looking at the competition and going actually all things are possible, remembering that Fonterra do pay a carbon price on their coal. So the economics should be transparent to everyone. If it’s a rational economic thing to do, I think everyone can say, well, then good things should happen.

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Nevill Gluyas, Jarden Limited, Research Division – Director of Equity Research [66]

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The focus being on swiftness of that process.

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Michael Fuge, Contact Energy Limited – CEO [67]

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Yes, yes.

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Nevill Gluyas, Jarden Limited, Research Division – Director of Equity Research [68]

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[Conditions…]

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Michael Fuge, Contact Energy Limited – CEO [69]

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No, no, no.

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Dorian Kevin Thomas Devers, Contact Energy Limited – CFO [70]

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You have some data centers. I know it’s not in the South Island, but it still helps the overall demand as well and recently announced, the 20 megawatts. It all counts. Nevill counts.

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Nevill Gluyas, Jarden Limited, Research Division – Director of Equity Research [71]

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I’m interested in your view then, I understand why coal might sound like a bit of a solution through rankings because it’s important (inaudible). But doesn’t that sort of have an image problem for the sector?

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Michael Fuge, Contact Energy Limited – CEO [72]

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Yes, potentially, but as long as there is a well-signaled transition path, then I don’t see an issue with that. I mean that’s the whole idea, and you’ll see that with the ESG reporting that we’ve adopted. It’s not about getting there instantaneously. It’s having a very clearly articulated plan and then implementing that plan in very measurable and public and very transparent steps. And that’s key. And as long as there is a plan, then I think the image problem goes away.

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Dorian Kevin Thomas Devers, Contact Energy Limited – CFO [73]

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And I think it would be a bigger image issue — running baseload thermal and producing lots of CO2 and causing hydro still would actually be a bigger image issue for the sector.

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Nevill Gluyas, Jarden Limited, Research Division – Director of Equity Research [74]

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Interested then sort of what is the plan afterwards, is the next question.

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Michael Fuge, Contact Energy Limited – CEO [75]

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In terms of?

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Nevill Gluyas, Jarden Limited, Research Division – Director of Equity Research [76]

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What is the solution after you retire the rankings?

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Michael Fuge, Contact Energy Limited – CEO [77]

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Well, that’s interesting speculation. I mean listen, you’ve got the Onslow study. You’ve got a range of technical solutions. You’ve got the demand-side solutions in terms of what — in terms of process heat, industrial hydrogen, ammonia export. All of those solutions have potential flex options in there as well as batteries. And I think that’s something which will emerge over the next year to 2 years of what the most optimal is amongst those.

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Nevill Gluyas, Jarden Limited, Research Division – Director of Equity Research [78]

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All those potential options (inaudible) are justified by sort of the new generation? Are they generally going to be economic? We hear all that (inaudible).

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Dorian Kevin Thomas Devers, Contact Energy Limited – CFO [79]

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Occasionally…

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Michael Fuge, Contact Energy Limited – CEO [80]

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Eventually, they will be. And it’s a question of the rapidity. I mean they — once you commence — start on the technology curve — we’ve seen it in wind. We’ve seen it in solar. We’re now watching it in batteries. The cost of delivering these solutions really does decline exponentially.

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Dorian Kevin Thomas Devers, Contact Energy Limited – CFO [81]

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And from your analysis, Nevill, you would see that there’s large dispersion in pricing in the island. So the location of these new sources of energy sink will be incredibly important, yes.

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Nevill Gluyas, Jarden Limited, Research Division – Director of Equity Research [82]

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On the retail front, what signs do you have of any kind of change in competition? Or is it just really too soon? When do you think you might see activity in the market?

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Michael Fuge, Contact Energy Limited – CEO [83]

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It’s too soon. Look, the market as it stands today is incredibly competitive. You’ve seen, with those that high volatility in wholesale prices, high wholesale prices, retail prices stayed flat. It’s an incredibly competitive market at the moment. And just as prices have gone up in response to those high wholesale prices very much, I’d be surprised if prices decline very rapidly in response to any volatility on the downside.

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Nevill Gluyas, Jarden Limited, Research Division – Director of Equity Research [84]

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(inaudible) throughout some C&I potential buyers.

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Michael Fuge, Contact Energy Limited – CEO [85]

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I suspect now the natural question is, what would you do? And you would — depending on your load, you…

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Dorian Kevin Thomas Devers, Contact Energy Limited – CFO [86]

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Yes, yes.

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Nevill Gluyas, Jarden Limited, Research Division – Director of Equity Research [87]

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So we’re very much in sort of a planning situation.

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Dorian Kevin Thomas Devers, Contact Energy Limited – CFO [88]

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Yes.

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Michael Fuge, Contact Energy Limited – CEO [89]

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Yes.

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Nevill Gluyas, Jarden Limited, Research Division – Director of Equity Research [90]

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And last question from me. Just in terms of stay-in-business CapEx, how should we think of that going forward? I mean how much of a sort of circa $75 million kind of per annum number is associated with TCC and with Whirinaki concessions?

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Dorian Kevin Thomas Devers, Contact Energy Limited – CFO [91]

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Yes. Of the $65 million, we normally assume $10 million on average per year is to do with a C5 or a C6. So that takes you back down to sort of $55 million across the cycle.

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Matthew Forbes, Contact Energy Limited – IR Manager [92]

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Final question on the line from Jeremy Kincaid from UBS. It’s the question, what are the rating agencies saying to you regarding the net debt of 2.8x? Is it a hard limit? And will they be willing to look through an NZAS exit?

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Dorian Kevin Thomas Devers, Contact Energy Limited – CFO [93]

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I’ll take this one. I mean if you look back at Contact, actually, we spend a lot of time well above our 2.8 limit actually. And S&P have been very supportive. They always say they want us to see a path back into below 2.8, and they want to see the appropriate actions around that. So I suspect you would be allowed to go above a bit and as long as they can clearly see the plans that would get you back below 2.8. But at the moment, like I say, we have quite a bit of headroom, and we’ve also got things like hybrids and stuff like that, that we could use if required.

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Unidentified Analyst, [94]

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Wondering if you can talk about post-balance date, what changes you’re seeing in bad debts and delinquencies for retail customers. Have they improved?

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Dorian Kevin Thomas Devers, Contact Energy Limited – CFO [95]

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Yes. I mean it’s been…

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Michael Fuge, Contact Energy Limited – CEO [96]

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Very good?

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Dorian Kevin Thomas Devers, Contact Energy Limited – CFO [97]

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It’s been very good actually. I mean the key — I think the key date is going to be what happens in September with the wage subsidy ending and how that sort of pans out. But so far, the — I mean I think our team have done a great job, though, actually around collecting cash as well and working with customers around that, which has kept our DSO down and reduced the amount of bad debts relative to what we were thinking could happen. But I think the — what happens in September is going to be a critical time for everyone.

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Unidentified Analyst, [98]

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And if TCC does close potentially, is there a working capital release there that you might be able to quantify in terms of inventory or you need growing gas storage?

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Dorian Kevin Thomas Devers, Contact Energy Limited – CFO [99]

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No. I mean if they get — we’d need the storage to support peakers to — as I said, to support our North Island position. The — what there is — and we’ve talked about it before is there is that nice tax credit that we get on TCC, which is about $35 million of tax that we get a credit on. But to do that, you have to not just shut it down. You’ve actually got to prove to the IRD that you’re never going to use it again, so take the sledgehammer to it pretty much. That’s the key benefit you get over and above the lower cost saving — the fixed cost savings.

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Unidentified Analyst, [100]

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And longer term, if a baseline (inaudible) the market, would it make sense for peakers to be combined across the market in terms of engineering expertise and cost savings?

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Michael Fuge, Contact Energy Limited – CEO [101]

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Yes, that’s obviously you’re looking at, and that’s where you…

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Dorian Kevin Thomas Devers, Contact Energy Limited – CFO [102]

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Reserveco.

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Michael Fuge, Contact Energy Limited – CEO [103]

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A reserveco or even for us, the transformed way of working that you can consolidate your teams without actually moving them together, getting them into one team, getting them into one place virtually. Consolidation into reserveco, that’s another question for the market longer term. It might be a medium-term solution. But at the moment, it’s a thought or an idea. It’s not a reality.

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Unidentified Analyst, [104]

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Would you be prepared to divest your stake in reserveco?

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Michael Fuge, Contact Energy Limited – CEO [105]

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Can’t comment. We’ll do what’s right for our Contact shareholders.

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Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division – Director & Senior Analyst of New Zealand Equities [106]

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I wanted to just ask one final question for me. On the Onslow project, what is your view on that in terms of (inaudible)?

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Michael Fuge, Contact Energy Limited – CEO [107]

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If you’re a hydro civil engineer, it’s the best thing. I think there are — there are a range of options for that dry year risk, which need to be carefully evaluated. And the wonderful thing about this evolving market is that they are not restricted to the supply side, but they will involve the demand side.

Now pumped hydro, my background with Pacific Hydro is something that we actively looked at. It’s interesting. It’s possible. It’s capital-intensive. It would take a wee while to implement hydrogeneration schemes per se. Geological risk is always a key consideration on average post-FID. They tend to exceed their FID internationally by about 40% on average according to stats published by the International Hydro Association.

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Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division – Director & Senior Analyst of New Zealand Equities [108]

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So (inaudible)?

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Michael Fuge, Contact Energy Limited – CEO [109]

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Potentially you are. And so it’s a journey. It has to be studied well. It has to be studied deeply. All geological risks have to be taken account of. But most importantly, the alternatives and evolving technology and market situation have to be stacked up against it.

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Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division – Director & Senior Analyst of New Zealand Equities [110]

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Just a follow-up on that. Do you have any — obviously, you focus on virtual peakers, but do you have any option to sell? Do you think you could have a small pump hydro or something (inaudible)?

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Michael Fuge, Contact Energy Limited – CEO [111]

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Well, then the options that any hydro operator has is increasing storage or capability within their own existing assets, and we have a number of options there. And then pump storage, potentially but not a slam dunk.

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Matthew Forbes, Contact Energy Limited – IR Manager [112]

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Thank you. Thank you, everyone.

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Michael Fuge, Contact Energy Limited – CEO [113]

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Okay.

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Dorian Kevin Thomas Devers, Contact Energy Limited – CFO [114]

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Thank you.

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Michael Fuge, Contact Energy Limited – CEO [115]

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Excellent.