CLP Holdings Limited (2) Earnings Call Transcript & Summary

Good morning, good afternoon and good evening, ladies and gentlemen. Welcome to the conference call. Our chairperson today is Ms. Marissa Wong. Ms. Wong, begin your call and I might be standing by for the Q&A. Thank you.

Thanks very much. Good evening, everybody, and thank you for dialing into this briefing call regarding the profit warning announcement that we just put out today. My name is Marissa Wong, I'm Director of Investor Relations. I'm accompanied by Chief Financial Officer of CLP Holdings, Nicolas Tissot, and other members of the Investor Relations team. We've got 30 minutes today, and we'll start with a briefing delivered by Nicolas, and that will be followed by a short Q&A session. Just some housekeeping notes. This call is being overseen by a moderator. She will invite questions and advise you on how to submit them after the briefing. Questions should be restricted to those who have received an invitation today. Please limit your questions to 2 so that we can get through as many as possible. And thankful if you state your name and company affiliation at the beginning of your question. My team and I will be available to answer further questions after the call. And this session is also being recorded, and it will be posted on our website with a transcript to follow. With that, I will pass it to Nicolas for his opening statements.

Thank you, Marissa. Good evening, everybody. Thank you for joining this late call with short notice. I'm happy to comment the announcement we have just issued after market close and answer the question you may have in relation with this announcement. Technically, our announcement is a profit warning as per the Hong Kong Stock Exchange rule. It is entirely related to the exceptional and prevailing market conditions in Australia and their impact on EnergyAustralia results. Before discussing the impact on EnergyAustralia and on CLP Group earnings, I would like to make reference to the broad market conditions we are facing in the Australian energy market. You will recall that we reported the volatile and rising wholesale power prices for both spot and forward contract in the Australian national electricity market in our quarterly statement for the first quarter of 2022. That was on the 16th of May. We also informed the market on the significant unfavorable fair value movements for the forward energy contracts with HKD 2.5 billion after-tax impact on earnings. In recent weeks, the Australian energy markets were faced with a bit of a perfect storm driven by the confluence of the unavailability of some major coal-fired power stations, weather incidences and high, if not very high, global commodity prices associated with the Russia-Ukraine conflict. As a result, prices in the national electricity market are further escalated to unprecedented and extreme levels in May. This has impacted further spot market on a day-to-day basis and also driven forward contract prices higher. As a result of the persistent high prices in the market and the concerns about the security and reliability of supply, reaching mid-June, the Australian energy market operator, known as AEMO, first introduced a AUD 300 per megawatt hour price cap in most Australian states. And then on the 15th of June, so just a few days ago, suspended the NEM spot market for the first time since its inception in 1998. We are facing really unprecedented events and EA acknowledge and supported EnergyAustralia -- sorry, acknowledged and supported the decision of AEMO to temporarily close down the spot electricity market at that time as the situation was posing challenges to the entire energy industry. If I now turn to the impact on EnergyAustralia earnings. The first and most significant impact of these market conditions on EnergyAustralia earnings as well as CLP group earnings have been in relation to the use of the futures market to hedge our limited loan position. As a gentailer, EnergyAustralia runs a broadly balanced portfolio with a limited loan position in the generation side of the business, and we usually hedge that position ahead of time over a 1 to 2 year -- 1 to 2-year period. As wholesale prices rise, our existing forward sold contracts signed in the past at lower prices, basically in 2020, 2021 for the contracting portfolio right now. They are -- they become out of the money when mark-to-market against these high prices, and this is reflected in the fair value movement of accounting unrealized losses. Based on the group's unaudited management accounts for the first 5 months ended 31st of May 2022, the unfavorable fair value loss after tax for EnergyAustralia was approximately HKD 7.2 billion, which will impact the group's operating earnings. This is recognized in the operating earnings line as per the accounting standards. As I said before, these forward energy contracts are entered into by EnergyAustralia for economic hedging purposes, and they will provide benefits to the business in future periods when they unwind at the contract, expire, wrote off and then expire. As a reminder, according to accounting rules, they do not qualify for hedge accounting and the fair value losses are incorporated into our operating earnings. Furthermore, the unfavorable mark-to-market loss of HKD 7.2 billion related to movement of forward energy contract position at a particular point in time, that is the loss is subject to change depending on the forward prices prevailing in the market at the timing of measurement. Obviously, the mark-to-market is going to continue to evolve on a daily basis until the final picture of the fair value is taken on the searches of June 2022 to prepare our interim accounts to be announced on the eighth of August. The second impact on energy coming from EnergyAustralia in recent weeks and months is in relation to the operational performance of the business. That's a more limited impact, but still a significant one. And we wanted to clarify to the market our situation in that respect. We communicated already in our quarterly report that the financial performance of Energy segment in Australia was adversely affected by 2 things. First, relatively low prices received for electricity generated from the power stations based on hedging -- based on hedging undertaken in previous years; and second, lower-than-expected generation from both Yallourn and Mt. Piper which has required EnergyAustralia to buy electricity at high prices from the spot market to settle contracts not covered by the power stations themselves. I wanted to report today that we have continued to experience unplanned outages at Yallourn and Mt. Piper has also continued to be fuel constrained due to lower-than-expected coal deliveries from EnergyAustralia supplier is the Springvale mine. And I'm happy to update that this week, 3 units out of 4 are running at Yallourn and that both Mt. Piper units are back up. But the impact during the first 5 months of the year was significant, and we reported in our announcement that for the first 5 months ended 31st of May 2022, EnergyAustralia's contribution to the group after tax operating earnings, excluding the fair value loss, was approximately HKD 1.1 billion lower than the same period for 2021. If you take into account the impact of the fair value losses, and the lower-than-expected operating performance of EnergyAustralia's generation assets, the consolidated operating earnings of the group for the first 5 months ended 31st of May is a loss of approximately HKD 3.7 million. I want to mention that outside of Australia, all the other units of the group are delivering at a level which is very similar to the same period last year. So really, the announcement today is entirely focused on the situation in Australia. The rest of the group does not require any specific comments or announcements. In summary, and before I give everybody the opportunity to ask questions, there remain challenging conditions in Australia, and we said that since the beginning of the year, and it continues to be so. And we are working around the clock with the EnergyAustralia teams for the market operator and our customers. Although there are some short-term challenges, we are unperturbed by the volatility, and we retain confidence in our ability to deliver long-term shareholder value through our EnergyAustralia business. Thanks for your attention. I'm happy to answer your questions.

Moderator, if we could open it up to the questions now, please.

[Operator Instructions] Our First question comes from Pierre Lau with Citi.

Good evening, everyone, and thanks for your time today. My 2 questions on the company is that the first one is you mentioned in your 2021 result announcement saying that you're looking for a potential investor to take up some minority stake of the Australian business. Could you let us know whether there's any update in the last few months? And second question is, obviously, your Australian business seems to have profitability lower than chief's expectations. And the question is whether you will further write down the asset there with more impairment losses?

Starting with the first question, we completely confirm the direction of travel communicated at the beginning of the year. We are open to the idea of establishing a partnership in Australia. That could be at the level of specific project or project that could be globally. But yes, we confirm that our view is that the best way to support the development and growth of EnergyAustralia for us is to partner with a like-minded partner because we feel that in terms of capital required for participating to energy transition and it's accelerating. In Australia, we think that the best interest of CLP is to establish a partnership. So we are actively looking for partners, but there's not much more I can say about it. Work in progress. About the write-down, it's obviously too early to comment about that one, and we have no particular announcement in that respect. I would just say that we will, as prescribed by the accounting standard, we will review any possible trigger events for the 2 CGUs -- the 2 cash-generating units in Australia. And if needed, if we have a trigger, we will run a full impairment exercise. But this is too early to comment on that one because, obviously, we will closely monitor the situation as required. Thank you for the questions, Pierre.

Our next question comes from Stephen Chang with JPMorgan. Thank you.

I have 2 questions. First is about the Australia business because we mentioned that the profit after tax was HKD 1.1 billion lower than the same period last year. So can you please give us a breakdown as to how much from retail and how much from wholesale? And then secondly, can you please give us an update on the thermal business in China, also India and also other part of the portfolio?

So you are -- I guess you are talking about the split of the HKD 1.1 billion decrease of after-tax performance, underlying performance. I guess that's my understanding. We are going to look for a more detailed answer, but I would like to mention that this is not a results announcement, so we are not going to provide many details. I think our key purpose today was really to inform the market about key developments that we felt needed to be understood and shared with the market early in the process, but we will detail the first half performance in our results announcement early August. Having said that, basically, you heard where the shortfall in earnings is in underlying earnings is coming from. It's coming from our Energy segment, and it's relating to -- for one key asset of the portfolio Yallourn to unplanned outages. So this is -- this part is -- it's really flowing the P&L of the Energy segment in Australia. And the second source of shortfall is basically the issues with the core supply of Mt. Piper in a very challenging fossil fuel market. And this is true also internationally as you are certainly aware. And this part is also flowing the P&L of our Energy segment. So I would say -- we see if we can provide you further detail, but the vast majority of the shortfall is coming from our Energy segment in Australia.

So Stephen, on that point, we don't give further guidance on just specifics relating to current performance of retail versus wholesale, but you won't have to wait too long because on the August 8, we'll have our interim results, and that's when we can communicate that switch between wholesale and retail. And the other part of the question you asked...

Yes. So we -- I'm happy to give a quick update on China and India, but basically, broadly speaking, the rest of the group is behaving at a level and generating a level of earnings, which is very similar to last year at least until the end of May, which is the reference of our announcement. I think the key updates on China are relating to also the pressure coming from the international energy market on the coal supply, and this is putting -- still putting some significant pressure on our coal operations. But as a reminder, this is quite a small part of our portfolio in the Mainland, and the rest of the portfolio with first and foremost, our nuclear operation is behaving very, very well according to plan. So there is some challenge but limited to the coal-fired capacities and all the rest of the portfolio is Yangjiang performing really well, Daya Bay performing also well and all the renewable portfolio broadly in line with last year. So that's a quick update on China. And India is also delivering, I would say, a truce based on the existing portfolio of renewables. Obviously, there is one coal asset in India, and it is exposed to the pressure coming from the situation and the tense situation on the coal market. But overall, the performance of India is also very similar to last year, broadly speaking. Stephen, you didn't ask the question, but Hong Kong is doing well. I'll just remind you that the majority of our earnings.

Okay. If I can ask a quick follow-up question that we -- our dividend policy should be independent of the fair value changes, right? So we should assume a stable dividend?

I think we -- I mean, we have distributed a level of dividend over the results of '21, which was exactly similar to last year. So we -- I think it's very important for the group to continue with a consistent, stable weighting so the shareholders, in terms of dividend, and there's no change in our approach to dividends. But then we always make a decision on dividends once we know the results of the year. And this is the final sovereign call of our board to make such decisions. But I think there's no change or no reason to change that I can report.

Our next question comes from Evan Li with HSBC.

It's Evan here. I have a couple of questions. And first of all, obviously, you've mentioned about how wholesale prices have sort of been hedged. Can you give us some details of how your fuel prices have been controlled in 2022 should coal have been available? And also, the second question to that is, how much of your historical costs since the original purchase of EnergyAustralia from day 1, how much of that has been impaired?

Okay. So on exposure to fuel prices as we already discussed in this call, I mean, this is -- this is in terms of international energy prices with a lot of impacts coming from the conflict in Ukraine and Russia. And there is an international pressure on prices everywhere, including in Asia -- in Asia Pacific, and that has put some pressure, and we are not entirely immune to this pressure, but we have some elements of protection. So I will first start with Australia because this is the topic of the day. So in Australia, you know that our Yallourn power plant also comes with a mine. So we are sourcing the coal from our own mines. So we are entirely protected from international market prices. And in Mt. Piper, we have a main supplier. We have multiyear contracts also at a fixed price. So we have some element of protection here. And talking about gas also, we have significant protection coming from multiyear contracts. So in Australia, we are pretty well-protected. I think your question is also on the rest of the portfolio. But I would say that in most parts of our portfolio, we have limited exposure because Hong Kong is also put under some form of pressure, but first, with the scheme of control, the fuel costs are a pass-through to the scheme of control business. So we are passing this pressure to the end customers through the fuel cost account. Also, we have some protection coming from the fact that we have long-term partnership with a limited number of suppliers and we are -- our prices are not directly connected to international prices. So here also, we actively manage the position through long-term sourcing. And I think the place where the exposure is the most direct to coal prices is actually in China, but with the caveat that in China, as you know, international prices do not directly apply, but they are somehow influenced by international prices. So we -- we are using all the options available to buy our coal in China from suppliers who provide attractive prices. And we also benefit from all the measures taken by the government to stabilize coal prices. So I think you should not think globally of CLP as a group with a large or direct exposure to international fossil prices.

Evan, on your question of the impairment, the answer there is it's around AUD 3 billion to date for EnergyAustralia.

Got it. Got it. If I were to ask you another question, sort of on the situation that we have. Give the units, the coal-fired units were available, should we expect -- how much of those fair value loss, I think, will be sort of encountered by the profit increases? Just want -- just trying to understand your hedging strategy and position for this year and how the situation might be if those units have become available and under the current market, how much would that be covered by the hedge?

I think in the first half, as we explained, including in the first quarter statements, we had moments where the level of -- we were kind of over-hedged. So we were not in a position to deliver the electricity associated with the hedges we have taken. So that has triggered some losses, which are -- which have nothing to do with the mark-to-market by the way. And I think if we are -- it's because it was unplanned outages, but looking forward, if we are in a position to continue to return to, let's say, normal availability levels, we should no longer see this phenomenon because we are basically hedging based on expected availability. So I think with the situation and with the recent efforts to put back on the units of both Piper and Yallourn, we should certainly see less of what we've seen in the first half during the second half.

I think we're heading up against time so there's probably room for one more question, please.

And our last question today comes from Teresa Yan with Morgan Stanley.

So first, we would like to ask in the July low in the single month because we noticed that the power generation of EA has improved meaningfully in that single month. So would the EA make a positive contribution, considering the rebound in the generation and the higher power tariffs? And then also, we would like to ask in terms of the impairment risk, like can you -- can you give us a breakdown of the goodwill between the energy business and the retail part?

I'm not sure I've kind of confused -- what was your question on July months, Teresa? I'm not sure about...

Yes. So in July, it -- is it generation -- sorry, in June, my bad.

In June, we're surprised you were talking about July.

Sorry. Sorry. Yes. So in June, yes, can EA make a positive contribution, given the rebound in the generation and the higher power tariff?

I think -- yes, I think the situation, if we keep on with the type of availability we have restored in the last few weeks or days, I think we can get to a better contribution. But keep in mind that we are still hedged for most of our generation with prices coming from 2021, 2020, which were low prices. So our hedges are still way out of the money. So the improvement will come from being able to provide the electrons unwind in a positive way of the hedges. But still, the reference realized prices, we will get in June, also in the second half will be based on our hedging in the last 2 years. On the impairment risk, I'm afraid I cannot be very specific, but I think if I look at performance and rebounding on another question earlier today, I mean, most of the shortfall is coming from Energy segment. So I think the pressure is more on the Energy segment. However, it's a good opportunity to mention that these very high prices are potentially creating opportunities for future earnings of EnergyAustralia -- of the Energy segment of EnergyAustralia. And as you can expect, I mean, any impairment test will be based on the future cash flows discounted. And therefore, even if there is pressure in the short term, the evolution of prices we have seen in the market in the recent weeks is potentially paving the way for improved earnings in the longer run, starting in '23 and '24 and even more '25, which are years where we are not yet pre-hedged. I think on the retail side, actually, we have -- we are sort of benefiting from our position. So the -- in terms of earnings, the level of margin is kind of positively impacted by the fact that we have hedged the sourcing of the electricity or the gas at a low price. So this is helping the margin. So I would not expect that there's a major challenge here in terms of impairment.

Thank you, everybody. I think I will put the call to an end. I really do thank you for your time in these [indiscernible] time. But [ Jay ] and I will be here for any further questions that you might have, just reach out to us by phone or by e-mail. And have a good night. Thank you very much.

Thank you, Marissa. And I would say that as a conclusion that most of what we discussed today, I hope we made it clear that this is really temporary in nature. So we have an effect -- of a very significant effect coming from the mark-to-market of our earnings for the first half, but this is somber in nature, and this is unrealized. Thank you, and thank you for your attention, and thanks again for connecting with a very short notice.

Thank you. Yes, thank you. Thank you for your participation. This concludes the conference. Goodbye.