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Edited Transcript of GNE.NZ earnings conference call or presentation 27-Aug-19 11:00pm GMT

Preliminary 2019 Genesis Energy Ltd Earnings Call

Auckland Mar 11, 2020 (Thomson StreetEvents) -- Edited Transcript of Genesis Energy Ltd earnings conference call or presentation Tuesday, August 27, 2019 at 11:00:00pm 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

* James Magill

Genesis Energy Limited - Executive General Manager of Product Marketing

* Marc England

Genesis Energy Limited - CEO

* Shaun Goldsbury

Genesis Energy Limited - Executive General Manager Wholesale Market

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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 morning, ladies and gentlemen, and welcome to the Genesis Energy 2019 Full Year Results Investor and Analyst Conference Call. (Operator Instructions) Today, I am 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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Good morning, everyone, and welcome to the 2019 Full Year Results Presentation for Genesis Energy. I'm joined in the room by Chris Jewell, our CFO, and a few of the wider executive team. In a moment, I'll walk through Genesis Energy's highlights and achievements for the 2019 financial year. Our financial performance and FY '20 guidance will then be covered off by Chris, after which I'll provide a brief update on our strategic progress to date and outlook for financial year 2021.

Moving straight to Slide 5 in our pack. Our FY '19 EBITDAF is up $3 million to $363 million. Now this is on the back of a tough year in the fuel supply market, which many of you are familiar with, gas outages, periodic hydro shortages and a high cost of importing coal filling in the gaps. The next few slides will show while value is defended in the wholesale market, our Retail segment really accelerated through FY '19 to build on the platform created over the prior 2 years.

Net profit is up $39 million to $59 million, the primary driver being fair value adjustments that this year swung positively after swinging negatively last year, the elevated forward curve being the main driver of that dynamic. Final dividend of $0.086 per share has been declared, bringing the full year dividend to $0.1705 per share. This represents a gross yield of just over 6.6% per annum at yesterday's closing share price. Dividends have increased 6.6% from FY '15 to FY '19 and this is when measured relative to New Zealand's CPI increase of 5.4% over the same period. Pleasingly, our underlying earnings are up 16% to $67 million for the year.

Across the business, we continue to see the benefits of our customer-focused strategy pay off in a highly price-sensitive market. Gross customer churn, disclosed for the first time this year, is down 3.8% to a little under 28%. Gross churn is defined as the total number of customers instigating a trader switch or home move, and we believe it's the best measure of loss improvement as it excludes customers who have been incentivized to stay through retention activity. The number of customers choosing their multiple fuels with us is also up 6.8%. We continue to target specific segments of business customers as part of our growth strategy, leading the market with innovative products such as For Dairy, which we developed with dairy farmers.

Total business sales volumes were 7.8% up by the end of June and continue to grow as For Dairy, which was only launched in May, starts to penetrate the segment. Our netbacks across all 3 fuels continue to improve across both residential and business segments, with all netbacks increasing by between 4.6% and 8.9% year-on-year. Digitization of customer service continues to drive down cost to serve as well, which is down $7 (sic) [7%] to $141 per ICP.

Generation volumes for the year were down 4% due to a combination of Huntly Unit 5 planned outage, adverse hydrology conditions and gas shortages. The combination of events of the high -- of the higher-priced importing coal to fill the fuel gap has manifested as a fuel supply shock to the industry, driving up wholesale electricity prices. Some have benefited and some have suffered. However, we have always maintained that Genesis' diverse plant and fuel mix can deliver stable results in most conditions. The last year has been unprecedented conditions and challenging at times, but I'm pleased to say Genesis helped to ensure security of supply and delivered a strong trading result, all things considered. This is all significantly assisted by strong asset reliability during the year as our employees put in long hours to keep the assets running during difficult conditions.

Kupe production levels reached another record year in 2019, in part as a response to the outages at Pohokura. Now 2 consecutive years of monetizing high gas production has meant we're now seeing Kupe production come off plateau, as notified to the market earlier in the month. I'll talk more on this in our strategic updates and outlook for FY '21 later in the presentation.

So moving on to Slide 6. Our value proposition remained strong for investors, which is to deliver stable growing earnings that underpin a stable and growing dividend. The natural and gradual decline of Kupe earnings has been more than offset by our customer-centric growth strategy, and our dividend yield remains market-leading, with a gross yield of 6.6%. And while the outlook for bond yields is likely to stay lower for longer, if not fall further, we believe Genesis represents a stable and safe investment proposition in the current market.

On Slide 7, our customer-centric approach is focused on generating loyalty across our base. This is being achieved by providing customers with knowledge, useful information on their energy; advice, tailored recommendations using that information; and action, enabling customers to do something about the recommendation. We're now giving customers more insight than they've ever had, but it's only just the start. Over the course of the last year, we've enabled over 200,000 Power Shouts to be redeemed; received more than 100,000 completed home profiles; deployed over 2,000 energy management connections in homes and businesses, which includes trialing 300 Bottle Gas Monitoring devices and Electricity Monitoring for over 900 businesses.

We've also led a growing number of cocreated initiatives with customers, such as For Dairy, whereby pricing plans are jointly designed to better manage consumption and which benefits are shared between the customer and Genesis. We're now seeing on average over 50,000 unique Energy IQ users logging into Energy IQ each week or nearly 100,000 per month to actually engage in their energy use. Unique weekly users are an important metric for us because if a customer's going into IQ more than once a month, in my view, they're engaging with energy in a new and different way that goes beyond just checking their bill at the end of the month. As you can see from the chart, we're also learning how engagement increases a specific initiative launched in market, and so we can feed that back into our product development pipeline.

Finally on this slide, the bottom right chart points to how the overall value of our residential portfolio has changed over the last year. What we call the customer life value index, the sum of the predicted lifetime value of our customers, is up 3% from a year ago. We haven't bought our customer's loyalty. We've earned it.

Moving on to Slide 8. Residential market netbacks are up across all 3 fuels. For clarity, we measure netback as EBITDAF per fuel type with the per unit fuel cost added back in. And we believe this is the most robust way to demonstrate where the margins are growing as it eliminates any year-on-year noise from wholesale transfer price movements. Gas and LPG volumes were also up on the prior year, though residential electricity sales volumes are down 2.5% due to lower consumption caused by warmer weather.

Top right chart shows that residential gross churn is down 3.8 percentage points to under 28%, with net churn after retention activity also down a further 2.4 percentage points to nearly 16%, and you can see that it's not a 1-year impact. It's been a trend that's been built up over several years. More than 112,000 customers now buy multiple fuels from Genesis, and residential dual fuel customers now make up 25% of all accounts, with the dual fuel churn rate at a low -- as low as 7.8%.

On Slide 9 onto the business side of the market now. Positive netbacks trends continue across all 3 fuels in the business market, too, with the step-change in volumes since sales teams were reestablished a year ago. Total business sales volume on a gigawatt hour equivalent basis observed in the bottom right chart has increased 7.8%. And as already mentioned, the best is still to come in this segment, however, with For Dairy product only launched in May and now is seeing a huge interest from farmers across the country.

Dual fuel business customers has increased 25% on the prior year. However, with these customers only representing 11% of the business portfolio, we see this as an opportunity for further growth.

On Slide 10, customer loyalty not only comes from having great products but also a simple, efficient service. Digital innovation is central to giving our customers greater understanding and control over their energy spend, and perhaps one of the biggest, but less visible successes this year, has been our ability to bring cost to serve down through digital initiatives to drive the netbacks on the prior pages up.

Genesis' new and existing products are increasingly digital by design, and you can see on Slide 10, digital customer interactions now make up 58% of all interactions, up from 43% 2 years ago. Customers opting for e-mail bills has risen by 23 percentage points over the same period, with 75% now not receiving paper mail, an overall cost efficiency. The cost to serve is steadily improving, down a further $10 in FY '19 as the digitization of our customer experience accelerates.

Onto the wholesale market, which, as mentioned earlier and much discussed over last year, suffered a fuel supply shock in FY '19. The fact we managed through it relatively unscathed is testament to the flexibility we have in our assets and fuel book. The volatile year plagued with hydro shortages, first in the South Island and then followed by the North Island in the second half of the year, and gas market constraints due to field outages for about 50% of the year. And all this took place in the year when we had midlife outages for our largest gas turbine at Huntly being the largest in 12 years. As a result, Rankine output was up 54% on the previous year, with 342 gigawatt hours of swaption contracts exercised in response to wholesale market conditions.

An observation we made at the half year was that the impact of electricity wholesale prices was driven by the relative supply/demand balance for gas. Gas production outages are not new in New Zealand. However, last October, gas demand didn't respond to the supply shortage, in part due to higher global oil prices driving higher prices for methanol. It was a perfect storm of low hydro levels, gas shortages coupled with no demand response and higher coal import cost.

Moving on to Slide 12. Reducing higher cost fuel supply has put forward pressure on wholesale prices, which resulted in an average $143 a megawatt hour for FY '19, up from $92 the prior year and $61 the year before. Genesis thermal fuel cost increased 10% on the prior year, impacting the portfolio fuel cost by $5 per megawatt hour on average. Genesis' balanced generation portfolio normally provides a high-level resilience against fuel shortages. However, the confluence of the 1- and 12-year Unit 5 outage and the high cost of imported fuel meant Genesis wasn't able to benefit from elevated wholesale prices.

While Kupe oil yield continues to decline as expected, LPG and gas production at Kupe had a record year. Our Kupe gas production over recent years, however, has supported -- in support of downstream demand, particularly with the other fields struggling. And while that has brought value forward to shareholders, production will now be in decline for the next couple of years before it pops back up again.

Finally, on Slide 13 before handing over to Chris, I'd like to call out our generation team for having managed through an outstanding year, managing our assets in difficult market conditions, with forced outage factor down to 0.3%, the smallest number on the page, but not one to ignore. The planned Unit 5 outage was delivered in time -- on time and to budget, with Rankine Unit 1 also recertified an additional 4 years of operations in the second half of the year, providing further flexibility to the portfolio's future.

So Huntly Unit 5 received a gas turbine upgrade during its outage that was delivered -- delivered an additional 2 megawatts capacity and efficiency savings of $800,000 a year. We've also demonstrated Unit 5 flexibility in stop, starting the unit around 40 times throughout the year, meaning we have confidence to our Unit 5 in a flexible manner as the market evolves, important for the future. Kupe also operated at 95% of agreed plant capacity over the year, and the current and forecast Kupe and generation asset capital expenditure profile demonstrates the attention we are giving our assets to ensure that these assets can deliver the stable earnings profile, underpinning the business for years to come.

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, and [good night/day] to everybody. Turning to Slide 15, financial highlights. FY '19 financial performance can be characterized under 2 themes: strong growth in our Retail P&L and Wholesale P&L having to defend value against sustained gas shortages and lower Northern Island hydro storage.

Looking across our key metrics. EBITDAF is up 1%. NPAT is up 201%. Underlying earnings, up 16%. Operating costs are flat. Operating and free cash flow is down 9% and 7% due largely to an increase in coal and carbon inventories. Capital expenditure is up 9% -- $9 million to $89 million, and dividends are up 1% to $0.1705 per share. And we'll dig into each of these components in more detail in the coming slides.

So turning to Slide 16, dividends. Our full year dividend for FY '19 is $0.086 per share, with a total FY '19 dividend of $0.1705 per share, which represents a gross yield of 6.7%. This remains a NZX peer group and world-leading yield. Over the past 5 years, Genesis has returned $830 million in dividends to shareholders, with $60 million being reinvested over the past 18 months through our dividend reinvestment plan. [Installation] remains at 80%, with a supplementary dividend to be paid to nonresident shareholders to support tax neutrality. We continue to offer our dividend reinvestment plan at a 2.5% discount. For our shareholders, this represents an effective way to reinvest dividends and that Genesis remains an effective approach to acquiring additional equity.

The free cash flow to dividend payout ratio this year is 99%, which is higher than previous years due to some significant one-off capital investments, such as the new Tekapo intake gate. Normalized for these investments, the payout ratio is 94%.

Slide 17, FY '19 EBITDAF. EBITDAF is one of the key measures by which Genesis management have set our targets and benchmarked our performance, and this was $3 million ahead of FY '18. Standout performance was our retail team at $13 million ahead of FY '19 -- FY '18, apologies. Despite the operating conditions, Wholesale had a resilient result, and Kupe produced an underlying outcome that was similar to prior year.

Slide 18. Turning to the detail of the performance of each segment now. At our Retail segment level, there are a number of very pleasing components. In 2016, we set out a retail growth strategy, and we've built some real momentum and delivery on this strategy, which is flowing through into the financial results. Our business segment is showing growth. We've seen strong growth in LPG sales, margins across both the business and residential segments and our operating costs are down. Residential consumption was impacted by the continuing warm weather.

At the wholesale level, we've made some changes to the way we account for carbon between our Kupe and Wholesale segments, and this is being reflected in the charts. Hydro and gas shortages drove GWAP up, or generation weighted average price, up $51 on the prior year to $143 per megawatt hour. Ordinarily, these conditions will be valuable for Genesis. However, the extended Unit 5 outage in the first half, gas production shortages from Pohokura to replace a more expensive fuel and the continuing North Island hydro shortages all had an impact on the Wholesale result. Our coal costs were up 16%, and our average fuel costs were up 10%.

The gas market shortages led to increased coal usage and a less efficient Rankines and necessity to purchase more higher-priced imported coal. Importantly, operating costs were well managed in an environment where we managed to maintain strong plant reliability, delivered some very large maintenance projects, and there were some significant changes to the way we operated our thermal plant to compensate for the fuel shortages.

The Kupe segment delivered a result consistent with FY '18: another record year of Kupe gas production enabled by the gas constraints in New Zealand and improved joint venture operating cost has offset the oil yield declines. The continued record gas production which -- has resulted in the earlier onset of fuel gas production decline, which will continue until the Phase 2 development project is completed in mid-2021.

Our Corporate segment had a $2.5 million increase in the cost base, and this was signaled at the half year and is solely a function of reduced capitalization rates within our technology development teams, which are represented in the corporate cost center. However, in the past 3 years, we've transitioned to an increased level of in-house development through our staff and contracting teams and we spent more time in the last year on maintenance activities than in prior years.

Slide 19. Importantly, underlying earnings has grown nearly 16%, and NPAT has grown 201%, and the key common drivers across these metrics include reduced depreciation due to prior year asset revaluations and a 7% increase in Kupe reserves offset by increased depreciation in retail assets following recent investments. Fair value adjustments are $35 million positive relative to FY '18, and this variance is driven by changes in the Huntly Rankine valuations and changes in fair value of financial contracts. Finance costs are down $1 million year-on-year, driven by the restructuring of the $240 million in capital bonds at a reduced coupon rate and we expect finance cost to come down a further $10 million by the end of FY '21 as fixed rate debt matures.

Slide 20, operating expenses. Controllable operating expenses have stabilized at FY '18 levels following a period of investment. As a result of the momentum and improved loyalty in the Retail business, we have been able to reduce our marketing and our standstill costs. Now this is a very important proof point for our strategy. Additionally, an increased focus on credit and bad debts is delivering improved results. Offsetting these gains are increased employee costs as our technology teams have spent less time on capital activities, as I described earlier.

Slide 21, capital expenditure. Capital expenditure is $9 million ahead of FY '18, and there was a step-up in expenditure in Wholesale operations and a reduction on expenditure in our Retail and LPG operation segments as a step-up investment in recent years has tailed off. A number of significant projects were successfully delivered in Wholesale in FY '19, including a major life overhaul of our Unit 5 combined cycle plant, recertification of Unit 1 at Huntly and the commencement of the $23 million safety upgrade at Tekapo intake gate. This is a very important project and demonstrates Genesis' focus and willingness to continue to reassess long-standing asset risks. We also have commenced the Kupe Inlet Compression Project, which will be delivered by mid-2021.

Slide 22. FY '19 net debt and net debt to EBITDAF remained similar to FY '18. However, coal and carbon inventory levels have increased $56 million year-on-year. Normalizing for changes in inventory levels, net debt to EBITDAF is 2.8, which shows continued improvement in credit metrics since the large acquisitions in FY '17. The dividend reinvestment plan that has been in place since FY '18, with the support of our major shareholder, has raised $60 million in equity to date and continues to be an important source of rebuilding our balance sheet following the FY '17 acquisitions.

Genesis had a very successful capital bond raising in early FY '19, which resulted in $240 million of new capital notes being raised and $200 million recalled. The net result was 154 basis point reduction in rates. In January '19, Standard & Poor's reaffirmed our BBB+ credit rating.

Slide 23, FY '20 guidance. Whilst hydro levels have recovered in recent months and are now close to average, it appears we have set a new normal in forward prices. 3-year Otahuhu forward prices are up $34 a megawatt hour or 45% on this time last year and hydro storage was similar. This is very positive for this sector and for Genesis. However, we expect the wholesale market to remain volatile as it adjusts to changes in the gas markets. EBITDAF guidance for FY '20 is $360 million to $380 million. Key features of FY '20 reflect the adoption of the new IFRS 16 standard, a 30-day planned outage at Kupe and an assumption of normal gas supplies resuming.

FY '20 capital expenditure guidance is up to $100 million. Capital will be elevated in FY '20 due partly to the commencement of Phase 2 development, which is being well signaled over recent years, and a one-off safety upgrade to install the new intake gate structure at Tekapo to mitigate seismic risk and also the cyclic nature of planned maintenance work in the wholesale team. Our long-run stay in business capital expenditure is expected to be $50 million to $70 million per year. Lastly, we continue to target the strategic goal of $400 million EBITDAF by FY '21 and our current expectation is $400 million to $420 million.

I'll now hand back to Marc for -- to finish on some operational and strategic updates.

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Marc England, Genesis Energy Limited - CEO [4]

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Thank you, Chris. So moving on to Slide 25 as part of our strategic update. We've had the same vision for 3 years now. And as a company, our purpose has been there for almost as long. Hope you can see we're making progress at both: Genesis customers receiving a vastly different experience than 3 years ago, but increasingly have the knowledge and the advice to be in control of their energy choices and they're increasingly rewarding us with their loyalty. We still have a long way to go, however, but we're well underway.

Our strategy is to maximize value through our market position, and we see 2 markets that we operate in: the retail market and the wholesale market. We describe our wholesale market strategy as maximizing value from our generation and fuels portfolio as we transition to a lower carbon future, and we describe our retail market strategy as engaging customers through loyalty as we innovate to a data-driven future. Our priority is to continually balance performing as a business by hitting our targets with ensuring we're also investing in the transformation we need to make to both meet customer needs and market needs for the future.

Top quartile shareholder returns in a stable but growing dividend had been our mantra with investors for a while now. And to that end, Slide 26 reaffirms our pathway to achieve over $400 million in FY '21. This is the same waterfall chart we showed in November 2018, with updated assumptions as a result of having FY '19 behind us. And as Chris said, our current expectation for FY '21 is somewhere between $400 million and $420 million, a slight decrease on the last version of this chart due to Kupe having delivered so well over last couple of years and now expected to decline before ramping back up to full production by mid-2021, but only really affecting FY '22.

Retail growth through the value optimization, our residential portfolio, volume and value in B2B and growth in synergies across LPG segment will continue the largest portion of growth. With $13 million of growth delivered over the last year by reducing cost to serve and growing value and volume in the right places, our track record and momentum should now provide confidence in our ability to deliver another $15 million to $30 million over next 2 years.

FY '19 and FY '20 have been and are impacted by large cyclical outages of generation plants in Kupe. That will not repeat in FY '21. The return to normal generation capacity in FY '21 plus some cost optimization, it will deliver another $10 million to $15 million.

And finally, we have reduced our expectation of the impact to the gas supply agreements rolling off slightly to reflect that the current elevated gas prices will put some pressure on gas prices over the next couple of years. However, we still expect to get a meaningful $10 million to $20 million of upside when the current high-price gas contracts start rolling off in December 2020 and expect that to continue to do so through the 2020s.

Slide 27 provides a little more detail on Kupe production, which is forecasted to decline by 1.2% to 1.5% per month. We're still expecting gas production of 24 petajoules in FY '20, however, the capacity of overachievement has now diminished until Phase 2 has been completed.

I'm delighted to say that FID has been reached this week, with all JV partners having now signed off and the inlet compression is due to complete by mid-2021.

Slide 28, the other end of the energy spectrum. We've announced today our exciting investment in Yoogo Share. We're excited because we see the partnership as a marriage where we both bring complementary skills and experience to the table. Having converted almost 50% of our light vehicle fleet to EVs over the last 18 months and with a commitment to get 100% by the end of 2020, we've learned a lot about the opportunities and challenges with converting business fleets. Businesses starting to convert their fleet are realizing a flexible and available car fleet is an asset that reduces their own capital expenditure and carbon footprint whilst providing their employees with an easy-to-use mobility solution.

Yoogo Share is the only fully electric vehicle car sharing business in New Zealand are well placed to meet this need. Yoogo starts in Christchurch, with Christchurch City Council providing car sharing for the city and airport runs. Yoogo's flexible platform enables customers to book and ride EVs from select spots at a fraction of the price of car ownership.

Initially, Genesis will be working with Yoogo to rebrand and sell EV fleet solutions to Genesis' business customers. However, this partnership will also enable Genesis to explore other future products in this growing market for electric vehicles and adjacencies to our current business.

Moving on to Slide 29, which will be my final slide before we open up to questions. At Genesis Energy, we know there are some things that are difficult to change quickly. A highly renewable electricity market requires backup when lights are low and the wind doesn't blow, and as we all discovered this year, also when gas doesn't flow. Despite that, there are many things we can do to positively impact the wider environment. And to that aim, our sustainability framework is focused on caring for the environment, building strong communities and also supporting New Zealand's energy transition with reliable low cost, and as much as possible, low-carbon electricity.

There are many initiatives inside and outside Genesis that we support and drive with this framework, and our website and annual report contain more information. The one we're most proud of at the moment is our support for the innovators of tomorrow through the School-gen program and recently established School-gen Trust, which won an award at last week's Energy Excellence Awards. Over 1,000 schools are now engaged in energy technology and STEM-related assets and educational material. And this week, we'll be enabling our customers to make standing donations through their energy bills to the School-gen Trust to accelerate the great work the trust is already doing. Donating $2, $5 or $10 a month will be seamlessly enabled through Energy IQ at the click of a button or even better, a few taps of your thumb.

Chris and I, plus other members of the executive team, will now take 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 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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Marc and Chris, first question regarding the Kupe outage in November. Can I assume that you guys have covered for pricing risk into that outage as you've known about it for quite a while? My second question on the great uplift in your C&I contract, of and above what you're talking about in your presentation, was there a bit of a percentage of your contracts rolling off into this higher priced environment that we're seeing? And if so, can you give us what sort of percentage has rolled off into the higher price points?

My third question is on retail pricing. It's indicated that you guys raised retail pricing by 3% to 4%. It would appear as though your competitors haven't really followed on this. Can you talk to why you think that's occurring that we're not having a following of price increases?

Fourth question is on your carbon credit sales this year. It would appear as though you made a $4 million profit out of that. Can I assume that there's no more of that in your FY 2021 guidance? Or are you going to be changing your outlook for average carbon price paid in terms of the chart that you put up a few years -- a few months ago?

And then my final question is on FID for Kupe. A while back, you were talking about using that as an opportunity to renegotiate some of your gas contact take-or-pay agreements, have you managed to do some of that? Or has this latest pricing environment scuppered that opportunity?

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Marc England, Genesis Energy Limited - CEO [3]

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Thanks, Grant. Quite a long list there. I'll answer the first one, pass on to James Magill for the second and third and pass on to Chris Jewell for the fourth and the fifth. The answer to the first one is, yes, we are covered. James?

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James Magill, Genesis Energy Limited - Executive General Manager of Product Marketing [4]

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Grant, so in relation to the C&I contracts, I think you talked about the roll-off schedule, roughly about 1/3 were rolled off, so quite evenly spread on the -- over the 3-year contracts.

With the residential pricing, I mean, I want to comment on other pricing strategy. We remain competitive. I am seeing competitive movements in price. I'm not sure we announced it to say that they haven't followed. But certainly, we monitor this monthly, and I would say that we are competitive in market in residential. And of course, you can see that we're managing churn well. So I think our customers are seeing the same.

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Marc England, Genesis Energy Limited - CEO [5]

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And the carbon sales and FID, Chris.

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Chris Jewell, Genesis Energy Limited - CFO & Executive GM of Strategy [6]

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Yes. So in terms of carbon credits, there are no more sales in the outlook. So the guidance factors in all our planned activity in that regard. In terms of FID at Kupe, the question was, have we been able to use that to renegotiate base contracts? Look, the majority of our base side contracts don't roll off, and Kupe until 2021 and onwards, we have signed a small contract as part of our approval of FID, which is a 10 petajoule contract, which is a small slither over the next 5 years, and that's at a very favorable rate, which we're very happy with, well below current gas prices and well below current gas-based GSA contracts.

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Grant Swanepoel, Craigs Investment Partners Limited, Research Division - Director & Head of Institutional Research [7]

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I think you said 10 PJ...

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Chris Jewell, Genesis Energy Limited - CFO & Executive GM of Strategy [8]

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Yes. I was going to say the balance of the big contracts, when we get the big roll-off from 2021 onwards through to 2024, that's all still to play for.

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Operator [9]

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(Operator Instructions) We'll take our next question from Aaron Ibbotson with UBS.

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Aaron Ibbotson, UBS Investment Bank, Research Division - Director & Research Analyst [10]

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I just noted that you then -- you increased your dividend by just sort of 1% and you put out a 5-year CPI comparison there. And I know that your guidance have been sort of grow dividends in real terms, I guess 1% or so, 1.5% over 5 years would be considered pretty much growing in line with inflation. So I just wondered if you could get some -- give us some sort of forward thought around growing dividend ahead of inflation and potentially, particularly, in light of your a -- '21 guidance, but also your falling interest expense?

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Chris Jewell, Genesis Energy Limited - CFO & Executive GM of Strategy [11]

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Aaron, it's a good question. Look, in ceding dividends, we obviously have to think about our forward outlook, and we also have to think about our current payout ratio. As I said earlier, our payout ratio this year was a little bit high. We had some big capital investments and I expect that to be the same, as I've guided for capital again for next year. So -- hence, we have set the dividend at the level we have.

We are -- in terms of the policy, the policy remains. We've grown dividends in real terms over time ahead of inflation over a 5-year period. The policy remains, we're not stepping back from that policy, and we expect to be able to continue to grow dividends, particularly as we get closer towards that $400 million target. The payout ratios will improve over time and as capital expenditure comes off a little bit from FY '21 onwards.

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Aaron Ibbotson, UBS Investment Bank, Research Division - Director & Research Analyst [12]

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Okay. Finally, I just wanted to know a little bit your thinking, I guess, broadly around net long versus sort of net neutral. If I look back at your, was it in 2017 or end of '16 when you put out your $400 million plus guidance, you've added your acquisition spend. So -- and you are now coming down a little bit below. It seems like a lot of things have gone your way since then, if I'm honest. You know you've had a significantly higher wholesale prices. You've had Kupe repowering, will be up and running by -- mostly by FY '21 and retail prices have also sort of continue to up a little bit, yet sort of your FY '21 target is slightly below what it was 3 to 4 years ago. I just wanted to know your broad thinking around it being able to capture higher wholesale prices again.

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Marc England, Genesis Energy Limited - CEO [13]

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Yes. I'll answer that, Aaron. I think the 2 things are disconnected. Yes, we're showing our target as $400 million to $420 million now for 2021, but we're reflecting in that the challenges around Kupe production and also gas pricing. They are what they are. It doesn't feel like everything's always going our way in this business, but it's nice it looks like that from outside. In terms of long versus short volume, we're -- in our residential portfolio, we said for a while we don't intend to grow it, and you can see actually our residential electricity has slightly shrunk because of demand, so we're managing that for value, we're not managing that for growth. In our B2B segment, we have been growing or continue to grow where the margins make sense. And as long as we can sign business -- energy contracts above the cost of future expectation and the future curve in the case of the electricity, then we think it's a deal worth doing.

And I know some of our competitors appear to be pulling back, but in a way, that's good for us too. So we do have an expectation of good margins coming from the B2B sector over the next couple of years. And we also don't look at our supply of electricity as just our generation assets. We manage it as a portfolio as a whole and so we make sure we manage our book, both on the supply side and the demand side, to make sure we're not net long, net short in the end.

So we look at it as a value pie and how do we carve it up, and we don't sign deals that don't make sense. In fact, the evidence over last year is, we've dropped a lot of low value business customers and replaced them with higher value, higher margin business customers and that's how we continue to plan to do it.

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Operator [14]

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We'll take our next question 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 [15]

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Couple of questions just around CapEx from me. First one, just around the Kupe project and just clarifying that the total cost is $30 million read over a couple of years. Are you able to sort of give us a rough split between FY '20 and FY '21?

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Chris Jewell, Genesis Energy Limited - CFO & Executive GM of Strategy [16]

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Andrew, so yes, you're correct. It's a $60 million project of which Genesis' share is $30-odd million. We spent a small amount in the year gone by, and I would suggest you could assume it's 50 -- 60-40 this year, 40% in FY '21.

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Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities [17]

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Okay. And the second question is just around the sort of the long-term CapEx -- maintenance CapEx guidance of $50 million to $70 million. That looks quite a bit higher than what it previously, I think, seen from you. Are you able to just sort of go through a little bit in terms of the breakdown and where the increases have come from and also, I guess, just around just the thermal plant, how much of that maintenance CapEx number is related to thermal plant versus other forms of CapEx?

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Chris Jewell, Genesis Energy Limited - CFO & Executive GM of Strategy [18]

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Yes. Andrew, it's actually not that much higher than historical guidance. Our historical guidance has been $40 million to $60 million. So we've, obviously, upgraded that to $50 million to $70 million. If you think about the things that have changed in the business in the last couple of years, we've obviously bought a LPG distribution business and we bought a bigger share of Kupe, which clearly come with ongoing maintenance CapEx. And the other component is, we're in the early stages of a reasonable amount of capital reinvestment in the wholesale space. So yes, that just reflects those 3 factors.

The second part of your question, is thermal facing a big uplift, I think, is the question. Well, we just obviously had the big midlife refurbishment of Unit 5. So that's behind us now. The Rankines are on 4 yearly recertification cycles. I guess the older they get, they do get slightly more expensive than the last 4 yearly recycle -- recertification, but I can't give you specifics on that. But you can assume that thermal takes no more of the share than previous expenditure. The big investments in the next couple of years are Tekapo, and we've got some big upgrades in our Waikaremoana scheme. We've be rolling through each of those 3 stations in the last year, and we'll continue to do that.

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Operator [19]

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(Operator Instructions) Will take our next question from Stephen Hudson with Macquarie Securities (sic) [Macquarie Research].

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Stephen Hudson, Macquarie Research - Head of Research [20]

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Marc, Chris and James, just 3 for me. I just wondered if you can give us a feel for what your oil hedge position is for FY '20. Secondly, have you taken any provisions for the various arbitrations that are going on with regard to the swaptions? And also, I think you disclosed the gas contract arbitration, are there any provisions relating to that?

And then just lastly, on the Inlet Compression Project, are you still expecting the $30 million of CapEx to cover or at least allow you to recover the 193 PJs of undeveloped 2P reserves or -- and sort of avoid any well development on CapEx?

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Marc England, Genesis Energy Limited - CEO [21]

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I'll just address the third one and then pass on to Chris. Yes, is the simple answer broadly. We take advice from the operator, but their latest advice is, we may not need to do any drilling in the future, but we won't really know until we see flow rates coming out of the compression project. Otherwise expecting that to be good news. And then Chris on the hedging.

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Chris Jewell, Genesis Energy Limited - CFO & Executive GM of Strategy [22]

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Yes. So oil hedging, we're about 60% covered this year. Our policy is 50% to 80% in the first 12 months, or at 60% in the year ahead. In terms of provisions, you talk about the arbitration around the gas contract, we haven't taken any provisions. We've, obviously, allowed for the cost of an arbitration within our guidance, but we're very confident about our position. So we haven't taken any provisions. We have disclosed it as a contingent liability, obviously, and that's -- the accounting standards require you -- it's a very, very high threshold of confidence that you require before you're required to disclose a contingent liability. So we remain very confident in our position, and that's reflected in the provisions.

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Stephen Hudson, Macquarie Research - Head of Research [23]

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And Chris, what is the 60% hedge and what's the cover price?

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

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I can't give you that.

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Marc England, Genesis Energy Limited - CEO [25]

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It's in the high 50s, $57 or $58, around that. We can clarify it with you later in U.S. dollar terms.

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Operator [26]

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Our next question comes from Nevill Gluyas with Jarden.

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Nevill Gluyas, Jarden Limited, Research Division - Director of Equity Research [27]

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A few from me as well. Just clarification on the long-term CapEx guidance. What proportion of that relates to Kupe? The sort of second question, if you can give a bit more color about this year and next, I guess, forward curve is anticipating lot of volatility, which tends to favor your generation cut and just sort of how much commentary you can give us around the uplift you expect to get out of that, using the Rankine field. And the last question, if you give a bit of guide as to how you're going with your post 2022 sort of swaption process.

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Marc England, Genesis Energy Limited - CEO [28]

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I'll approach those in reverse order if I can, and then Chris will cover the third one, which is your first, around long-term CapEx. But as you're aware, we're in market now talking to competitors and our other market participants around whether they have a demand for any swaption agreements post the end of 2022. That process will carry on through end of this year. We received responses, and we're going back with pricing in the next couple of months. So it'll be an ongoing process. If there's anything to announce, we will. But we're reasonably optimistic that there's decent amount demand for swaptions beyond 2022.

And the second question you have is around the forward curve, I'm not quite sure how to answer it. I mean we're aware the forward curve is volatile and we're aware our business model is set up to manage that. Maybe I'll just hand over to Shaun, who's here in the room as well. Shaun Goldsbury is now an executive and he can give you a sense for how he looks at it.

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Shaun Goldsbury, Genesis Energy Limited - Executive General Manager Wholesale Market [29]

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Yes. So I think there will be some uplift on the revenue side from the forward curve being high, but we've got some costs that are uplifting as well, so we got our coal cost continue to go up, there's sort of less gas availability, we've got [wells into] Kupe outages and also another reported outage in March. So at times, we expect to have reduced gas to Unit 5 and substituting Rankine [for coal] becomes quite expensive. So there's a bit of a holding pattern with a lift in revenue but a lift in costs too.

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Chris Jewell, Genesis Energy Limited - CFO & Executive GM of Strategy [30]

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Yes. Just on the Kupe...

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Nevill Gluyas, Jarden Limited, Research Division - Director of Equity Research [31]

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Just some clarification -- sorry.

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Chris Jewell, Genesis Energy Limited - CFO & Executive GM of Strategy [32]

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You go, Nevill. Finish your question, so...

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Nevill Gluyas, Jarden Limited, Research Division - Director of Equity Research [33]

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Just a detailed one for Shaun. I guess your assumptions in the guidance assume some kind of exercise in the swaptions against you as well, I would assume during this high-priced times?

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Shaun Goldsbury, Genesis Energy Limited - Executive General Manager Wholesale Market [34]

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Yes, yes, they do. It's probabilistic because there's a range of hydrology situations, apparently. But I think with the volatility of the market at elevated prices, we're assuming a high level of swaption cost than we had in previous years.

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Marc England, Genesis Energy Limited - CEO [35]

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Chris.

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Chris Jewell, Genesis Energy Limited - CFO & Executive GM of Strategy [36]

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Yes. Nevill, just on your last question around long-run stay-in business capital, for Kupe, it's between $5 million to $10 million, depending on the work that's going on at the moment in time. So in the year gone by -- sorry, in the year ahead, we've got a -- obviously, got a big outage at Kupe, it's closer to the $10 million end. On a normal year, it's closer to the $5 million end.

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Operator [37]

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(Operator Instructions) We'll take our next question from Gavin Evans with Business Desk.

Gavin Evans;BusinessDesk^ Marc, just a question on the gas outlook. Just curious to see whether you are any more confident or feeling more satisfied with the efforts that are going on out at Maui and some other fields now around longer term gas supply?

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Marc England, Genesis Energy Limited - CEO [38]

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Yes. I'm reasonably confident about the medium- to long-term gas, well, breakdown the terms, I think we're going to see some volatility in the next year, 1.5 years continue. As we get into the 2020 -- the early 2020s, I'm pretty confident. And when I talk to -- says there's just plenty of gas there and there's been some more drilling recently. And as you know, we'll have Kupe back up to full pace. So my prediction is, once you get into 2021, we're going to be back to normal on gas, where everyone will forget that it ever existed. If you go back 9 months or a year, no one really thought about gas in our sector, apart from maybe Genesis and maybe Todd, maybe Contact. Many of our competitors didn't even think about it and now it's becomes of the flavor of the year. I think we will go back to that normality before we then go into a longer term gradual decline of production because of no more exploration or limited exploration.

So 3 different phases. I think we can expect the next year to be still be challenging and then we'll go back to normal again before we go into long-term decline. So we're quite optimistic about that. And therefore, when you think about the wholesale electricity price in 2 to 3 years' time, with 2 new wind farms coming online and perhaps some geothermal, we're not bullish on wholesale prices in the medium term.

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Operator [39]

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We have no further questions at this time.

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Marc England, Genesis Energy Limited - CEO [40]

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All right. Thank you very much, everyone, for listening. We feel it's been a fantastic year at Genesis. It's been a tough year in many cases, but our key growth strategy around retail is starting to deliver, and we're very proud of that. And we look forward to talking to you more as we go around New Zealand and Australia and elsewhere and with lunches with analysts to give you some more detail. Thank you very much for listening.

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Operator [41]

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Ladies and gentlemen, this concludes today's conference. We appreciate your participation.