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Edited Transcript of GNE.NZ earnings conference call or presentation 20-Feb-20 10:00pm GMT

Half Year 2020 Genesis Energy Ltd Earnings Call

Auckland Mar 11, 2020 (Thomson StreetEvents) -- Edited Transcript of Genesis Energy Ltd earnings conference call or presentation Thursday, February 20, 2020 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chris Jewell

Genesis Energy Limited - CFO & Executive GM of Strategy

* Marc England

Genesis Energy Limited - CEO

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Conference Call Participants

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* Aaron Ibbotson

UBS Investment Bank, Research Division - Director & Research Analyst

* Andrew Rupert Pelham Harvey-Green

Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities

* Grant Swanepoel

Craigs Investment Partners Limited, Research Division - Director & Head of Institutional Research

* Nevill Gluyas

Jarden Limited, Research Division - Director of Equity Research

* Stephen Hudson

Macquarie Research - Head of Research

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to the Genesis Energy 2020 Half Year Results Investor and Analyst Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded. Today, I'm pleased to present Marc England, Chief Executive Officer; and Chris Jewell, Chief Financial Officer. They will initially run through a short presentation.

Please begin your meeting.

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Marc England, Genesis Energy Limited - CEO [2]

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And good morning, everyone. Welcome to the 2020 Half Year Results Presentation for Genesis Energy. Shortly, I'll talk through Genesis' key highlights and achievements for the first half of the financial year. Our financial performance will then be covered up by our CFO, Chris Jewell, followed by which I'll provide a brief update on our operational progress to date. Chris will elaborate further on our outlook for the full year prior to us opening up for Q&A at the end.

If you flip to Slide 4 on our results at a glance. As you'll see shortly, the half year numbers tell a tale of 2 different arms of our business. The retail segment continues to deliver on its goal to put customers in control of their energy through increased engagement with energy and deliver on the business and financial goals we set out a few years ago to grow through a mixture of increased loyalty, driving low residential churn, targeted B2B growth and LPG operational synergies and profit growth.

Meanwhile, gas supply issues, higher fuel costs and less hydro generation have put short-term pressure on the Wholesale segment, which has materially impacted the first half when compared to the same period last year, which itself was a record. We expect the second half of FY '20 to be much better than the first in the Wholesale segment with a full production capacity at Kupe and less Genesis' plant outages within the last 6 months despite outages elsewhere across the sector.

In summary, the financial performance for the first half of FY '20 saw EBITDAF down $30 million versus the same period last year to $167 million.

Net profit was down from $49 million to $9 million with the key drivers being fair value adjustments for this year swing negatively, upstream positively in the first half of last year and higher depreciation due to an increase in the value of our generation assets at the end of FY '19. Chris will discuss our impact on underlying earnings in more detail shortly.

We're declaring a final dividend of $0.08525 per share, half of last year's full year dividend, which is consistent with our recent approach to half year dividends and aligned to our policy to increase dividends in real terms over time.

Back to the Retail segment. You'll see that our netbacks across all 3 fuels continue to increase year-on-year with the LPG netback increasing by 17.9%. Customers purchasing more than one fuel grew by 5% to over 119,000 customers, as we continue to push the benefits of our multi-fuel energy offering at Genesis. We introduced a new metric of gross churn to the market last year as a clearer measure of loyalty as it measures before saves and win backs. I'm pleased to say gross customer churn continues to fall, down 2.5 percentage points when compared to a year ago with net churn also down 1.2 percentage points.

The digitization of our customer service center and improved service levels across the board has continued to drive cost to serve down 3.5% on prior half year to $139 per customer. We've confirmed this week that we will pass-through $50 million of network cost reductions to our customers from the 1st of April. This is great news for Genesis' customers and perhaps also other energy consumers if other retailers do the same. This is a profit-neutral decision for our Retail segment, have an important one, as energy consumers need to see their prices reflect cost changes and also see they can fall as well as rise. Over the last half year, we've seen the long hangover resulting from the chronic gas shortage experienced last financial year. High fuel costs, particularly resulting from the high cost of coal sitting in our stockpile coupled with the low hydro inflows and consolidation into Q1 2020, have all impacted earnings in our Wholesale segment. These factors will not persist, and we expect to see improvements in the second half, particularly with less planned outages in the portfolio. More on that later. Pleasingly, portfolio management activities using various fuel electricity derivatives positively impacted the first half results.

On to Kupe. Production levels were down 14% due to that planned statutory 30-day outage in November, which was successfully completed by Beach Energy with no plant or health and safety issues. You'll see further work at Kupe in February with a well perforation project, that if successful is expected to lift production by up to 5 petajoules prior to mid-2021 to offset the natural decline ahead of the compression project completing around the same time.

I'll now hand over to Chris to talk you through our financial results in more detail.

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Chris Jewell, Genesis Energy Limited - CFO & Executive GM of Strategy [3]

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Good day, Marc. So I'll step through each of the summary points in more detail on subsequent slides, but Slide 6 contains a summary of all of our key metrics. EBITDAF, NPAT, underlying earnings, operating cash flow are all down on the prior comparable period due to the market conditions. But pleasingly, the core controllable metrics of controllable operating costs, CapEx and debt, well under controlled.

Operating expenses were flat at $123 million. CapEx was down 3%, net debt was down 1%, dividends are up 0.9%, EBITDAF was down 16%, NPAT down 82%, underlying earnings was down 62% and operating cash flow was down 8%.

So if I just step forward to Slide 7 and dividends. So our Board has made the decision to pay a half year dividend of $0.08525 per share. This represents a 0.9% increase on the prior half year and continues the trend of continued real increases over time. Imputation remains at 80% with a supplementary dividend of $0.012035 per share to be paid to nonresident shareholders. We continue to offer our dividend reinvestment plan at 2.5%. And for our shareholders, this represents an effective way to reinvest dividends, and for Genesis, it remains an effective approach to acquiring additional equity. The payout ratio of 93% of free cash represents an increase on prior years and is reflective of the reduced earnings this half.

So Slide 8, half year EBITDAF. EBITDAF for the half year was down $167 million -- down [to $167 million]. This is down from half year '18 to '19, which both had stronger wholesale market conditions. Within the $167 million, our Retail segment has grown $9 million, which is a very good result, whilst the Kupe and Wholesale results were down in line with variable market conditions and planned outages. It's worth noting the Retail segment faced increases to its underlying cost base across all 3 fuels and has grown value over and above these increases.

On Slide 9. Turning to the key components of performance in each segment. So at a Retail segment level, we saw improved residential margins achieved from cost and strict residential portfolio management by maximizing the volume, price and discount mix to deliver increased value. We had continued growth in LPG, which remains a key initiative that supports our FY '21 targets. And this segment has outperformed our expectations from the time of this acquisition. These positives were partly offset by softer business margins due to rapidly rising wholesale costs across all fuels, longer tenured contracts and inability to pass-through some costs immediately and our decision not to pass on these increases to all consumers.

At a Wholesale level, the prior year was a record for Genesis. The half year performance was impacted by lower hydro generation, which was down 15% on the prior comparable period, following higher inflows in higher comparable period also; a low June 30, 2019, starting storage position, Waikaremoana was at 11% of average and Tekapo was at [87%] of average on June 30; and a decision to conserve water for the period of the HVDC outages and the Pohokura outages in quarter 3 FY '20, which we're rolling through at the moment. The hydro -- reduced hydro generation was replaced by thermal generation.

The second point I'd make is the dollar per megawatt hour cost of fuel for thermal generation was 19% higher than first half FY '19 due to a 21% increase in coal costs following a period of higher import prices 6 months earlier. Higher cost spot gas was used to replace the gas during the Kupe outage and carbon costs are also rising. The aging there has been put in place in some way to offset these impasse. So the net result was a reduction in EBITDAF of $30 million year-on-year. Importantly, these factors are predominantly driven by a combination of uncontrollable factors and do not reflect any change in underlying performance or outlook.

Lastly, the Kupe segment delivered a result $10 million lower than the comparable period. This was well signaled as it can be attributed largely to production being down 40% -- 14% due to the planned 30-day statutory outage that was successfully completed in November and also the field coming off plateau. This outage was signaled at the full year '19 presentation. And pleasingly, it was completed ahead of time and on budget.

So just turning to Slide 10 and underlying earnings. So 4 components have impacted the $40 million decrease in NPAT. These 4 components are reduced EBITDAF, higher depreciation, unfavorable movement and fair value adjustments and was offset by a reduction in income tax due to the significant decrease in EBITDAF and income. A large component of the movements are a function of our accounting approach to fair value in generation assets and derivative instruments. The unfavorable movement in fair value adjustments of $13 million is driven by higher forecasted future electricity price, reducing the value of disruptions and other sales, CFDs. Our forecast for future electricity price is often heavily influenced by short-term factors. The unfavorable movement in depreciation is due to the June 29 increase in book value of the generation assets following the regular fair value exercise and some one-off adjustments for soon-to-be-replaced assets. This increase in DDA is partly offset by a decrease in oil and gas depletion from the planned 30-day outage at Kupe.

So turning to Slide 11, controllable operating expenditure. Controllable expenses have fallen since half year '18 and remained flat on half year '19. Much of this relates to realizing synergies following the 2 acquisitions in FY '17 and reduced costs in our customer operations and corporate centers. Cost to serve connection is down a further $3 per ICP since June 2019 to $139. Controllable operating expenses are now shown as per the new segment notes. So there have been a few changes in the way we describe these across the segments.

Some notable movements within controllable operating expenses compared to the prior half year include a reduction in customer acquisition costs by $1 million; an increase in staff cost or staff costs by $2 million due to the capitalization of some labor-intensive projects in the prior comparable period; an increase of Kupe operating expenditure due to the planned 30-day outage, so we had some project expenditure at Kupe; and a reduction in contractors and software costs of $1 million.

So turning to Slide 12, capital expenditure. Capital expenditure is elevated this year as we complete a couple of significant one-off installation and upgrade projects. The one-off installation of the intake gate at Tekapo gives us significantly enhanced earthquake protection, and this is well underway and is expected to be completed in financial year '21; as is the Kupe Inlet Compression Project, which unlocks a large portion of the residual reserves at Kupe and that is due for completion in financial year '21 also. Other significant maintenance projects during the period included the planned statutory outage at Kupe, Tekapo turbine overhaul and Tekapo B and Waikaremoana local service upgrades.

Our full year CapEx guidance remains unchanged at up to $100 million. Key projects for the second half of the year include the completion of the turbine overhaul at Tekapo, intake gate replacement, Kupe compression and the recently announced well perforation project at Kupe as well as some upgrades to our LPG operational depots.

So Slide 13, capital structure. Net debt has been reduced by $12 million since June 2019, and our ratio remains within our target band, although it is at the top end of the band. We do expect this ratio to fall as earnings grow from financial year '21 as CapEx rolls off. And with the fall of our legacy contracts, this will also add to earnings growth from FY '21 and then outer years.

Importantly, Standard & Poor's reaffirmed a BBB+ credit rating in December 2019. And we do remain committed to maintaining this rating. Our average tenure of debt is 11.4 years and the average interest rate of 5.5% for half year '20. That's a reduction of 0.3% from the full year 2019. And we will see our cost of funds continue to fall as fixed rate, debt matures in a lower interest rate environment.

So at that point, I'll hand back to Marc, and Marc will give you a bit more flavor from an operational perspective.

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Marc England, Genesis Energy Limited - CEO [4]

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Thanks, Chris. So starting with Slide 15. We set out a few years ago to drive value in our residential portfolio of customers by taking data-driven and customer-centric approaches to drive a deep level of engagement in customers who in turn would reward us with their loyalty. By putting them in control of the choices they have, giving them more knowledge than they've ever had and helping them with useful advice to take action, we're starting to differentiate our offer and have an impact on the metrics. I won't pretend that every customer wants to engage with us in the same way or in some cases, at all. But this is a super price-sensitive market with lots of choice for consumers that we're contending with.

Politicians and regulators still see churn as the best measure of whether competition is driving consumer choice. We see it a bit differently though. In that, while being able to choose between multiple retailers is important, of equal importance is having choice within a retailer about how you consume your energy, how you want to pay, engage and understanding the choice you have and about when you consume it. We still have some way to go, but we're happy with the progress to date.

This slide demonstrates how some of our digital features have delivered choice and insight for our customers over the last few months and how we're increasingly learning what works and what doesn't and adjusting course where needed. This strategy has helped us increase the value of our customers by 12.4% since January 2019 and continues to drive down residential customer growth churn, down 2.5 percentage points to a record low level.

Furthermore, on Slide 16, as we continue to increase digitization and automated service offerings, we are able to continue to drive down our cost to serve. Cost to serve has been steadily improving over the last few years, adding up to a total reduction in cost to serve of $20 per customer since FY '16. As much as possible, we're digitizing all engagements. However, for those who still want to speak to us but don't want to wait in a queue, we've recently enabled a function that allows our customers to book a call for time that suits them.

Top right of this slide also shows the first time the trend over the last 3 years and across our LPG products, where we've been able to absorb the increasing cost of wholesale LPG, reduce the cost to deliver and grow our margins, all while creating a better customer experience. Growing the LPG customer base and earnings from it is a key initiative driving towards our FY '21 targets.

We continue to report and track netbacks across all 3 fuels for both the residential and business segments as shown on Slide 17. Volumes and netbacks are up for all 3 fuels in the business segment, gas and electricity volumes have come under pressure in the residential segment due to competition, and in the case of gas, particularly high wholesale prices. However, netbacks continues to still rise for both.

Moving on to the Wholesale segment now on Slide 18, the long hangover. Inflows at 82% of average during the first 4 months of FY '20 combined with the starting storage levels below average limited our hydro generation with total generation down 15% year-on-year to 1,452 gigawatt hours. Beginning of January, hydro storage was at 122% of average, up 44 percentage points from the prior year following significant inflows in December 2019. This will ease the pressure on Genesis for the second half, but outage at Tekapo will limit South Island generation until May, at which point we will likely be starting winter with a full lake. The last couple of weeks or last month, I should say, of inflows into North Island has also been challenging.

Thermal fuel costs on average were up 19%, and portfolio costs were up 38% for the half, but the weighted average fuel cost for thermal plant is at $82 per megawatt hour. This was driven by a 14% increase in gas costs due to more spot purchases as a result of the planned statutory 30-day outage at Kupe and an increased coal burn costs following more expensive imports 6 months earlier. The weighted average cost of coal burn for FY '20's first half was up 21% to $7.1 per gigajoule or $81 per megawatt hour excluding carbon. As we've now worked through most expensive coal purchase at a price peak in FY '19, the weighted average cost has now peaked and will fall in the second half. Kupe production is down in the first half due to the 5-year lease statutory outage, but we'll recover in the second half of the financial year.

We're on Slide 19 now. The well perforation project we announced a few weeks ago has passed the critical stage where wireline surveys have confirmed the benefits of additional -- having additional perforations. Once the perforations are complete, if successful, our expectations are for additional production through the rest of 2020 and the first half of 2021 of up to 5 petajoules.

Gas supplies still remain a risk for the market, however, as Pohokura continues to produce below levels of a couple of years ago.

Another theme for us is rising carbon prices. Our expectation is that carbon pricing will continue to flow through to wholesale pricing. Genesis' hedging policy has insured below market cost, which has provided some protection from rising carbon prices. However, our observation over the last year has been that as carbon pricing has risen, competitors have priced renewables into the market higher, knowing that the price Genesis will bring our Rankine units online.

The ASX future market is at elevated levels and remains elevated through to 2023, driven by gas and coal prices and market supply constraints, carbon prices and short-term HVDC outages. Volatility has moderated in the past 6 months though relative to the first half of FY '19.

So on our final Slide 20, talking about our sustainability future. There's a number of things we're proud of the Genesis. We announced this morning as well is the Waipipi Wind Farm where we're at the advanced stages of discussions over a solar array in the North Waikato, which could add up to 300 megawatts of solar due in around 2023. We're keeping confidential for now who our partner is with this, but I can assure you, it's a similar model to the Waipipi farm -- Wind Farm that we've contracted in partner with Tilt and the Genesis will be paying a fixed price for the power from the panels and not putting any capital into it. I'm sure you'll have questions later on more on that.

Across the rest of our sustainability plan, we're still engaged in our School-gen Trust where we're proud to be investing in science, technology engineering and math capability within the schools across New Zealand. We've taken a 40% stake in Zilch, which is the only -- EV-only car-sharing scheme in New Zealand and they're now growing in Auckland and Wellington. And our customers are continuing to engage in our IQ app, not only from an energy management perspective but from a sustainability perspective with our eco-tracker tool, which gives real-time data on what's going on the market, and increasingly, it will give customers advice on whether they want to or can or choose to consume their energy in a different way because of the carbon emissions at that point in time in the market.

We've also announced the move to the Wynyard Quarter for our Auckland office later in 2020. That will be to a 6-star energy-rated building and with a theme around public transport for all employees, which will [tend] our consumption profile around emissions that we can control.

I'll now hand you back over to Chris to cover our outlook for the remainder of 2020, and look forward to answering questions in a minute.

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Chris Jewell, Genesis Energy Limited - CFO & Executive GM of Strategy [5]

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Thanks, Marc. So second half, we are expecting an improved performance in the second half relative to the first half, as there are a number of factors that are different, including the ongoing gas constraints at Pohokura plant in March and the HVDC outage. They do continue to impact price volatility, but they have created trading opportunities. Thermal margins will be improved due partly to our lower average cost of fuel with higher priced coal used in the first half, and Kupe will benefit obviously from one more month of production.

So our FY '20 guidance has been updated to reflect the persistent low hydro inflows in the North Island catchments of Waikaremoana and Tongariro. And additionally, the significant rain events in the South Island have exacerbated constraints on the HVDC and also led to a softening in spot prices in both islands. And consistent with prior years, we have also narrowed our guidance range by $10 million.

So as a result, we've reduced the top end of the guidance range, and our FY '20 EBITDAF guidance range is now $360 million to $370 million EBITDAF. Our FY '20 capital expenditure guidance will remain unchanged at up to $100 million for the year.

So as we wrap up the full presentation and move to Q&A, I'd just like to summarize the half year's result as one that we feel the team has done a good job in managing the controllable factors over the past 6 months. We've continued to create really good momentum in our Retail segment, and we've defended the Wholesale result, whilst we are managing through a challenging and volatile set of circumstances and the very weather-dependent and field-dependent Wholesale segment.

So with that, we'll wrap up, and I'd love to hear your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question today from Grant Swanepoel with Craigs.

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Grant Swanepoel, Craigs Investment Partners Limited, Research Division - Director & Head of Institutional Research [2]

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Few questions, obviously. So you mentioned -- so Marc, it was you who mentioned that you'll be passing on the distribution line, cost cuts 1st of April. Why would you signal this? When the prices go up, you don't normally pass them on. So why do you only take it on the downside?

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Marc England, Genesis Energy Limited - CEO [3]

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That's factually incorrect. Actually, Grant, we put price rises through over the last couple of years where the wholesale prices have risen or network costs have risen. And so we've been pretty regular in our approach. So we've signaled this one because the decision has been taken around the time of results announcement, so it's too tough to signal it. And we think it's the right thing to do. So we raised prices in January because of Wholesale price rises. We raised prices the prior year, too. And then the last -- probably the last year to 18 months, I think probably the Wholesale price rises have clouded any movement in network charges, but we always factor them in. And it's important to us to send a signal to our customers that we will reflect costs in their price, whether it goes up or down.

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Grant Swanepoel, Craigs Investment Partners Limited, Research Division - Director & Head of Institutional Research [4]

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What is your price increase in January, quantum?

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Marc England, Genesis Energy Limited - CEO [5]

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For uncontracted customers, we had a roughly about 5% price rise in January, effective January 1 or 7. So that was announced late last year.

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Grant Swanepoel, Craigs Investment Partners Limited, Research Division - Director & Head of Institutional Research [6]

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And then your carbon trading was up this half quite substantially. Does that mean that we should reassess the table you put out in terms of what your carbon average cost is going forward? Have you used up some forward potential in this half to shore up your earnings?

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Chris Jewell, Genesis Energy Limited - CFO & Executive GM of Strategy [7]

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No. No. We run super books, Grant. So what we have conveyed previously just relates to the cost to our generation business for generating activities.

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Grant Swanepoel, Craigs Investment Partners Limited, Research Division - Director & Head of Institutional Research [8]

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Okay. Kupe's perforation project, can we expect a little uplift in -- relative to our expectations for FY '20? Or is this all a FY '21 benefit?

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Marc England, Genesis Energy Limited - CEO [9]

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No. This is -- the project will be finished in the next couple of weeks. So you'll see an uplift, assuming success, in the back end of the FY '20 and '21. So it's roughly an 18-month profile. So we're saying up to 5 petajoules spread over that 18-month period.

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Grant Swanepoel, Craigs Investment Partners Limited, Research Division - Director & Head of Institutional Research [10]

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And then obviously, on the solar farm, hundreds of questions, but I'll just want to know a couple. Are you supplying the land for this?

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Marc England, Genesis Energy Limited - CEO [11]

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We are not supplying the land, but the land has been secured.

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Grant Swanepoel, Craigs Investment Partners Limited, Research Division - Director & Head of Institutional Research [12]

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And you're confident that the pricing is in the ballpark of what you can get wind for, so we shouldn't be expecting that you're doing this as a balancing factor, but it's just a normal economic decision?

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Marc England, Genesis Energy Limited - CEO [13]

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Yes, absolutely. In fact, the answer to the first part of the question is yes, simply yes. It is a normal economic-related decision. But it is a balancing factor in the sense that having a mix of different sources in our portfolio makes sense. If you think about the North Waikato and Huntly in high temperature summer days, I'd love to have had some solar panels contributing over the last few weeks when we've had to turn down Rankine's because of river heating issue. So there is no alignment there in our portfolio.

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Grant Swanepoel, Craigs Investment Partners Limited, Research Division - Director & Head of Institutional Research [14]

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And can we just assume that you're not going to pull any triggers until at least you have some certainty around Tiwai?

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Marc England, Genesis Energy Limited - CEO [15]

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Yes, but remember the trigger is, yes, yes, you can. We're not going to commit -- in that -- and that you can -- also this is the same structure as the Waipipi Wind Farm, and in that, Genesis will commit to buy the power, but we're not putting any capital in, and therefore, taking huge risks. But yes, you won't see any final investment decision before at least the end of March.

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Grant Swanepoel, Craigs Investment Partners Limited, Research Division - Director & Head of Institutional Research [16]

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Fantastic. And then just 2 more. The FY '21 guidance unchanged at this stage, $400 million to $430 million?

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Marc England, Genesis Energy Limited - CEO [17]

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Correct. Well, I think the last time we gave you any guidance for FY '21 was $400 million to $420 million.

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Grant Swanepoel, Craigs Investment Partners Limited, Research Division - Director & Head of Institutional Research [18]

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$420 million. The last one, just in terms of...

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Marc England, Genesis Energy Limited - CEO [19]

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The last was $400 million to $420 million in September.

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Grant Swanepoel, Craigs Investment Partners Limited, Research Division - Director & Head of Institutional Research [20]

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And then the last one, just on Contact's results information. The 37 PJs that they've secured gas contracts through '25 is above $8. Does this affect your thinking on how your gas roll-offs could benefit you? Do you think that you'll get a better price than $8 plus? Or is it too early to tell?

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Marc England, Genesis Energy Limited - CEO [21]

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I think in the short term, there are some challenges about the cost or price of recontracting gas, but remember some of the -- all the benefit for us at rolling those contracts off is on us. We used to be long gas, and we sold that gas at a loss to C&I customers. So those C&I customer contracts are back-to-back with our GSAs. As our GSAs roll off, we no longer have that headwind in our P&L. So it's not so much the gas we need to run our power stations, it's the gas we contract to customers as a loss versus our GSA prices, but nothing has changed there.

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Operator [22]

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We'll hear from Andrew Harvey-Green with Forsyth Barr.

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Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities [23]

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Marc and Chris, a couple of questions from me, actually sort of covering much of the territory that Grant has, to be honest. But first of all, just on the Kupe and the perforation work. As that comes through successfully, has that actually been included in your FY '20 guidance numbers, the uplift -- expected uplift in production from that or will that be additional?

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Chris Jewell, Genesis Energy Limited - CFO & Executive GM of Strategy [24]

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Yes, it has.

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Marc England, Genesis Energy Limited - CEO [25]

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That's been included, Andrew.

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Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities [26]

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Okay. Yes, yes. And secondly, on a similar vein on those emissions trading gains, which were well up, how should we think about the sort of level of gains going forward from here? I presume the uplift came partly because of the increase in carbon prices, so you're able to secure a bit of prices. So should we assume reasonable trading gains going forward or expect that to sort of taper off to what they have been more over previous halves?

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Chris Jewell, Genesis Energy Limited - CFO & Executive GM of Strategy [27]

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Yes, I think your latter would be -- should be your assumption. I think, this is always upside. It's always volatile. It all depends on how rapidly the carbon market falls or rises. So don't expect super profits and carbon trading gains on the go forward.

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Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities [28]

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Yes. Okay. And sort of last question around this, I guess, the guidance side of things. The first half results, I guess, when I look at it, it was probably a little bit softer than what you may have originally imagined with original guidance. You would just sort of give us a feel for when you set the FY '20 guidance back in August, what your first half expectation was within that?

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Chris Jewell, Genesis Energy Limited - CFO & Executive GM of Strategy [29]

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Yes, we don't -- obviously, we don't guide first and second half. But your sentiment is appropriate. It was a little bit low in terms of -- than our internal expectations when we looked at it nearly 9 months ago, maybe even 12 months ago. But no, we don't guide first and second half. But I think the important component is the second half is opportunity that the first half didn't. So we remain confident with the numbers that we've refreshed. I think the -- and the reason for the adjusting guidance at the top end was it was just harder to see a pathway to the top end of guidance, which is why we've taken $10 million out of the top end of that range.

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Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities [30]

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Yes. I guess the sort of follow-on point then is that it appears that your second half -- and plus the upgrade from what you probably originally thought and I imagine some of that Kupe proliferation work as a part of that, is there anything else that is sort of really driving that from what you originally thought?

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Chris Jewell, Genesis Energy Limited - CFO & Executive GM of Strategy [31]

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Yes, I think the Kupe uplift, I think, it's -- I probably can't give you much more color than what we've laid out. We've laid out in the presentation there, Andrew.

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Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities [32]

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Okay. And last question -- another question on the solar for me. I'm assuming you have some sort of minimum offtake clauses in there. When I just was looking at the capacity factor, it seemed relatively high for a New Zealand solar farm at over 21%. Is there some sort of -- is there sun-tracking technology going in there as well? Or what's driving that relatively high capacity factor?

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Chris Jewell, Genesis Energy Limited - CFO & Executive GM of Strategy [33]

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Yes. Look, I think we've done quite a lot of international research on that, and capacity factors are very different than what they were 15-odd years ago when people were first thinking about these things. So that is -- those are the numbers that we've been quoted. Will there be minimums? There's always contractual structures that require certain outcomes, minimums and maximums as caps and floors. So yes, look, I think we got a -- we will -- it is structured contractually to make sure that we can get access to or we can lock down as much as we can. The only thing we can't control, obviously, is whether it's sunny on a day or not sunny on a day, but everything else that can be within the control is modeled and contracted.

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Operator [34]

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Next, we'll hear from Aaron Ibbotson with UBS.

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Aaron Ibbotson, UBS Investment Bank, Research Division - Director & Research Analyst [35]

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I just have 2 quick remaining questions. And my first one just relates to sort of continuing to work in light of the potential exit of the smelter. I just wanted to know if you have any updated thoughts on potential implications. And more specifically, how much power you think potentially will make its way from the lower South Island to the North Island? There seems to be a quite wide range of views there.

And then my second question was just a clarification on your answer to Grant's question about the pricing of the solar, not 100% sure I got it. So was it or was it not in line with wind pricing?

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Marc England, Genesis Energy Limited - CEO [36]

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On the first one, we don't have a huge amount of insight to add versus what we did. I think it was in October, we issued a couple of slides on the market on our views on the smelter. We're not involved in any negotiations. So we don't have any knowledge of whether it's going to -- what the outcome is going to be there. So that's one thing to note. I do think my own judgment is that it's going to take long for the power to get to north than some people think. And I know Contact and Meridian have pre-invested to support Transpower in the bottom end of the South Island upgrade. But even then, that will only get to the middle of the South Island. So our view hasn't really changed. And we issued a couple of slides in October on our roadshows, you'll have seen, and it's no point of me suggesting we have any more insight than that now. On the solar pricing, yes, it is commensurable with wind.

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Operator [37]

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(Operator Instructions) We'll now here from Stephen Hudson with Macquarie Securities.

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Stephen Hudson, Macquarie Research - Head of Research [38]

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Mark and Chris, just a few from me. I just wondered, firstly, on your retail netback, or in fact, your residential netback of $123 million, whether or not you can give us some idea of where you think the rest of the market is in that regard? I know there are some definitional issues with that, but any sort of feel for where you are versus your competitors would be useful.

Secondly, just on contingent assets. I know there's been a number of suspension events called with regards to the swaption. Are there any contingent assets that you're expecting to monetize for the second half or indeed in the near term? And also I think you've recently noted a gas contract arbitration process that you've entered into. If you can just update us on that?

And then just lastly, you've talked about the trading -- the emission trading results. Just on the emission, if you like, recovery on your fuel cells, it looked as if you were around about 10 million lives in the half. Are you expecting that to be recovered in the second half as part of your guidance?

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Marc England, Genesis Energy Limited - CEO [39]

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Okay. I'm proud of that, Steve. We don't have huge insight on resi netbacks across our competitors because they don't disclose them as well as us, and we wish they did. We also wish they will disclose the profitability of their retail businesses the way we do. And we wish there's much more transparency around who's cross-subsidizing between their generation and their retail businesses. Contact is the closest to us, their disclosures are good. And I know a lot of the smaller retailers are wanting more disclosure and arguing for it, and we are too. So the other 2 don't tell us anything -- tell you anything on what's going on their retail business. I think what you're alluding to is probably our price position, but I'll let you ask a certain question about so -- but in terms of netback themselves, no, we don't have much insight.

The contingent asset one, no, we're not expecting anything in second half on that. A couple of relatively small disputes going on around swaption clauses, but nothing material. And so there's nothing there.

And then I think the gas contract arbitration, you must be referring to must be with Beach, which we've put a note in our accounts against, and that's around carbon obligations, and we've put a note in our accounts on that. And we're in an arbitration process with Beach. Chris will answer the fourth one.

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Chris Jewell, Genesis Energy Limited - CFO & Executive GM of Strategy [40]

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Steve, would you mind just telling us that question again? I didn't quite capture it.

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Stephen Hudson, Macquarie Research - Head of Research [41]

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Look, it was just on the -- I think you split out the emission trading component for the half, which I think was about a $9 million gain from what I can see, which I think the other analysts have talked to. But if -- that you've also split out the emission costs and emission revenue with regards to your fuel trading, if you like, or presumably, that's your internal generation, the emissions relating to your internal generation assets and retailing of energy. And that looks to be about a minus $10 million drag. You only recovered about $10 million of the $20 million cost. And you talked in the slides about an expectation that you would pass-through more emission costs or at least emission costs would feed through into higher wholesale prices, I think. Is that what you're talking about that you're expecting further firming, I suppose, of wholesale prices to recover that $10 million, if I read it correctly?

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Chris Jewell, Genesis Energy Limited - CFO & Executive GM of Strategy [42]

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Yes, there's always -- there's never quite a one-to-one pass-through on day 1. Those things tend to catch up over time. So we do expect that as carbon prices rise, wholesale prices must rise, and I guess they've proven that over the last 2 or 3 years. And we do -- as a consequence of that, we do expect to recover carbon costs, but it's never quite a one-to-one in the year that it occurs. But the [thematic] is rising carbon process leads to rising wholesale prices, which ultimately leads to rising consumer prices.

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Stephen Hudson, Macquarie Research - Head of Research [43]

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I suppose the other way of putting it is, if wholesale prices remain about flat and carbon costs remain about flat from here, then there's sort of a $10 million potential shortfall in your guidance, I suppose that's the other way of asking the question?

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Marc England, Genesis Energy Limited - CEO [44]

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Second half of the year? Yes, no, I wouldn't -- not a good conclusion.

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Chris Jewell, Genesis Energy Limited - CFO & Executive GM of Strategy [45]

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Yes, I understand where you're going. I can't quite do the reconciliation to give you the same confidence. I'll give you that same -- come to that same conclusion. We're very confident in our guidance stated that's $360 million to $370 million.

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Operator [46]

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Our next question will come from Nevill Gluyas with Jarden.

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Nevill Gluyas, Jarden Limited, Research Division - Director of Equity Research [47]

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Three from me. Just a quick confirmation last point on the -- last question on solar. Just confirm that, that is a generation following contract you're sort of aiming to sign up for.

Second question, in terms of gas price outlook, as Grant mentioned, Contact talked about their latest contracts being around the $8 mark, but felt that was sort of as high as they might get or suggested that was as far as they could get. Interested in your own thoughts on that, whether or not you think sort of the $7 to $8 range is right? Or whether they could go north of $8?

And lastly, just in terms of your FY '21 guidance. If I remember correctly, the sort of the key factor behind the range between $400 million and $420 million was about your success levels on reducing gross churn and the cost related with that and possibly achieving sort of higher headline price as well, all through retail netback, as I recall. Just wondering how you think that's sort of tracking and whether or not you think that's on target for another step-up for the FY '21 year?

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Marc England, Genesis Energy Limited - CEO [48]

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So thanks, Nevill. Yes, simple answer is yes. It's a generation following contract, exactly like IPP. So we're not taking any risk on production. If it generates, we buy it at a certain price. And it's our backing over the long term that allows the provider to go and get financing to build it. So not our capital and not our production risk.

On gas prices, I can disclose that we've done a similar but much small deal without [leaving] Contact, about 14 petajoules over 3 years. Our view is that we -- the gas price is situational to some extent, and as you move into the early to mid-2020s, we should see it ease, but we're not -- we can't really pick a number for you and disclose what we think it will be. And obviously, the majority of our gas still comes from Kupe. But we've topped up a little bit for 2021 with a little bit of our own (inaudible) gas at a similar level to Contact.

In terms of FY '21 guidance, hopefully, the 4 or 5 slides in this pack on our Retail segment give you the confidence you need to answer that question yourself. But yes is the answer. We're tracking nicely. The strategy is delivering, the margins are growing, the costs are falling, the loyalty is growing. So Retail is a momentum business unlike Wholesale, which is a volatile weather-dependent business. And so we're very happy with the progress of the Retail business as we move into 2021. There's nothing at this stage to believe we're on guidance. When we give it for FY '21, it won't be any different to the targets we've laid out previously. And in some ways, while this is a bit of a painful result for us for the latter half and the prior half, we're comforted by the fact that, as Chris said, the things we're controlling and the strategy is delivering and it will come right on water and fuel costs over the next 6 to 18 months. And I think the next 3 halves, I'll be a predictor here, are going to be the 3 best halves Genesis has had because we've built the momentum in the Retail business and we'll come out of this tough hangover we've had since the back end of 2018 in the wholesale market.

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Operator [49]

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(Operator Instructions) And that will conclude today's question-and-answer session. I will now turn the conference over to Marc England for any additional or closing remarks.

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Marc England, Genesis Energy Limited - CEO [50]

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I think my final answer is as good as I can get on a closing remark. So I'll end it there. A tough half in the first half of this year. We're going to better second half. We've built great momentum in the Retail business. And we're looking forward to talking to you all over the next few weeks and further at the end of this full year as well. So thanks for spending the time to understand the business.

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Operator [51]

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That does conclude today's conference. Thank you for your participation. You may now disconnect.