Contact Energy Limited (CEN) Earnings Call Transcript & Summary

[Foreign Language] [Presentation]

[Foreign Language] Good morning, everyone, and welcome to Contact's Annual Shareholder Meeting. My name is Rob McDonald, and I'm the Chair of the Contact Board. On behalf of the Contact Board and of all our people across New Zealand, I would like to welcome you to our 2020 Annual Shareholder Meeting. It is the first to be held in a fully virtual format a necessity given by the uncertainty of the COVID world. You can vote and ask questions online. I'll provide you with further instructions as we progress in the meeting. If you encounter any issues, please refer to the virtual annual meeting online portal guide or you can phone the help line on 0800-200-220. As a quorum is present, and you notice of this meeting has been given, I declare the meeting duly constituted and open for business. I'd like to start by introducing my fellow directors. With me today, we have Whaimutu Dewes, Elena Trout, Victoria Crone, Dame Therese Walsh, David Smol and Jon Macdonald. Members of the senior leadership team are also present at the meeting as well as representatives from our auditors, KPMG. Today's meeting will commence with an address from me as Chair and also from the Chief Executive, Mike Fuge. Following this, we will consider the financial statements and then move on to the resolutions that are outlined in the notice of meeting. We have 3 resolutions put to the meeting today, and these resolutions will be decided by taking a poll. I would encourage you to send through your questions as soon as you can. This will allow us to answer these questions at the appropriate time of the meeting. To ask your question, click on the box that says ask a question and follow the instructions on screen. You must register to vote before you can ask a question. Today, I'd like to share some brief observations about Contact Energy, the industry and the Contact's context in which the company is operating and then look down the track to what lies ahead as we pursue our vision to help build a better New Zealand. After the resignation of Dennis Barnes as CEO in June 2019, Mike Fuge arrived in February 2020 to begin a new chapter of leadership for Contact. Mike joined us from Refining New Zealand on with a strong history in the sector in New Zealand and overseas, including as CEO of Pacific Hydro in Australia, and as Chief Operating Officer at Genesis Energy. Mike has demonstrated his passion for renewable energy and as well as the challenges and opportunities that have come in his way over the past 9 months. Just weeks after its commencement, the COVID-19 pandemic response began and his focus and energy turned to crisis management, and doing right by Contact's customers, staff and broader New Zealand. It has been and continues to be an extraordinary time. Contact fully supported the actions of the New Zealand government in restricting the spread of COVID-19. A lot of work was done to ensure we actively reduced the risk of the virus spreading and made sure our people across New Zealand were safe as possible. More change and challenges to come soon after the pandemic lockdown with the closure of the Tiwai smelter announced following the conclusion of the Rio Tinto strategic review. Citing high energy costs and a challenging outlook for the aluminum industry, NZAS gave notice to terminate the power supply in August 2021. We have made no secret of our view that the people of Southland, New Zealand Inc., and a stable path for renewable energy investment is best served by NZAS remaining operational in the medium term, ideally, for at least the next 5 years. We remain hopeful that a deal will soon be struck given the goodwill from all sides that emerged in the lead-in to the election. More recently, the Board has been working with Mike and the leadership team on Contact strategy and reflecting on the future shape of the company, the sector and the country and the world -- in a world of COVID-19 and potentially no Tiwai smelter in the short or medium term. There is uncertainty, but within this lies plenty of opportunity to, and we expect Contact to play an important role in the decarbonization of the energy sector and the wider economy. This year, we increased our efforts to promote our ESG credentials. This includes the emergence of our first annual report aligned with the integrated reporting framework as we deliver on providing more transparency on how we do business and deliver value over the longer term and beyond just financial returns. We have a good story to tell, and we understand and agree with the increased expectation on all companies from investors, customers and communities to provide this information. Contact has a leading role to play in tackling climate change via tangible actions that drive good business outcomes. As we say, and as you saw on the video, change matters. This includes supporting and growing New Zealand's low-carbon advantage. We do this -- we need -- to do this, we need policy settings to support accelerated electrification of process heat and the transport and agricultural sectors away from carbon-intensive fossil fuels like coal and petroleum, but without unduly burdening, the economy and consumers. Here, I feel compelled to make a brief comment about the pump hydro plan set to be investigated at Lake Onslow. Whilst it is a fascinating project, we do have concerns that although the goal is worth pursuing a multibillion-dollar solution from the past is high risk on several fronts, and we're not sure it will solve the problem in the best way. We only need to look across the Tasman to the snowy hydro projects enormous cost overruns. We believe there's much smarter technology that can potentially be harnessed in pursuit of a lower-carbon economy in Awarua Tauhara. We are concerned that project Onslow threatens to paralyze investment in renewable energy infrastructure in the meantime, and we hope that other options identified and explored as part of the investigation are considered with an open mind. This may be -- this may well be a once-in-a-generation opportunity to embrace the future of renewable energy in New Zealand. So let's get it right and not lead to high-risk solutions grounded in the past. Elsewhere, Contact is already one of the first power companies in the world to have carbon emission targets verified by the science-based targets initiative. We have an innovative green borrowing program. This year, we inked one of the first -- the country's first sustainability linked loans. With the recent appointment of James Kilty as Deputy CEO, we have also reiterated our commitment to accelerating the decarbonization of the New Zealand economy and our intention to play a leading role in this ongoing transition. We also walked the talk by making reductions in our own carbon emissions. We can do more here. And the Tiwai smelter exit will, over time, expedite the retirement of thermal generation assets in the industry, which will see emissions decline even further. We see geothermal generation as a huge -- has a huge part to play here, too. We're very proud of our team that leads the world and the development of this very low-emission option. As you'll be aware, we have a world-class, shovel-ready project at Tauhara on hold. We believe it is a matter of when, not if, Tauhara will play an important role in the New Zealand's transition to a low-carbon future. However, we must get a clearer picture of demand before we make any final decision to proceed. We are very pleased to deliver a solid financial result to investors in August. The second half of the year was in line with our expectations despite the impact of COVID-19. We had a more challenging first half of the year, which was impacted by poor gas availability. Mike will update you on how things are progressing early in FY 2021. In August, the Board approved a final dividend of $0.23, thus totaling $0.39 per share annual dividend this year and in line with last year. As I have previously mentioned, we anticipate a likely period of disruption in the industry, and we are reviewing the appropriate level of future dividends as the status of Tiwai and Tauhara are cemented over the coming months. We will provide you with more clarity as soon as this is appropriate. But rest assured, our focus on delivering sustainable long-term growth and value for our shareholders. Contact is a resilient organization and in very good shape. Our portfolio of long-life, renewable and flexible generation assets, a strong balance sheet and operational discipline provide confidence we are well-placed even in a lower demand environment if it emerges with the Tiwai exit in the near term. To finish, I'd like to thank our customers and our suppliers for their support and assistance. Thank you to Mike and the leadership team and the wider Contact far now for their hard work over the past year. There's always much to be done, but it is an exciting time to be at the company and for the sector. Thank you also to Vic, Elena, Therese, David and Jon for their commitment and dedication as directors. And today, a special acknowledgment to Whaimutu Dewes for his decade of service on the Board. Whai has indicated he will stand down as a Director in 2021. He has made an enormous contribution to the governance of Contact since joining the Board in February 2010. And the time Whai has been a director, he has provided guidance and stability, as we have seen changes in leadership both at the CEO and the chair level and negotiating at the sell-down of origin's majority stake in Contact. Whai has also been a significant contributor to the Board, most recently as the chair of the health, safety and environment committee, and he has also been instrumental in guiding the Board through a cultural shift across HSE and our stakeholder relationships. He has consistently challenged the management team to do better for shareholders, customers and all stakeholders. The good news is that although Whai is stepping away from his governance duties, we're very pleased he has agreed to stay on involved with Contact and support the company, its relationship with EV stakeholders for initial period of 2 years. Thank you, Whai. The Board is well advanced in our search for a new director, and we hope to make an announcement in the not-too-distant future once the process concludes. And finally, thanks to you all for tuning in today and for your ongoing support as investors in Contact Energy. We appreciate your commitment to Contact's ongoing success, and we appreciate the opportunity to speak to you today. [Foreign Language] Now I will hand over to Mike for an overview of the year.

[Foreign Language] Greetings to you all, and thank you for tuning in today. Rob, thank you for your kind words. That's very much appreciated. I'd like to introduce my fellow leadership team members here with me today in this room, Jacqui, James, Dorian, Vena, Catherine and Jan, who unfortunately can't be here. Our team has changed and evolved this year with Jan joining in November 2019. Jacqui being promoted to our Chief Generation Officer role in July 2020. And James moving into the new role of Deputy CEO to lead our decarbonization and demand growth efforts. Contact is a great place to be, and I'm very proud of what we've achieved in this past year. We have a fantastic, talented and resilient team throughout the company and a very supportive Board. I'd like to thank everyone for making me feel so welcome and for their assistance over my first few months in the role, which were interesting, including, of course, the outgoing CEO, Dennis Barnes. The time has flown by since my first day late February 2020. I do think as a relative new starter, Contact is guilty of hiding its light under a bushel at times. We're not that good at celebrating our successes externally. When, in fact, we are doing a host of very good things that more people need to understand and know about. This is a challenge I have put to the leadership team as something that we need to work on over the remainder of this year and beyond. So expect to see a little more of us getting out there and making our voice heard. This has included and will include on the ESG front where we are on a journey of pursuing a range of meaningful targets and have this year produced one of the best integrated reports on the NZDX. On the financial front, the year certainly through its fair share of unique challenges our way. This included the impact of COVID-19, Tiwai exit announcements and an unusual hydrology sequence in the Clutha River, where we experienced both periods of extremely low inflows and a 1 in 20-year flood. We also felt the impact of a recent underinvestment in New Zealand's aging gas fields and industry as an unreliable supply of natural gas led to a sharp increase in thermal input costs. I was particularly proud of the company's response to the pandemic situations we all found ourselves in as a nation changed forever at 11:59 p.m. on March 25, when we went into lockdown. Throughout the lockdown, we stood up a crisis management team and continue to operate as an essential service and lifeline utility. With an unwavering focus on looking after our customers, looking after our people and doing right by New Zealand. This included extensive support for our customers, having a tough financial time and the milestone of uncertainty that our company the pandemic response, including adapting payment terms and conditions, working with social service agencies, suspending disconnections and debt collection referrals and automatically applying from payment discounts or foregoing late payment penalties. We're also heavily involved in the electricity retailers association-led initiative to fund 10,000 power credits worth $120 each, allocated by community groups and communities to households affected by COVID-19. And we acknowledge the efforts of organizations on the frontline looking after New Zealanders by providing Women's Refuge, Salvation Army in St. John's, with more than $400,000 of free electricity across their sites throughout New Zealand. We know the response to the pandemic, and its aftermath is going to require an ongoing commitment of time, resources and perhaps most importantly, kindness as we all come out of it. From an organization perspective, through necessity, we mobilized all of our people to work from home, including home-based call centers within the space of days. This was extraordinary. And frankly, it was something we never thought we could do. We looked after our people across our sites and offices across New Zealand in Te Rapa, Stratford, Leven, Taupo Whirinaki, Dunedin, Clyde, Roxburgh, Auckland and Wellington. We continue to serve our customers but minimized any risk of spreading COVID-19 through meticulous continuity and crisis planning and ramped up hygiene and physical distancing. As COVID-19 response got underway, we also reassured our 943 Contact employees across New Zealand that if they needed to be home for anything pandemic related, including looking after elderly relatives or to be with their kids, we would back them 100% of their salaries and not require them to take leave. It was simply the right thing to do, and the feedback we received on all fronts was overwhelming. Despite all of these unusual circumstances, our high-quality, long-life renewable generation assets and lean low-cost retail operations combined to deliver another solid financial result for our investors, which Rob has alluded to. In FY '20 Contact generated revenue of $2,073 million, EBITDAF for $451 million, net profit after tax of $125 million, operating free cash flow of $290 million. Our statutory profit for FY '20 of $125 million was $220 million lower than FY '19. But note that last year, this included a $170 million gain on the sale of the Rockgas business and the Ahuroa gas storage facility. EBITDAF from continuing operations was $54 million or 11% down on last year due to a combination of lower renewable generation, lower wholesale prices and the impact of rising costs of thermal generation and restricted gas supply. Operating free cash flow was $290 million, down 15% on FY '19 due to lower operating earnings, partially offset by lower stay-in-business capital expenditure and interest costs. I also want to update you on how things are tracking so far in FY '21. In September, we were delighted to complete the 100% acquisition of Simply Energy, a business we acquired a stake in last year. Simply is a Wellington-based company that delivers integrated energy solutions for generators, distributors, retailers and perhaps most importantly, commercial industrial customers across New Zealand. Simply's value proposition is to help these customers take meaningful action, as we alluded to before and change matters, towards a cleaner energy future and the efforts form a key part of change matters. We want Simply to continue to operate as an agile stand-alone company, so it can stay nimble and keep innovating fast for our customers and for New Zealand. More broadly, we have been very pleasantly surprised in how strongly demand has held up, especially from large commercial and industrial customers. Given the hard logical sequence in our gas supply, we're in good shape and have made a strong start to the year as you may have seen in this morning's October operating report. This has been supported by an excellent operational performance with strong plant uptimes. We also have more transformation initiatives in the pipeline to change the way we work as a company, very fundamentally. In terms of our customer business, we now have more than 510,000 connections across electricity, gas and broadband. We now provide more than 35,000 customers in New Zealand with broadband from a standing start 18 months ago. We're continuing our transformation to become a digital-first retailer, and more than 100,000 customers now use our apps and website for self-service each month. We've committed money to accelerate the lower South Island and upgrades to ensure Tiwai -- ensure that if Tiwai less, the renewable energy isn't stranded in the South Island. And it's very pleasing to see that transfer has begun this work in earnest and with some urgency. We're continuing to plan for a post-Tiwai environment. You may hear this described as as just transition or orderly exit to enable Southland, New Zealand and the electricity industry to prepare for a post-Tiwai world. We remain optimistic that a fair deal will be done soon. As Rob mentioned, we have put the development of the power station on the Tauhara get geothermal field near Taupo on hold. The team involved in the preparation of the site, and the $40 million appraisal campaign had done an absolutely outstanding job and have confirmed that Tauhara is a world-class renewable geothermal project with very low associated carbon emissions. We believe Tauhara remains New Zealand's cheapest and most attractive option for new renewable electricity generation. And when its time comes, it will deliver sustainable economic benefits and jobs in the Central North Island of New Zealand. Before I finish, I do want to reiterate where we're putting our energy. Firstly, Contact wants to play a lead role in leading New Zealand to a low-carbon future by developing low carbon solutions for our customers and advocating for regulatory settings that will facilitate the transition of New Zealand's energy systems away from fossil fuels. We are well underway ourselves with helping large industrial customers transition from high-carbon fuels to low carbon fuels with new product and renewable substitutes based around renewable electricity and direct heat geothermal steam. We are aiming to replace one petajoule of industrial heat with electricity by 2022 or roughly the equivalent to the electricity used by all the homes and Taupo in a year. Our recent successes have included partnering with Open Country Dairy to support the installation of New Zealand's first electrode boiler at 30 megawatts at their Awarua site, and the expansion of our geothermal direct heat to connect the Nature's Flame wood pallet manufacturing plant and displace coal usage outside of New Zealand, and you saw that on the video. We're actively pursuing other opportunities too, including electrifying further process heat applications and scoping green hydrogen production for potential use for the likes of green ammonia and urea production. We have also continued to grow our demand flexibility platform with more than 20 industrial and commercial customers now signed up to automatically reduce power consumption from equipment such as pumps, fans and compressors during high-usage periods. As well as our focus on decarbonization and demand growth, we're also underway with several other areas of strategic activity, which include maintaining the flexibility and freedom to explore options around where we will invest across multiple renewable energy sources with the focus, of course, on geothermal. Simplifying how Contact is set up to be more effective and efficient, transforming our operating model and building on the experiences of COVID-19 lockdown to transform the way we work together, being a lead energy retailer in New Zealand as we accelerate digitization, consider more adjacent products and services and optimize our spending and embedding our commitment to best environmental, social and governance practices across Contact, which I alluded to at the beginning. Finally, I do want to thank Rob and the Board for their support over the last year. Thank you to the Contact team and the leaders here today for their commitment to doing a great job. And a big thank you to our customers and suppliers. Thank you also to our neighbors. We live, work and operate in communities across this nation, and we know our actions impact on people and the environment around us. We do not pretend to be perfect, but we do every day strive to be the neighbor you'd want to have. [Foreign Language] Thank you.

Thank you, Mike. We now move to a discussion of Contact's financial statements. The FY '20 financial statements were released to the market in August, and as set out in the integrated report, which is available on our website. Now as your opportunity to ask questions, you may have specifically on Contact's financial statements. KPMG Audit Partners are present at the meeting, should shareholders have any questions of them. Any questions that are of a more general nature will be covered later in the meeting. Are there any questions? Okay. There doesn't appear to be any questions at this time. So we'll move on. We now come to the formal part of the business: matters requiring resolution, which are outlined in the notice of meeting. As I mentioned, shareholders are able to cast their vote using the electronic voting card received when online registration was validated. To vote, you need to click, Get Voting Card within the online meeting platform. You'll also be asked to enter your shareholder or proxy number to validate. Please then mark your voting card in a way you wish to vote by clicking for, against or abstain on the voting card. Once you've made your selection, please click submit voting on the bottom of the card to lodge your vote. Please refer to the virtual meeting online portal guide or use the help line specified if you require assistance. Voting will remain open until 5 minutes after the conclusion of the meeting. Each resolution set out in the notice of meeting is to be considered as an ordinary resolution and, as such, must be approved by a simple majority of votes cast by shareholders entitled to vote and voting on the resolution. The outcome of proxy votes will be displayed for your information after voting on all the resolutions. So we now move to resolution 1. Because the first resolution concerns my reelection as a Director, I will vacate the chair and Whaimutu Dewes will assume the position of Chair of the meeting while my appointment is being considered and the resolution voted on.

[Foreign Language] Rob. So it is my pleasure to move that Robert McDonald be reelected as Director of Contact. Rob was first appointed to the Contact Board in November 2015 and has been the Board chair since 2018. And a brief biography for Rob is set out in the notice of meeting. The Board unanimously recommends that shareholders vote in favor of his reelection. And I'd now like to invite Rob to speak in support of his reelection.

Thank you, Whai. I'm excited to have the opportunity to continue my involvement in Contact Energy. I relish making a contribution to one of New Zealand's most important companies, and I'm passionate about Contact Energy's role in the future of decarbonization of the New Zealand electricity industry. I've been a Director of Contact since November 2015 and was last reelection -- reelected at the 2017 Annual Shareholder Meeting. I'm again standing for election as a Contact Director because I believe is an important time for the energy sector and an important time to ensure that we make the most of the opportunities that will emerge for Contact during what will emerge as a period of disruption. I bring it as diverse set of skills and experience to the Board, having held a number of senior management roles, with a focus on business, finance and strategic planning. I have over 40 years of business experience in New Zealand and overseas, including 25 years at Air New Zealand and including 14 as Chief Financial Officer. I'm a Director of Fletcher Building, AIA New Zealand and Charter Accountants Australia and New Zealand. Also I'm Chair of the University of Auckland Business School Advisory Board. I'm careful not to be overcommitted and have a good balance with my governance appointments. I see my role as providing Contact's CEO and leadership team with guidance, support and strategic advice. I see the chair as a bridge between the CEO and executive management and the Board. I also see the chair role as -- the chair role to facilitate thought provoking robust but constructive debate and challenge between the Board and the executive. It is important Contact contributes to a better New Zealand and delivers value over the long term to investors and wider stakeholders. I'd say wider stakeholders because it is increasingly a requirement, underpinning the ability for companies like Contact to deliver long-term shareholder value. I thank you for your continued support.

Are there any questions in respect of Rob's reelection? So the question. Rob, you're the only Director to hold both shares and bonds. You hold the most shares of all the directors. Will you be encouraging all directors to lift their shareholding given that Contract is going to make the most of the opportunities over the next few years with disruption in the energy sector?

Thanks, Whai. I hold those amount of shares because that's a personal decision that is further than the guidance that directors are given when they join the Board, which is to hold 20,000 shares. And I don't mean to change that at all, any investment decisions that directors make beyond what we asked as directors as matters of their personal investment profile.

Thank you. Well, there being no further questions. Would you now please complete your voting card for resolution 1, please select either for, against or abstain. [Voting]

Okay. Thank you, Whai. Our second resolution today relates to the reelection of another existing Director. It is now my pleasure to move that Victoria Crone be reelected as a Director of Contact. Victoria also joined the Board in November 2015. She is a member of Contact's Audit and Risk Committee. A brief biography of Victoria is set out in the notice of meeting. The Board unanimously recommends that shareholders vote in favor of her reelection. I'd now like to invite Victoria to say a few words before we proceed your discussion on the resolution.

[Foreign Language] My Vic Crone. It is my pleasure to be nominated again as a Director of Contact Energy. The fourth industrial Internet revolution has well and truly arrived. So just think about things like drones, robotics, autonomous vehicles, machine learning, 3D printing, new biotechnologies. You name it, it is heading us. And it is interacting with other major sociodemographic changes that are coming through to create the perfect storm of business change in every single industry. It means the decline of traditional industries, the rise of new industries and the acceleration of disruptive innovation. Our traditional energy sector is moving to smart grids, smart buildings, home energy management and propelling the decarbonization of economies through claim technologies. So while 2020 has been 1 heck of a year, there is no going back, and we are adapting to a new pace of change. I bring a passion to see Contact Energy flourish through this revolution and bring skills and experience in the following areas if I'm elected. Strategic transformation of organizations and associated investment programs to deliver. How technology main streams to create new capabilities for organizations to realize and create new value and optimizing across multiple stakeholder needs: customers, shareholders and rapidly changing societal expectations. I would love the opportunity to continue to apply my experience to support Contact Energy to this disruption and uncertainty into long-term opportunity. Thank you.

Thank you, Vic. I now invite discussion on the resolution. Are there any questions? So the question is the company requires all directors to hold a minimum of 20,000 shares within 3 years of joining. You joined in 2015 and owned 20,500 shares. Is there any reason why you have not purchased additional shares in the past 5 years, given you believe in Contact and you help government guide and determinant strategy in future? As I mentioned before, the Board guidance is to hold 20,000 shares. And in today's share price that is close to full year's director's fees. So I think for most New Zealand companies, my view, that would be quite sufficient. So it's up to you, Vic, if you want to make any further comment, but I'll leave it with you otherwise.