Clp Holdings Ltd S/Adr

Good afternoon, everybody, and welcome to CLP's 2022 Interim Results Briefing. I'm Marissa Wong, Director of VIVESTA Relations, and I am your host today, which will be delivered today by CLP Holdings Chief Executive Officer, Mr Richard Lancaster, and Chief Financial Officer, Mr Nicola Tissot. We lodged our 2022 interim results announcement with the Hong Kong Exchange around midday today. The announcement and this analyst briefing are now available on our websites. This event is also being recorded and will be available on our website later today. Before we begin, please be reminded to read the disclaimer on slide two. And for today's agenda, we'll follow our usual practice and hear from Richard and Nicola, and this will be followed by a Q&A session. For participants, you'll all get a chance to ask questions. For Zoom participants, please use the raised hand icon to ask a live question or send a written question using the Q&A button. If you're joining by webcast, please submit your questions through the Q&A box at the bottom right-hand side of your screen. Preference for live questions will be given to research analysts covering CLP and we'll try our best to get to all your questions. With that, I'll now hand over to Richard to commence the briefing. Thank you, Richard.

Thanks, Marissa. And good afternoon, ladies and gentlemen, and welcome to our 2022 interim results presentation. The last 18 months have demonstrated just how integral energy is to our lives. This was the case during COVID where economies were locked down and we continued to power homes and businesses. And we're seeing it today with the war in the Ukraine impacting the affordability and the reliability of energy supply around the world. Despite some of the most challenging times this industry has ever seen, we have delivered solid performance in Hong Kong and dependable earnings from our clean energy portfolio in mainland China. This is a testament to planned diversification investments and a focus on resilient and reliable energy systems in our region. However, reflecting these demanding energy markets, our thermal operations in mainland China and Taiwan have been impacted by high international coal prices. And in addition, extreme market conditions, volatile wholesale prices, and low generator availability have driven earnings materially lower in Australia. As the energy transition continues to reshape our industry, our commitment to lead and invest in the decarbonization of our operations is even more clear. A decisive step in this direction is the strengthening of our partnership with CDPQ announced in mid-July, which will support the development of a greener economy in India. Now is the time to accelerate our own transformation with even greater purpose and determination so that we can deliver sustained financial performance in a lower carbon future. With our resilient track record, our strong position in Hong Kong, and our long-term commitment in mainland China, we're optimistic about the future of energy and the future of CLP. Financially, our Hong Kong and mainland China businesses reported solid performance. At the group level, international commodity prices and the impact of market and operating conditions in Australia led to significantly lower earnings. Before factoring in the impact of Energy Australia's unfavorable fair value movement, the group reported half-year operating earnings of $4.1 billion, around 25% lower than last year. Adding in the unrealized accounting losses from these fair value movements, operating earnings were a loss of $3.8 billion. The Board has kept the second interim dividend constant at 63 cents per share. This is in line with the first interim dividend of 2022, and it's the same as the first two interim dividends last year. Based on the share price at the end of June and the most recent four interim dividends, this provides a yield to investors of around 4.8%. Turning to our operating performance, over the years we've established world-class reliability which has helped power Hong Kong's growth and remains exceptional compared to most urban centres in the world. An unfortunate Cable Bridge fire in June led to a loss of supply to some of our customers in the New Territories West region. This impacted our unplanned customer minutes lost which is our main reliability Our team worked very hard to restore service as quickly as possible. However, it's a reminder of the importance of our commitment to reliably service our customers. Electricity generation was lower, primarily driven by lower demand in Hong Kong, lower thermal output in China and coal constraints in Australia. Our business grew in the first half with more customers and more investments in renewables, batteries, new gas and hydrogen technologies across the group. I'll now hand over to Nicolas to take you through the financial results.

Thank you, Richard, and good afternoon. I'll start with a snapshot of our financial results. Although most of our operations navigated the energy crisis well, these accounts bear the mark of higher and extremely volatile energy prices in Australia. Our diversified portfolio delivered higher revenue of nearly $48 billion, driven by higher tariff and fuel recovery in Hong Kong as well as high wholesale prices in Australia. EBITDAF decreased by 16% to around $10.8 billion, mainly due to lower margins from thermal generation under the pressure of higher fuel costs. With our sustained capex, we reported a slightly higher depreciation and amortization and therefore a 27% decrease in ACOI to around $6.1 billion. Our operating earnings were massively impacted by unfavorable fair value movements on forward energy contracts in Energy Australia. In May and June, we alerted the market of this impact on which I will expand in next slide. Including the accounting effect of fair value, group operating earnings were a positive $4.1 billion. After taking into account the fair value movement, it was a loss of $3.8 billion. Total earnings amounted to a loss of $4.9 billion due to the impact of the sale of an additional 10% of APRAVA Energy to CDPQ. Capital investment across the group was over $7.6 billion as we continued our investments in decarbonization across our portfolio. Drilling into operating earnings and moving down the P&L, our business in our home Greater China markets delivered higher results, with contributions from Hong Kong and mainland China increasing by almost half a billion dollars. More than offsetting this were the losses in Australia, where we faced considerable operational challenges and the unprecedented volatility of the energy market. The shortfall in generation at Yallourn and Mount Piper in a period of very high wholesale prices led to a loss of $700 million for Energy Australia at operating earnings before fair value level. The contribution from APRAVA Energy, while marginally lower, was steady and we believe that the deepening of the partnership with CDPQ will further drive the pace of our growth in India. For Southeast Asia, open power stations saw very high coal prices, which will be passed through next year, but impacted margins this year because of the usual annual time lag in the tariff indexation. The increase in other earnings and allocated items relates mainly to spend on our digitalization and other operating capabilities in support of our broader transformation. The mark-to-market losses on energy derivatives in Australia had a negative impact of $8 billion after tax. To illustrate the magnitude of the shock on forward electricity prices in New South Wales, the price for delivery in the second quarter of 2022 quadrupled in the first half, and the price for delivery in the last quarter of 2023 nearly doubled. I would like to stress that these losses are not related to underlying operational business performance. They are unrealized losses reflecting the opportunity cost versus prevailing prices at a particular point in time. The original sale price of the hedge will be realized at contract expiry matched against the generation hedge, with the fair value losses reversed. There is a slide in appendix giving you all the details. This half year's results includes another one-off which is related to the sale of an additional 10% in APRAVA Energy to CDPQ. As per accounting rules, although only 10% was sold, the $986 million negative impact booked in our half-year accounts also includes a fair valuation of CLP's remaining 50% interest. As announced at signing, the transaction is recorded as an asset held for sale in our first half accounts and a foreign exchange loss will be booked when the transaction closes in the coming months. These two exceptionals bring total earnings to a loss of $4.9 billion to be compared with a profit of $4.6 billion for the same period last year. I will now turn to our business performance. After excluding the impact of the depreciation of the Australian dollar and the Chinese renminbi against the Hong Kong dollar, our ACOI was down by 26%. This was mainly driven by Energy Australia turning to losses due to a shortfall in generation in a period of very high wholesale prices, generating a significant loss. Conversely, Hong Kong was dependable at a high level and earnings from mainland China and India were higher. Finally, we will come back on how high coal prices impacted earnings from our thermal assets in Taiwan and mainland China. I will now take you through the performance and outlook of each of the business units. Please note that from here, all variances will exclude forex. In Hong Kong, we delivered another dependable half-year performance despite the pandemic, the milder weather, economic recession, supply chain disruptions and fuel cost increases. The return on higher net fixed assets reflected our ongoing investment in major decarbonisation and network enhancement projects. Scheme of control capital expenditure continued at the high $4.9 billion for the half, 2% higher than last year. We reported ACOI of $5.8 billion, flat compared with last year because of lower allowable tax and interest expense under the scheme of control. Local electricity sales declined by 4.1%, notably driven by milder weather in May, in sharp contrast to record high temperatures in the same months a year earlier. We made good progress on our major decarbonisation projects. This includes the second new combined cycle gas turbine at Back Point and our offshore LNG terminal. Where work on the pipeline to Black Point Power Station is nearing completion. Both projects will go into service in 2023. In the short term, rising fuel costs will significantly impact electricity bills in Hong Kong as in the rest of the world. We will continue to maintain prudent cost controls and a range of fuel sources to mitigate the impact, but significant pressure on tariffs will be inevitable. Looking forward, we will work with the government on the new 2024-2028 development plan to ensure an orderly transition towards Hong Kong's climate action plan to become net zero emission by 2050. Overall, for mainland China, we recorded an ACOI of $1.6 billion, 30% higher than last year. Our nuclear and renewable assets delivered strong financial performance, while high coal prices have impacted the margins of our thermal plants. The positive variance in thermal earnings you see on this slide was largely due to a one-off adjustment last year for the Shandong Joint Venture assets. The operation of the nuclear portfolio remained more than dependable. However, the strong performance at Tianjiang may not be repeated in the second half due to the uncertainty in economic growth and power imports into Guangdong. Going forward, we will pursue more non-carbon investments across mainland China and have already made good progress this year securing development rights for new renewable energy projects. We will continue to use all the options available to mitigate the impact of high coal prices at Fangshan Gong. We will also continue to explore investment opportunities in energy infrastructure projects and deploy innovative technologies and business models to capture emerging opportunities in the energy as a service space. Turning to Energy Australia's financial results, the combination of extreme international and domestic market conditions, as well as constrained generation, had a major impact. Mount Piper's output was penalized by coal supply constraints, while several unplanned outages led to lower generation formula. As these volumes were hedged, reduced generation resulted in Energy Australia having to settle contracts that the assets were unable to cover at the prevailing high prices on the spot market. I will discuss the impact of these unprecedented prices on Australia's results in more detail in a subsequent slide. The loss of margin from Montpiper and Yallourne was partially offset by our gas-fired generators being able to run more, and also by the impact of improved gross margin in the customer segment. However, this could not prevent Energy Australia from recording a loss of just over HK$1 billion at the ACOI level. Looking ahead, in the customer segment, we will continue to support customers with a range of energy services. We expect to see higher costs to procure energy and continuation of intense competition in the retail market. We will also continue to manage the operation of our generation portfolio focusing on reliability and cold supply. The cold supply to Mount Piper and the availability of Yaluon are expected to improve and we are already seeing some positive indications although we expect market conditions to remain challenging in the second half. In the medium term, if high wholesale prices continue, it should improve financial results, provided we can purchase the fuel and generate the electricity as required. As we continue through the energy transition, we will proactively explore partnerships to continue our move to cleaner and flexible assets as we do with the Wurin Battery, Hitstone Pump Hydro Storage, and Talara B Gas Hydrogen Picker. I think we have a small technical issue. I propose we move straight to the cash flow and financial situation slides, please. Finally, we have some comments on the specific situation we had in Australia. As I just mentioned, I would like to provide some context on what has hit the performance of our two major generators in Australia using the example of Mount Piper. Due to very disturbed coal supply, generation at Mount Piper was severely constrained. The chart on the left shows the shortfall of generation volume for Mount Piper in the first half of 2022 versus the first half of 2021, severely impacting its gross margin. In addition, forward contracts for 2022 were struck in advance at the relatively low price prevailing at the time of hedging. In a confluence of unexpected events, the national electricity market went through an abrupt inflection during the second quarter of 2022, as illustrated in the chart on the right. Mount Piper was therefore required to settle its shortfall position against contracts sold in the market at this extreme, sustained high prices. This resulted in a total $1.5 billion reduction in gross margin for Mount Piper as shown in the ACOI chart. Our other major generator, Yilon, also experienced an unexpected shortfall in generation. While the cause was not linked to coal supply constraints but to unplanned outages, it also had a significant HK$940 million negative impact on gross margin. Now turning to APRAVA Energy. On 12 July, we signed and announced the sale of an additional 10% stake, thereby strengthening our partnership with CDPT. Once completed, we will be equal joint owners and APRAVA Energy will be deconsolidated from CLP accounts. It will enable APRAVA to grow on its own financial resources and reduce pressure on CLP Holdings balance sheet. During the half, the KMTL transmission asset acquired at the end of 2021 started to contribute to earnings. The generation from our renewable portfolio was also higher. However, it was more than offset by higher O&M costs. At Jajar, while operations have been stable, our earnings were impacted by a lower tariff under the terms of the PPA. In the near term, the business will focus on continuing the construction of the Sidpur wind project in Gujarat. which is expected to complete in the second half of this year. And looking forward, supported by CDPQ and CLP, Aprava Energy will participate in India's move towards a lower carbon future, investing in renewables, transmission and smart meter infrastructure. Operationally, our assets in Southeast Asia and Taiwan continued to perform reliably. However, there was a $125 million loss driven by a threefold increase in coal prices for the Hoping Power Station. As a reminder, the energy tariff at Hoping is adjusted annually to take into account prior year coal prices. Given the high coal prices in 2022, we will see higher tariffs next year. Operations were stable at Lopuri Solar Farm in Thailand, but its contribution was lowered by a step down in PPA tariff starting December 2021. Looking ahead, Hoping will focus on optimizing fuel costs when international coal prices are expected to stay high. Moving to the cash generation and liquidity of the group, cash flow generation was negative in the first half, mainly due to extremely high margin deposits for Energy Australia's hedges, with a negative contribution to cash flow evolution of HK$5.8 billion. In addition, EA operational Cash flow evolution as well as unfavorable movements in the fuel close account due to higher fuel costs and the tariff stabilization fund due to lower electricity sales under the SOC resulted in a total cash outflow of $3.4 billion for the half compared to a $6.1 billion inflow last year. The group increased its capital investment to $7 billion. Within this total, $5.1 billion was for investments in the energy transition and to improve the transmission and distribution networks in Hong Kong. We also spent around $2 billion towards a cleaner portfolio in Australia, mainland China, and India, and made initial payments for our new head office in Hong Kong. Dividend payments for the half were maintained exactly at the same level as last year at $4.6 billion. Our financial position continues to be robust despite the temporary liquidity requirements in Australia. Our net debt to total capital ratio remains healthy. We have significant unroamed debt facilities and cash in hands and strong credit ratings. Net debt has increased to $59 billion due to significant temporary cash deposits required in Australia as well as capital expenditure for large-scale infrastructure projects in Hong Kong. As a result, our net debt to total capital ratio has temporarily increased to 32.7%. In this context, our actions to raise new bank facilities both in Australia and in Hong Kong allowed the group to maintain M.A. M.B.A. M.A. As a matter of fact, our blended average interest rate for the first half of 2022 was slightly lower than last year. S&P have just reaffirmed CLP Holdings' A credit rating with stable outlook noting the funding needs in Australia should be temporary. To conclude, Australia's extraordinary operating conditions took their toll J.P. J.P. J.P. J.P.