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Edited Transcript of ORG.AX earnings conference call or presentation 21-Aug-19 11:30pm GMT

Full Year 2019 Origin Energy Ltd Earnings Presentation

Sydney, New South Wales Sep 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Origin Energy Ltd earnings conference call or presentation Wednesday, August 21, 2019 at 11:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Frank G. Calabria

Origin Energy Limited - MD, CEO & Executive Director

* Greg Jarvis

Origin Energy Limited - Executive General Manager of Energy Supply & Operations

* Jon Briskin

Origin Energy Limited - Executive General Manager of Retail

* Lawrence John Tremaine

Origin Energy Limited - CFO

* Mark Schubert

Origin Energy Limited - Executive General Manager of Integrated Gas

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Conference Call Participants

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* Benjamin Wilson

RBC Capital Markets, LLC, Research Division - Analyst

* Daniel Butcher

CLSA Limited, Research Division - Research Analyst

* Ian Myles

Macquarie Research - Analyst

* James Byrne

Citigroup Inc, Research Division - Research Analyst

* Mark Samter

MST Marquee - Energy Analyst

* Peter Wilson

Crédit Suisse AG, Research Division - Associate

* Robert Koh

Morgan Stanley, Research Division - VP

* Tom Allen

UBS Investment Bank, Research Division - Director in Equities Research & Lead Analyst of Utilities

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Presentation

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Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [1]

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Okay. Good morning, everyone, and welcome to Origin's 2019 full year results presentation.

I'm Frank Calabria. And I'm joined here by my CFO, Lawrie Tremaine. And I'm also joined by the Origin leadership team. I've got Jon Briskin here, who's our Head of Retail; Greg Jarvis, who heads up energy supply and operations; Tony Lucas, who heads up Future Energy and business development; Sharon Ridgway, our Executive General Manager of People and Culture; Mark Schubert, who heads up Integrated Gas; and Samantha Stevens, who's our Head of Corporate Affairs.

So welcome, everyone. When we go to the agenda for today, a familiar format: I'll go through the performance highlights then hand over to Lawrie for the financial review, come back and make some comments on our operational performance and review, then go to outlook. And then we'll open up for questions.

Now turning to the performance highlights for the year. And if we move through to Slide 4, you can see there our 2019 financial year highlights.

Some of our key objectives over the last several years have been to improve the returns and reduce debt so that we could improve the returns to shareholders through the return of dividends but also to pursue growth opportunities in a disciplined manner. And I'm happy to report the delivery against these objectives for the 2019 financial year, our statutory profit of $1.2 billion, our underlying profit which is up 42% to just over $1 billion. Our operating cash flow has grown strongly by 35% to $1.3 billion. We've improved the return on capital employed by 1.4% to 9.1%, which is pleasing to see that it's approaching above our cost of capital. And we can see that we've been able to reduce our debt by a further $1.1 billion, and we're now down to $5.4 billion at 30 June. Our debt reduction has continued since 30 June with the completion of the sale of Ironbark for just over $200 million. And I'm pleased to say, with all of the work and dedication of the team to deliver those outcomes, we've been able to declare a final dividend of $0.15 per share, which takes our full year dividend for financial year '19 to $0.25 per share.

So our focus is firmly on shareholders. At the same time, we're committed to all of our stakeholders. And if -- the first thing I would like to draw your attention to on Slide 5 is about getting energy right for our customers. And you can see there that we've been able to report improved performance on our Net Promoter Score. Firstly, our strategic Net Promoter Score, which is a measure of customer perceptions of Origin, has improved a further 7 points. It is at minus 6. It's as strong as it's ever been, but it'd be fair to say you want that to be in positive territory, so we're pretty much focused about what we can continue to do to improve that. And our interaction NPS has never been stronger also at around plus 22. So very good to see the progress with customers and very much got our sights set on how we can continue to improve that.

For the community in which we operate, it's all about comparing -- caring about our impact. Firstly, we operate in a lot of local and regional communities, and so they're very important to us. And it's pleasing to see we've been able to increase our regional procurement spend to be, I think, just over 12% of our total spend in the last year. We made a commitment to increase our renewable and storage capacity as a percentage of total generation capacity of 25% by 2020. We introduced just under a further 500 megawatts of renewable supply this year, and so we're now up to around about 19%. And we're on track to achieve that goal next year.

For our people, it's about keeping them safe and also engaged. We strive to do that every day, so it's with that objective that I have to report a disappointing performance in relation to personnel safety. We have seen good progress on process safety and our environmental performance, but it cannot be escaped for the fact that, after several years of improvement, our recordable injury frequency rate has increased to 4.5 from 2.2 last year. And that's not an acceptable outcome to us, and our efforts are focused on making sure our people return home safely every day. Our employee engagement score of 61% is consistent with last year's result. That is despite significant organizational changes throughout the year. We continue to strive to improve that further.

If we then just talk a bit further about supporting our customers and communities. Through the year, we've actively supported both of those stakeholders. For customers, clearly affordability has been a pressing issue. We continue to play our part in reducing energy prices for consumers, with electricity prices flat or falling compared to the prior year. And we've also continued to offer some of the lowest prices in the market while ensuring customers in hardship continue to be protected from price increases for the third consecutive year. On the 1st of July, we did go beyond what was required of us in the Commonwealth's Default Market Offer and extended the same pricing to our customers on nondiscounted plans, and we thought that was the right decision to make. This has -- this move has meant that we've got more than 500,000 customers that have -- residential and small business customers, that are now paying less for their electricity. We increased the supply of our baseload electricity and gas to support reliability and affordability. We're a Co-founder of the industry Energy Charter, which is a good step forward for the industry. And we will continue and have done advocating for the right policy settings with the objective of producing good outcomes for customers.

For the communities where we work, I'm proud of the contribution that we make as a company. We've been recognized as the best workplace to give back in 2019 by GoodCompany. We have a foundation, Origin Foundation, that's approaching 10 years. And you can see there, over that 10-year period, we've contributed over $25 million to education through this time. We've reached the next stage of our journey on reconciliation and have launched our stretch reconciliation action plan. And we play an active role supporting local communities through programs, activities and other areas like APLNG where we promote living local.

Now just turning to our strategy. Our strategy is designed to deliver value in a future energy world. And it's a strategy that's shaped by a world that we see a rise in renewable energy and the importance of gas, and we see those 2 sources of energy as ones that will continue to grow. We see an increasingly decentralized energy system, the advancement of digital technologies and all combined to produce a very different and changing customer experience over time, so our strategy of connecting customers to the energy and technologies of the future is really designed to set up for us to thrive in that changing environment.

The key strategies that sit underneath that. And hopefully, you'll see progress towards each of these as we go through the presentation. The first is accelerating towards clean energy. And for us, that means not only growing renewables but also running the existing fleet of assets well and also setting ourselves up for a market that's changing through the introduction of that renewable energy through fast-start and other technologies. And it also means having a competitive wholesale gas supply for our customers and power stations in Australia.

In the context of gas being a fuel that will continue to grow and thrive in this part of the world, being a low-cost operator that can compete against global supply into the Asian market and also growing gas resources is key. And you'll -- I'll draw out one of those key aspects, which is we had set ourselves, after achieving a breakeven better every year, to actually being less than $35 a barrel. And you'll see that we've made good progress towards that when I come to the operational review. We're embracing a decentralized and digital future not only through solar, storage but also analytics and digital capabilities and also a platform to connect those decentralized assets and data to customers.

We do see that over time a new, connected business model, both in front and behind the meter will be one that will be key to a changing energy landscape. And lastly, just in terms of the customer experience and solutions, really about 3 things: transforming the customer experience, being a low-cost operator and targeting that market-leading cost position and then growing new revenue streams through several adjacencies. So they're our strategies, and hopefully, they'll -- you'll see that they'll bear out over time.

In terms of the continued focus on shareholder value, it starts with the foundation of delivering on our commitments to you as our shareholders. And that's really, I think, now described by Origin being a simplified business, one where the culture is transforming through a leaner operating model; through new purpose, values and behaviors; and through proactively adapting to a changing energy markets. And we've also achieved a step change in cash generation from our 2 businesses that are continuously improving their operating performance. Through this focused and disciplined capital application, we've now achieved the target capital structure and recommenced dividends, so it's a great place to be after the hard work over the last several years. This has, however, also enabled us to now progress the execution of growth options which extend right across our business, whether it's the resource position in APLNG or in Origin through opportunities like Beetaloo. It's through the renewable energy supply that has come onboard over the last 12 months and continues, and then it's also progressing generation opportunities that complement that growth in renewable energy. It's about growing our centralized energy services business, solar, storage; and setting ourselves up. The one message I'd leave with all of you, though, is that, that continues to be executed in a disciplined way and will always be assessed against increasing returns to shareholders through distributions. And I'm pleased to announce in that context our shareholder distribution policy today.

So turning to Slide 10. That distribution policy is designed to deliver sustainable shareholder distributions through a business cycle. And the policy, therefore, is one that's targeting an ordinary dividend payout range of 30% to 50% of free cash flow per annum. In our definition of cash flow, it includes all operating activities and investing activities and interest paid. You'll see that we've excluded major growth projects, and we will identify which of those major growth projects. And to put that into perspective: We're not identifying anything in the context of the current -- capital expenditure in the next 12 months, but it could, for example, include an FID on a key project going forward. But you will know that because we'll make that clear as we go through them. The remaining cash flow after that will be applied to further debt reduction, growth opportunities and also additional capital management initiatives.

Clearly, the Board would retain a discretion to adjust shareholder distributions for economic conditions. We've -- continue to have a DRP in place, but it operates at 0 discount, and the company will purchase shares on market to satisfy that DRP. I have mentioned before, but we will declare a $0.15 a share dividend as a final dividend fully franked.

I'll now hand over to Lawrie, who will pick up the financial review.

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Lawrence John Tremaine, Origin Energy Limited - CFO [2]

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Thanks, Frank. And good morning, everyone, and thank you for joining us on our results call and for your continuing interest in Origin.

I will start with our financial highlights on Slide 12.

As Frank has said, we've delivered a strong financial performance for the year. The result reflects good operating performance, higher realized prices, cost efficiencies and continuing disciplined capital management. Each of the headline results shown on the slide represents substantial year-on-year improvement. Underlying profit in 2019 is slightly lower than statutory profit mainly due to the backing out of favorable fair value adjustments.

Both the statutory and underlying results include the impact of a $170 million pretax increase in the provision for restoration of legacy gas worksites. Operations at these sites ceased several decades or more ago. However, the restoration responsibility for many of the sites was inherited by Origin at its formation. Much of the increase in the provision has arisen following on-site investigations at the largest of these sites at Osborne in South Australia. The total provision for these legacy sites is now $300 million, with the restoration work expected to be phased over many years.

Underlying EBITDA is up $445 million or 16%. You can see in this chart that a small reduction in Energy Markets EBITDA is more than offset by an increased earnings at APLNG. Free cash flow is lower in 2019. This is due to the impact of the Lattice Energy disposal in 2018. Excluding disposals, free cash flow increased by over $1 billion. Debt is now well within our target capital range, but I'll speak more on that later.

Strong financial performance at APLNG and lower net financing costs were the main drivers of the $302 million increase in underlying profit, shown on Slide 13. These positives were partially offset by marginally lower earnings in our Energy Markets business, the impact of oil and LNG hedging and trading activities, and the impact of the legacy gas works provision. Looking forward to the coming year, though, the oil and LNG hedging impacts are expected to be substantially lower. We don't have any reason to expect further material increases of the gas works provision. And we do expect continued reductions in net financing costs as debt levels reduce and we refinance existing relatively higher cost facilities.

Slide 14 shows Energy Markets earnings were down $77 million or 5% year-on-year, with almost all of the decrease coming from the electricity business, partially offset by earnings growth in the gas business and lower costs to serve. Electricity gross profit decreased $154 million mainly due to customer price relief measures and the full year impact of competition and discounting activity from financial year 2018. This was partially offset by record generation output from the Eraring power station and large business electricity contracts being repriced to market. Gas gross profit increased $66 million largely as a result of higher sales volume and higher margins from wholesale customers. We're also starting to realize the benefits of our retail transformation activities with a $15 million reduction in costs to serve.

On Slide 15. Integrated Gas earnings are up $641 million or 51% to $1.9 billion. Earnings from Origin's share of APLNG increased by $718 million. This mainly reflects higher realized LNG prices underpinned by oil. Average realized LNG prices were up 40% to AUD 13 per -- AUD 13.42 per gigajoule or USD 10.12 per MMBtu. Domestic gas prices were also on -- up on average by 12% to $5.04 per gigajoule. Beyond commodity price impacts, the APLNG result also benefited from a strong operating performance, with operated production up slightly despite planned maintenance on 15 -- sorry, 12 of the 15 upstream gas processing trains. Higher prices have resulted in higher royalty expense, which was partially offset by unit cost savings and lower gas purchases. The Integrated Gas result also includes $231 million of other costs, $77 million higher than the prior year. The $231 million comprises $199 million of expense related to oil and LNG hedging and trading activities and $32 million of Origin overhead costs.

Next, to free cash flow on Slide 16. As mentioned earlier, excluding the impact of Lattice and also the Acumen sale proceeds in -- from FY '18, our free cash flow has grown by over $1 billion to $1.5 billion. This strong result is underpinned by 2 key factors: firstly, improved working capital in Energy Markets driven by improved collections from business energy customers and favorable movements in futures exchange collateral. And secondly, cash received from APLNG was a net $943 million compared to $363 million in 2018, up 160%.

As with profit and cash flow, underlying returns have also improved in 2019 and again due to business performance in the Integrated Gas business partially offset by headwinds in Energy Markets electricity business.

Now to the proportionate free cash flow view on Slide 17. This measure reflects the free cash flow generated by both our businesses, with APLNG shown on a proportionate consolidation basis and before project finance principal repayments. Free cash flow on this basis was just below $2 billion and represents a 15% yield at the current share price.

On Slide 18. Having focused on debt reduction for several years, I've got to say it's pleasing to be able to report debt down to $5.4 billion; gearing of 29%; and debt-to-EBITDA of 2.6x, at the low end of our target capital structure range. The trajectory of our balance sheet improvement and our demonstrated commitment to our ratings target have resulted in upgrades of our long-term credit ratings to BBB and Baa2. Our average cost of debt reduced from 6.5% to 5.9% in 2019, and we expect the average rate to fall further with the refinancing of the $1.4 billion hybrid this September. The refinancing is expected to deliver $60 million of interest savings in the 2020 financial year.

And the next slide, 19, is a reminder that APLNG is continuing to delever. USD 1.6 billion of project debt has been repaid to date, and along with cash retained, gearing has reduced to 30%. Debt reduction is forecast to continue at a rate of USD 500 million to USD 600 million per annum over the next 5 years. USD 4.5 billion of debt was refinanced during the past year. Lower interest costs and principal amortization deferral is expected to increase Origin's share of APLNG distributions by $100 million per annum over the 6 years to 2025. APLNG's average interest rate is forecast to be approximately 3.6% over the coming year.

Having achieved our target capital structure, commitment to disciplined capital management is more important than ever. We have well-defined processes in place to assess, verify and rank investment opportunities. We also routinely evaluate our project delivery performance and identify lessons to feed back into future projects. Slide 20 shows how we will prioritize the allocation of operating cash flow. That priorities are debt service, capital expenditures and then dividends. Any additional cash can then be apportioned between debt reduction, investment- and value-accretive major growth projects and additional returns to shareholders, all depending on the economic outlook and the needs of the company at the time.

So with that, I'll now pass over to Frank for our operational review.

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Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [3]

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Okay. Thanks, Lawrie.

So now turning to operational review.

And firstly, we'll turn to Energy Markets. Some key highlights for Energy Markets on Slide 23 show, firstly, having achieved a record output for Eraring (inaudible) exceeded that again this year. And if there's ever a time that you need baseload energy to be performing reliably, it's over the last 12 months. So a great performance at Eraring. We've continued to increase our gas sales, and you can see that they've grown year-on-year. And customer activity is moderating.

It does highlight just how intense competition has been through the 2018 financial year. So it's moderating off a high, but it is showing signs of coming off. Really when you look at the way we think about the supply of energy across our portfolio and the way our Energy Markets business operates, I think the last 12 months continues to highlight its ability to adapt to a changing energy market. Our electricity supply shows on the left-hand side we increased the baseload operation of coal.

And secondly, it's introduced more output from the renewable supply. What that's enabled us to do is to turn down the gas-fired generation, and we've therefore redirected that gas into wholesale business customers, which you can see by the growth in the light blue on the side, on the right-hand side. So as the market continues to evolve, our portfolio of energy supply and the connectedness between both the electricity and gas markets enables us to respond in a dynamic way.

So responding through the years have been an important feature. At the same time, setting it up for the future is equally important. And you can see there that we've continued under our strategy of accelerating to clean energy our respond to this changing market by progressing opportunities in a disciplined way. I did touch on the fact that we had just under 500 megawatts. You can see that 476 megawatts of renewable supply has come online in the financial year, and we're on target to get to our 2020 target of 25% of capacity. And that's really driven by the Stockyard Hill project you can see outlined there of 530 megawatts.

At the same time, we've introduced new fast-start repower at the Quarantine Power Station, having completed unit 1. And we're in progress on unit 2. We have options across the fleet that we continue to progress, including the feasibility study for Shoalhaven which will be completed this year; and also the opportunity to add additional capacity and storage solutions across Mortlake, Darling Downs and Eraring. We will continue to progress these. And as I said earlier, they'll be done in a disciplined way because investing in the current market needs to be carefully considered, particularly with the backdrop of the regulatory environment, but we're setting ourselves up for that future.

The gas portfolio continues to be underpinned by strong supply, and it's also complemented by good storage and transportation flexibility. What that does is it enables us to redirect gas -- or direct gas to the highest-value domestic market. We'll continue to do that. What we've also shown is the duration of that supply over time. And you can see the various natures of those contracts matched against our contracted demand for customers, excluding generation. And we continue to work on that portfolio every day to continue to maintain the value that we generate there.

When it comes to retail, we've taken a disciplined approach to managing customer value. We've done that disciplined approach through both 2 things, rational pricing in the market but also the way we manage customer acquisition costs. And we balance that against defending market share by choosing the markets in which we want to expand; and you can see that on the right-hand side, by the expansion in certain states with fuels and also our centralized energy services business. We have been operating in a market where high price disparity and intense price competition means you need to be very focused on the incremental returns that we get from customers. In many cases, the incremental margin from acquiring customers is very low, and we've therefore continued to take a disciplined approach to that. We also need to be very mindful we have a large book of customers, and we need to be very mindful of the contagion of that price effect across its back book. I think the team has done a very good job in terms of managing that customer value and defending share over the last year.

If we now look to the market we're working -- we're in today, though, you can see 2 things. Whilst the moderating churn I touched on earlier, on Slide 28, has occurred, you can see, since last July, really it's borne out there that, that price dispersion has really reduced. And we're obviously only about 7 or 8 weeks into that period, but you can see that we are operating in a market where that price dispersion of market offers is significantly reduced. The fact that those Default Market Offer and the Victorian Default Offer act as reference price is actually improving transparency, albeit all retailers are going through the change of implementing that. There are signs that churn is reducing. It is still early days and so therefore too early to call out a broader trend, but those are showing that the market we're operating in now is different to the one even just a few months ago.

A key aspect of our customer strategy is really targeting a step change in our retail business, which is really framed in the context of the market I've just described. It really centers across those 3 pillars. We've described these to you before: transforming the customer experience, simple, seamless and also digital; a market-leading cost position, targeting a greater than $100 million cost out by the '21 financial year; and growing new revenue streams. And then in terms of us progressing that, we're on track to do that.

I highlighted earlier the improvement in customer experience, although still more to come. But we have simplified products. We've reduced the number of products from 55 to 17. We've simplified the customer journeys and we continue to advance that. We are on track to achieve our cost-out reduction. And we've given some highlights there of some of the drivers that are sitting behind it. The increasing move of interacting with our customers through digital service and sales capability is advancing. We're billing customers, as you can see, every day more through eBilling. Service calls are down 20% over the last 12 months. And we're increasing automation and offshore capability, all of which are driving towards resetting that cost base and that market-leading position.

We continue to grow our centralized energy services business. The growth in that profit is driven by both organic growth and also the OC Energy acquisition. And we've continued to grow our solar, rooftop solar, installation business. And you can see there the growth in megawatts to 49 megawatts.

Now I'll turn to Integrated Gas. And I'm very pleased to report that APLNG has continued to improve performance. You would have all seen some of this information at the quarterly report, but just to really highlight: We've maintained stable production despite, as Lawrie said earlier, 12 of the 15 operating gas processing facilities having outages. We've got record gross operating production rate, really hitting those records several times in August, up to 1,594 terajoules a day. Really pleasing to see the improvements in productivity occurring there. And I'll highlight that -- a little bit, that really is bringing on what we call -- the ERIC pipeline has been brought online, and I'll describe that in a moment. Our revenue growth is driven by those higher effective oil prices, but also the performance is driven by our unit cost reductions and also that productivity. And you can see there that's translated to a net cash from APLNG of $943 million. You can see the effective price there was $73 a barrel, and also $0.72 exchange rate.

I then take you to the next slide. It might recall many of you may have been at our Investor Day in November 2017, where we committed to building a low-cost operating model over 18 months, an operating model that had both an aligned and simplified organization, streamlined processes, CapEx and OpEx reduction and production improvements. We set ourselves June 2019 run rate targets on a number of metrics, and I'm pleased to report our delivery against those metrics.

I'll touch on the cost per well and operated OpEx on the next slide, but we did set ourselves an objective of getting our operating breakeven less than $24 a barrel and getting our distribution breakeven at less than $40 a barrel. And you can see on the right-hand slide (sic) [side] that we actually achieved $36 a barrel in 2019, which is obviously very, very pleasing to achieve. It's also, however, that breakeven lower than our guidance that we previously gave to you, and when we've outlined those explanations down below. We certainly had lower sustain and exploration and appraisal spend. That was due to some deferral but also due to reduced scope. And in particular, and Mark is available for questions on this later, but we just definitely fracked less wells than we thought we would at the beginning of the year, which is pleasing to see our fields operate well. We obviously got higher nonoil-linked revenue also from the higher volume of domestic sales.

The $500 million cost out was an important objective to us. And I can say that we achieved that through our unit cost reductions at June, but we are very -- have been very clear to you all that we will have higher spend due to additional scope, where we've got a range of spend of $2.8 billion to $3 billion this year. That additional scope is actually to deliver sustained higher production, and we'll talk that through in a moment.

The unit cost targets. You can see that in terms of run rate, the average we achieved over our cost per well. A single vertical Surat well was AUD 1.4 million. The run rate at June is $1.2 million, and therefore that translates through to the FY '20 financial year. In terms of the operating costs, though, we were able to achieve it both on a run rate and an actual basis for the full year at $1 a gigajoule. And you can see there that the savings have come right across the leaner asset-led business model, the process I talked to earlier: procurement, lower overheads, low electricity costs and streamlined maintenance processes. So a tremendous effort over the last 18 months by our Integrated Gas team to actually achieve these outcomes.

We have, however, also delivered value, in addition to the OpEx and CapEx reductions, through other means. In terms of delivering value to the APLNG asset, the first thing is that we've increased reserves not only through better recovery throughout operating areas but also through the award of a new gazettal of a block awarded in Queensland which will go to the domestic market and deliver sales of greater than 50 petajoules. And we've also developed -- progressing the development at the Mahalo block.

In the context of infrastructure and other things, clearly the sale of Ironbark enables it to be brought to market in a more efficient way given its proximity to existing infrastructure and by APLNG. And we described the ERIC pipeline, but really just to make that clear: That's really connecting where we've got good-producing fields to where we have spare ullage. And that's really connecting the excess gas supply at Reedy Creek field through to Spring Gully. And that's contributing to those record daily productions, so great to have that online. We have described the commercial transactions that added further value to APLNG previously. To remind you, there's the cargo deferral deal with one of our customers over the next 6 years. And there's also the long-term infrastructure-sharing agreement and supply with QGC, all of which are creating more value for APLNG in addition to the operational performance.

Just turning to our reserves report. We've released our reserves report for the year. We are really underpinned at APLNG by a very stable reserves position. Before production, both our 1P and 2P reserves have grown. They've grown through further development drilling. They've grown through updated drilling plans based on improved field performance, and they've also grown through field extensions. So -- and very pleasing to see that trend and for you as shareholders to know that APLNG is underpinned by a very solid and stable reserves base.

If we then look at the APLNG production and cost outlook that underpins part of our guidance for next year. We delivered 679 petajoules this year, but we will be targeting between 680 and 700 petajoules in the next financial year. We still do have some of those turnarounds we've got to manage, so we're still doing that but lesser than the prior year, but that increased production online reflects that pipeline but also the continued focus on productivity improvements as we run this asset day in, day out. If you then look at the cost that goes with that: Firstly, we delivered a breakeven last year of $36. We're now guiding to a distribution breakeven of $33 to $36 for the financial year '20. That translates back to a CapEx and OpEx spend, excluding purchases, of between $2.8 billion and $3 billion to deliver the sustained higher production. And you can see there that we've had unit cost reductions flow through. The scope items that we're going through are really the large proportion of fracked and horizontal wells and a lot -- and some spend that will go into the production for the following year and activity for the following year. We do have higher workovers due to more wells online, and we've had some spend on spares and downstream maintenance.

We did set that target to be -- to get ourselves to below $35 a barrel. It's great to see that on the back of $36, we're at $33 to $36, but it hasn't stopped there our continued focus. And the team have plans for further cost reductions, productivity improvements and also further value enhancement initiatives.

Turning to Beetaloo. Probably the key thing there is we're back on the ground in the Beetaloo, and the key thing is we've got all our environmental approvals in place at Kyalla. We're awaiting civils, drilling and stimulation approvals of the Velkerri. We will -- the objective of these plays or these 2 -- these wells are really around the liquids-rich plays. The results are expected in FY '20. We continue to make sure we spend that capital wisely, but it's an exciting prospect for us, and clearly that's a key focus over the coming months.

Now just turn to outlook. And some of these, we have touched on, but just to come back: Energy Markets delivering a guidance of $1.35 billion to $1.45 billion. Electricity is down that we had foreshadowed through our briefings to you as shareholders over previous months. It really is a reflection of the default offers coming in, which also underpinned the lower renewable certificate prices that are flowing through and some lower usage that flows through. Gas is estimated to be relatively stable. And we will continue to advance that cost-out program I mentioned earlier, with $40 million to $50 million in costs-to-serve savings. The increased production I just referred to of 680 to 700 petajoules; and the estimated breakeven I just mentioned, which does exclude obviously the Ironbark acquisition costs.

Our CapEx guidance of $530 million to $580 million really embodies in it $110 million to $120 million in exploration and appraisal, including Beetaloo. And that's probably one of the key reasons for that increase, alongside work that's going on across our generation fleet. So for the key drivers. And we expect our corporate costs to be between $70 million and $80 million this year.

So on those notes, I -- on those comments, I think we'll open up now for questions. And the team look forward to hearing questions from you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question today comes from Ben Wilson, Royal Bank of Canada.

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Benjamin Wilson, RBC Capital Markets, LLC, Research Division - Analyst [2]

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I just had a question on your outlook statement on Energy Markets, specifically with reference to the longer-term $100 million of cost-saving initiatives that you're targeting till FY '21. The -- I'm just interested in the proportional -- or progress that's baked into your FY '20 guidance. Should we take the $40 million to $50 million saving on costs to serve as indicative of that you may be halfway there through FY '20?

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Jon Briskin, Origin Energy Limited - Executive General Manager of Retail [3]

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Yes. It's Jon here. That's exactly correct. So $40 million to $50 million for the next financial year -- or this financial year.

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Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [4]

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That's right. And the run rate will continue to escalate through the year, but when you're looking at the full year savings, it's reflective of the plan. So that will be the delivery this year as we head in, and we'd -- we expect to deliver the full $100 million by the FY '21 year.

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Benjamin Wilson, RBC Capital Markets, LLC, Research Division - Analyst [5]

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Okay. That's clear. And just one more while I'm here, in respect of your LNG contracts out of APLNG. There's been a lot of discussion about the state of the market and price renegotiations in your core contracts. I was wondering if you could provide some commentary about timing of any reopeners and, more broadly speaking, expectations of price resets.

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Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [6]

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Yes, I'm happy to. And we actually also put something in our OFR. I know we didn't put it in the presentation, but if you looked at Page 15 of our OFR, we've made some specific comments around that. But we do -- as typical with LNG contracts, and APLNG's is no different, there are periodical price reviews every 5 to 7 years. The first of those reviews will arise under the LNG contract with Sinopec within the next 18 months. It does require the parties to use reasonable endeavors to agree on any changes required, okay, but in the absence of agreement, neither party is permitted to request this first price review to be determined by an expert. The subsequent price reviews enable it to be referred to an expert, which you may be familiar with this is quite often the case.

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Benjamin Wilson, RBC Capital Markets, LLC, Research Division - Analyst [7]

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Okay. That's great. So how -- what's the, I guess, resolution mechanism in the event of a disagreement on the first reopener then? Or is it described within the...

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Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [8]

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There -- no. It's -- it requires both parties to agree. So there is no -- yes. So there isn't one besides the parties coming together to discuss.

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Operator [9]

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Your next question today comes from Tom Allen at UBS.

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Tom Allen, UBS Investment Bank, Research Division - Director in Equities Research & Lead Analyst of Utilities [10]

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Congratulations on the strong result. My first question relates to growth. I'm interested in what the specific market policy conditions you think are necessary to move forward on your Shoalhaven expansion and then separately to build new greenfield [gas-taking] power stations in today's market.

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Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [11]

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Look, I think -- so the key aspect for us really is -- when you put long-dated spend into any assets is that you've got to have a reasonable view of the range of outcomes over time. I don't think we'll ever get perfect certainty in a regulatory environment, Tom, so I'm not looking for some perfect solution. And we'll always invest in times of market conditions. So really for us it's around just recognizing that -- when we do the scenario analysis around what we think could occur in the marketplace and those outcomes, that we can see returns through the course of time. And that's really the way we'll assess them as we come about.

Obviously, anything that goes to giving confidence around the market settings improves that, but we'll just make that assessment again. So clearly if we knew that there were going to be emissions policies that would stay over time and that there was going to be a clear mechanism of how governments would invest into that environment, they will help us (inaudible) but it really will come down to us to assess the opportunities against that backdrop, Tom. There's too many variables to think about one set of scenarios.

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Tom Allen, UBS Investment Bank, Research Division - Director in Equities Research & Lead Analyst of Utilities [12]

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Okay, sure, sure. And then just quickly, on CapEx. Obviously, your CapEx guidance of $530 million to $580 million is a little higher than anticipated. If most of that -- well, of most of the $110 million to $120 million relates to Beetaloo, that sounds like more than double what you've previously outlined. Can you discuss how that work program for Beetaloo next year has changed?

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Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [13]

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Yes, okay. I can get Mark to comment on Beetaloo, and then I'll get Lawrie to give you a broader context around how to think about the CapEx, okay?

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Mark Schubert, Origin Energy Limited - Executive General Manager of Integrated Gas [14]

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Yes. I don't think it really has changed too much. I think at the Annual General Meeting, we got asked that question, and we said sort of $85 million to $100 million. I think we're saying $110 million to $120 million and probably just want to note that, that includes both the Beetaloo 2 wells that we intend to do this financial year. And also -- we also -- in the OFR, if you can find it, we talk about some work that we're going to do on a new -- some new acreage that we've -- we're farming into. And there's some spend there that is included in the $110 million to $120 million.

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Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [15]

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Yes. Your turn.

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Lawrence John Tremaine, Origin Energy Limited - CFO [16]

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The other thing I would mention is we do have a capital expenditure chart in the back up in the pack, so Page 50 in the pack. What that shows is the other part. So beyond Beetaloo, the other part of the increase relates to generation. And so it's largely a higher level of overhaul activity going on in this year, but also there's likely to be repairs associated with Mortlake that will reflect here as well.

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Tom Allen, UBS Investment Bank, Research Division - Director in Equities Research & Lead Analyst of Utilities [17]

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Okay. Great. And just quickly: On Mortlake, are you still on track to have it up and running by the end of -- before Christmas?

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Greg Jarvis, Origin Energy Limited - Executive General Manager of Energy Supply & Operations [18]

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Yes, we are on track. So we've told AEMO that the generator will come back in on the 25th of December, and all things are progressing well. We've actually found a spare in the U.S. and that's currently being shipped to Australia.

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Operator [19]

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Your next question comes from James Byrne at Citigroup.

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James Byrne, Citigroup Inc, Research Division - Research Analyst [20]

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Congratulations on the results. Look, just on the dividend policy, 30% to 50% payout ex major growth projects. I appreciate that this is going to be a bit of an open-ended question because there's going to be a lot of moving parts in any given year, but let's say you were to commit to a major growth project. Would we expect the Board in that instance might have a lower -- have a higher propensity to pay at the lower ends of that payout range?

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Lawrence John Tremaine, Origin Energy Limited - CFO [21]

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Yes. James, I think it all depends on the circumstances that we face going into an investment decision; and the size of the investment decision, of course. But as Frank said in his part of the presentation, the -- our intent here is to have a free cash flow-based payout ratio which speaks to affordability. And if our affordability is impacted in the future by our intent to invest in a large project, what we will do is we'll just call that out. We'll let you know we're going to adjust the dividend for that major project. And yes, we may well move to the bottom end of the range as well to ensure that we're securing as much of our internally generated cash as we can to fund the project. But again that really depends on the size of that project; and the impact it has over the current year, the next year and probably the year after. So a bit hard to say and, as you said, an open-ended question.

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James Byrne, Citigroup Inc, Research Division - Research Analyst [22]

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Yes, got it. All right, appreciate that. Look, just thinking about Energy Markets earnings beyond FY '20. I mean you're kind of saying that -- the rest of the cost-out $50 million to $60 million benefit in that period, but as I eyeball the charts on gas rate pricing, it looks like about 30 petajoules in FY '21 to go to reprice, that's a couple-of-bucks movement. And that already completely offsets your cost out before considering the extent of additional headwinds in electricity. I presume that we should continue to expect further contraction in your margin across Energy Markets. Do you think that's accurate?

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Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [23]

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Really we -- you'll see the key drivers are the ones you've described; and in addition to that will be the flow-through, if any, of further reduction in the oil rig price and wholesale price. So everybody will turn on those. Clearly, it will also turn on the competitive dynamic in the retail market, but they're the key drivers going forward. We haven't given guidance beyond FY '20 because we can't predict all of those drivers right now, but you're right about the fact that we're actively out there managing all of those key aspects, including the gas. It's probably even too early to call what that gas reprice will be over that time even now. Did you want to make any comments on gas reprice?

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Lawrence John Tremaine, Origin Energy Limited - CFO [24]

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Yes. Look, it's hard for to comment -- for me to comment on price reviews, but the devil is in the detail. And some of those price reviews are coming up in the next year. But remaining fairly confident about those outcomes.

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James Byrne, Citigroup Inc, Research Division - Research Analyst [25]

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Got it. Okay. I might sneak in a very quick third question. It is related to gas repricing but at APLNG. So if it was to go to a independent expert, what are you able to say within the clauses of the contract that might protect you from some of the perverse outcomes on the downside, acknowledging that your contract price is at least 200 basis points on a slope higher than what's in the prevailing market today for new contracts?

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Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [26]

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So I -- look, I -- the only comments I've got are the ones I raised earlier with Ben, that there's no -- it just is that the parties come together now. There is no clearing mechanism to an independent expert. It's just if the parties can agree. Otherwise, the price would remain the same. Yes, there's not. By the way, to be very clear: We've said that in a subsequent price review for the contract there would be an expert, but that would be several years away.

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Operator [27]

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Your next question comes from Peter Wilson, Crédit Suisse.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [28]

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I was hoping you could just comment on the expectations around the distributions out of APLNG for the next 12 months. Your JV partner Conoco has pointed to lower cash flows at least for the next 6 months, so just hoping you could comment on what you're expecting.

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Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [29]

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I'll get Mark to make a comment.

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Mark Schubert, Origin Energy Limited - Executive General Manager of Integrated Gas [30]

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Yes, sure, yes. So I mean yes. Well, I mean we all heard what Conoco said in their recent report. I mean we're not giving cash guidance. That's the first thing. What we're giving you is breakeven guidance so that you guys can fill in the oil price and work out the cash, but what I would say is a couple of things. So firstly, last year, the $943 million, of course, didn't include the proceeds from Ironbark that flowed through or that APLNG effectively retained on the other side to pay for Ironbark. And the other thing that wasn't in the $943 million that will flow through in FY '20 will be the cargo deferral deal that we talked about at length, I think, last time.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [31]

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Okay. I mean I think those -- I mean both of those factors would be known to your JV partner. There might well be maybe some sort of differing opinion on distributions. Or is it first half, second half? Is that the reason?

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Mark Schubert, Origin Energy Limited - Executive General Manager of Integrated Gas [32]

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I think there will always be differences because we will have a different view of oil. They'll have a different view to us. And I think they -- there's different views. I've talked in detail about the timing of the different payments, yes. So I mean we're not going to give a forward estimate of cash generation, but like I said before, we expect we're going to pull the breakeven down further between $33 and $36, and then production will -- production up at the same time. And then it will be determined by what is the oil price, what sort of -- what's the nonoil-linked revenue look like. And away we go. And then of course, offset in FY '20 -- or helped in FY '20 by the cargo deferral deal.

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Lawrence John Tremaine, Origin Energy Limited - CFO [33]

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I don't -- I'm not sure there's a fundamental difference in the 2 shareholders' understanding of the business. I think it just reflects probably Conoco's view on oil price. However, we've chosen to guide to breakeven so that you can, as Mark said, put in your own oil price and then work out the cash distributions yourself.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [34]

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Okay. And one on Energy Markets guidance. So in the guidance you -- one of the reasons you've given is lower renewable certificate prices in business tariffs. I thought that was a bit of a curious statement. I mean I imagine that both retail and business are going to -- well, there's going to be lower LGC prices. And also curious in the context that always understood that majority of your LGC procurement for business customers is actually coming from market rather than medium- to longer-term contracts.

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Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [35]

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Yes, but the -- I think that's a fair comment. And it's not the biggest driver, by the way. I mean it's overwhelmingly through the VMO and -- the DMO, sorry, and the VDO. So what you've really got is the LGC prices somewhat then becomes overshadowed in the retail prices because it's reflected in those regulatory determinations. That's a more -- that's a bigger impact. You're right. There's a reasonable proportion of what we do in the business customers' back to back. And those certificates, it's not completely back to back. And so this is the impact, but it's a more modest impact, by the way. Did you want to add anything, Greg? Just a more modest impact. It's not the biggest driver. I just want to be complete, but there is also LGC impact beyond the residential and small business customer tariffs. That's all.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [36]

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Okay. And just one last one, the expectations for Eraring output. I mean the last 6 months is, I think, a record output. Just wondering what kind of shape the plant is in and the expectations for output this year in the context of that and in the context of your fuel supply.

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Greg Jarvis, Origin Energy Limited - Executive General Manager of Energy Supply & Operations [37]

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Look, it's going to be something similar. It's it depends on market conditions as well, but if markets stay high, I'm reasonably confident we can start getting something similar out of Eraring. We have good access to coal and we can rail that coal into Eraring, so reasonably confident with similar output levels.

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Operator [38]

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Your next question comes from Ian Myles, Macquarie Group.

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Ian Myles, Macquarie Research - Analyst [39]

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Just can we get back to CapEx? Looking at your -- that chart on Page 50. There's quite a large shift in that generation sustain CapEx, but sort of -- and then you sort of say in the commentary there's a $25 million creditor payment. I'm just trying to understand. How much is sort of Mortlake? How much is you're doing overhauls? And what will that come back down to maybe in FY '21 and a more normalized basis?

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Greg Jarvis, Origin Energy Limited - Executive General Manager of Energy Supply & Operations [40]

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So there's a couple things going on right now. Uranquinty have come up for major overhaul. It's just the timing of the cycle and usage. So we've done that. There's also work being done at Mount Stuart and it's just the timing of it. So next year, we would not have to do those overhauls on those power stations. With Eraring, it is fairly consistent. We will do one overhaul per year, but this financial year, we just have more to do because of the timing of those outages.

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Ian Myles, Macquarie Research - Analyst [41]

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Okay. And in terms of Mortlake, are you going to get insurance recovery for this whole process?

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Lawrence John Tremaine, Origin Energy Limited - CFO [42]

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I would certainly hope so. And so there's a few issues we've got to manage. One is just timing, so when do we receive those insurance proceeds. And then secondly, how does it get reported? So my expectation on insurance, we'll probably report against income statement, but we'll write off damaged equipment and then capitalize new equipment.

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Ian Myles, Macquarie Research - Analyst [43]

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Okay. So whilst you have a high-CapEx profile in '20, it actually -- it slips down in '21 on a go-forward basis.

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Lawrence John Tremaine, Origin Energy Limited - CFO [44]

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That's correct. By the way -- it's sort of penciled in. And by the way, I'm not providing specific guidance beyond 2020 because I don't actually know. And Greg and I haven't had that conversation, but you'll see in years going by generation-sustaining capital of around about $120 million or $150 million. I don't have any reason to believe why that wouldn't continue.

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Ian Myles, Macquarie Research - Analyst [45]

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Okay. Well, that's great. In terms of your -- I saw you issued a new debt series. So maybe you could give us some color on is that fixed price and what sort of rate you've actually locked in over the 10 years.

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Lawrence John Tremaine, Origin Energy Limited - CFO [46]

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Are you talking about the work that we've done in-- for Origin...

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Ian Myles, Macquarie Research - Analyst [47]

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Origin, yes.

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Lawrence John Tremaine, Origin Energy Limited - CFO [48]

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Great. Yes, sure. Look, we've just been on a constant program. Because we raised a lot of debt to fund our investment in APLNG, all of that debt is essentially being refinanced over the last probably 18 months or so. And if you look at Origin's ability to raise $500 million to $1 billion of debt at a time: We've been able to source some of that from bank markets. And you would most likely expect that to be floating, but we also go to capital markets, so international capital markets. And so you would expect us to go to USPP market and then maybe bond markets but eurobond more likely than U.S. And maybe we'll look at Australian bonds. And so we'll target the cheapest market essentially, and so we may -- we have to make a view about one where Origin's name will perform well and performance of that market generally. So we'll make decisions as we go. We're -- we target to have fixed-to-floating in a range of 40% to 60%. And so floating could be 40%. Floating could be 60%, and the reverse fixed. And so we typically look to manage that through the facilities themselves rather than through derivatives.

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Ian Myles, Macquarie Research - Analyst [49]

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Okay, but you -- I think you said in your -- what do you call it, your operating and financial review that you raised USD 525 million on a 10 year -- via a 10-year placement. I'm sort of wondering what rate you managed to lock that down at.

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Lawrence John Tremaine, Origin Energy Limited - CFO [50]

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I don't think we've disclosed that...

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Unidentified Company Representative, [51]

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(inaudible) fixed...

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Ian Myles, Macquarie Research - Analyst [52]

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That's why I'm asking.

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Lawrence John Tremaine, Origin Energy Limited - CFO [53]

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(inaudible) but I don't think we've disclosed it. But I think we have mentioned our average rate dropped to 5.9% in the year, but again, it will continue to move down as we continue to refinance for the next 3 years of towers. So if you have a look, we've got around about -- I think it's around about AUD 5 billion of debt to refinance over the next 3 years. And some of that -- it's all legacy priced, but some of it is high priced, including particularly those hybrids. So 6 -- 5.9% will keep coming down.

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Ian Myles, Macquarie Research - Analyst [54]

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Okay. Just one final question then. On APLNG, you talk about investing to, by additional scope, delivering for high sustained plateau. Is 680 to 700 a higher sustained plateau? Or are we thinking a higher number than that on the basis of this investment?

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Mark Schubert, Origin Energy Limited - Executive General Manager of Integrated Gas [55]

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Yes, so we're not -- so we're saying 680 to 700 in FY '20. I think what I would say is, even at those levels, 680 to 700, we expect to still have ullage in the upstream fields. The way to think about that is even at 680 to 700 probably you've got about 30 petajoules of ullage annually, available. And obviously we are eyeing that off as an opportunity.

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Operator [56]

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Your next question comes from Rob Koh, Morgan Stanley.

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Robert Koh, Morgan Stanley, Research Division - VP [57]

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Can I ask about for APLNG? I believe Origin won a court case with the Queensland government over the original royalties agreement. I'm just wondering if you could remind us how you guys are treating royalties at the moment and within your guidance.

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Mark Schubert, Origin Energy Limited - Executive General Manager of Integrated Gas [58]

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Well, do you want to have a go, Lawrie?

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Lawrence John Tremaine, Origin Energy Limited - CFO [59]

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(inaudible)

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Mark Schubert, Origin Energy Limited - Executive General Manager of Integrated Gas [60]

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Okay. Well, I mean we're treating royalties in the same way that we have historically, while we worked through obviously the court case because there's -- the court case was won, but that means then that we're waiting to see what the actual royalty regime will be. And in the meantime, we still need to continue to pay royalties on some basis.

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Robert Koh, Morgan Stanley, Research Division - VP [61]

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Okay. Yes. So the way you're treating it is basically the conservative approach then. Is that fair?

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Lawrence John Tremaine, Origin Energy Limited - CFO [62]

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Yes, the guidance includes that conservative approach, yes.

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Robert Koh, Morgan Stanley, Research Division - VP [63]

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Yes, yes. Okay. Okay. Now just moving to Energy Markets and thinking about potential major growth projects. Are you guys able to look at contracting with Amungee projects or clinker projects or anything like that?

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Greg Jarvis, Origin Energy Limited - Executive General Manager of Energy Supply & Operations [64]

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We're looking at all those options, Rob, so yes, yes.

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Robert Koh, Morgan Stanley, Research Division - VP [65]

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Okay. All right. That was an easy one for you, Greg. Okay. I guess perhaps a question of -- a couple of questions for Jon. And I noticed in the retail market there seems to be a trend towards offering rebates. And just wondering if there's been any kind of response from stakeholders as to how that sits with moves towards pricing transparency. Is that something that Origin is doing as part of its customer retention strategies?

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Jon Briskin, Origin Energy Limited - Executive General Manager of Retail [66]

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I think what's happening right now is still, it's still early days with the new regimen. And I think there's still a bit of shakeup around what offers will attract customers and retain customers and what won't. Historically, we were seeing percentage discounts have been the most common way which will -- why which customers will move. I think rebates perhaps will play a role. We're seeing that come on and off at the moment, so I wouldn't necessarily hold your breaths and say that will be the strategy going forward.

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Robert Koh, Morgan Stanley, Research Division - VP [67]

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Okay, cool. And then perhaps could you provide some commentary on how you see competition in the C&I electricity space? And I guess ERM has an announcement this morning that's relevant to that.

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Greg Jarvis, Origin Energy Limited - Executive General Manager of Energy Supply & Operations [68]

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Well, it remains competitive, Rob. I mean we maintain our market share and -- but it's fiercely competitive. The good thing about our portfolio, we've managed to grow our market share on the gas side of the C&I business. So yes, with the ERM announcement, I see no change to that.

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Robert Koh, Morgan Stanley, Research Division - VP [69]

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Okay, great. And then I guess, given the guidance incorporates allowance for major growth projects, I wonder. Is there any kind of size guideline for what constitutes a major project? Just to help us with thinking there. I know it's not all about size, but is there any color you can share on that?

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Lawrence John Tremaine, Origin Energy Limited - CFO [70]

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I actually wished you hadn't asked, but -- because it's difficult to answer because we have to look at a project at the time and reflect on economic situation at the time and the gearing of the company at the time, but we're really talking about an individual project that would have expenditure of $100 million or more. It's that order of magnitude. And again I think the most important thing is, if we took an FID on a project like that, you're going to know about it. And we will call out at that time how we would treat that from a dividend perspective.

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Robert Koh, Morgan Stanley, Research Division - VP [71]

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Yes. Lawrence, I appreciate that. And then perhaps just a general comment. And perhaps at your next Investor Day, you'll give us more color on what future growth strategies are, but do you have any thoughts on convergence with data?

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Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [72]

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Well, we certainly do. Do you want...

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Mark Schubert, Origin Energy Limited - Executive General Manager of Integrated Gas [73]

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We can update in October...

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Unidentified Company Representative, [74]

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Yes.

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Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [75]

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We will give a further update on October, but we -- it's been used in a very generic term that what we ultimately see is that -- and we'll expand on it, but we ultimately see the understanding of energy usage. And therefore the information that's gathered closer to the premise, whether it's the home or the business, will become a key aspect of understanding supply/demand and therefore the products and the way you manage your business going forward. That's the key aspect that we see.

We probably think of broadband differently. We think of that just as a cross-sell to a move event into our customer base. And we feel that's a natural extension, but I wouldn't be drawing the data linked to the broadband. I'd be thinking it more about us capturing insight in a much richer way but ultimately will lead to business model innovation. And we will expand on that, but that's how we think about it. And that's what we've been spending our time doing is really capturing, understanding, translating it into our existing business but also to establish what we think that might be in the future, as a retailer and operator of business.

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Operator [76]

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Your next question comes from Mark Samter, MST.

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Mark Samter, MST Marquee - Energy Analyst [77]

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Just a couple of questions around APLNG. If -- and I apologize if it's sort of been asked. I haven't listened to all of the Q&A, but with the like CapEx and OpEx, you've obviously lumped them together with the guidance now. Can you confirm on a unit cost basis if there's any increases versus last year, or the exit run rate more accurately in either the CapEx or the OpEx side?

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Mark Schubert, Origin Energy Limited - Executive General Manager of Integrated Gas [78]

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Are you saying what will be the unit cost rates...

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Mark Samter, MST Marquee - Energy Analyst [79]

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Yes. Because we just can't differentiate between CapEx and OpEx. Whether that's going to, a like-for-like look on how that -- those track. And is it fair to be -- is it all just the increased number of units, or has there been any delta in unit costs?

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Mark Schubert, Origin Energy Limited - Executive General Manager of Integrated Gas [80]

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Alright. I think what we're saying there is we -- yes. We've delivered the $1.2 million well and the AUD 1 per gigajoule there. They underpin the guidance looking forward. That would be the first thing I'd say. I think what you're seeing that drives that from sort of why is there a bit more CapEx being spent in FY '20 -- I mean really that's because we're doing more work. We're doing a bit more spend to -- on in the sort of well delivery area, and that's really about sustaining that higher plateau production. And then there are some other things like higher production means higher power because power is proportional to production. We've got some higher workover costs, that makes sense because we've got more wells, got more wells every year. So we've got more wells to work over. And then the other thing that sort of continues on a little bit next year is that we've got -- we continue to have turnarounds. So we've got 3 more in the upstream to go. And we've also got a downstream turnaround which is on the bulletin board.

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Mark Samter, MST Marquee - Energy Analyst [81]

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So on the OpEx side, you're not seeing any in particular. Because there is some talk of cost inflation starting to peak into [Queensland]. Are you seeing anything on that side? And would we think you're pretty comfortable around the OpEx side of things?

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Mark Schubert, Origin Energy Limited - Executive General Manager of Integrated Gas [82]

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No. We definitely see, we see the cost inflation, but our approach is that to eat the inflation each year. And we've got a plan that does exactly that, so we can offset the inflation with just finding smarter ways to do the work that we need to do.

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Mark Samter, MST Marquee - Energy Analyst [83]

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And then just quickly, on the reserves. And obviously not to diminish from the areas where you have made some positive revisions. Can you just talk through a little bit about the downward revisions [on backing the operator then? An operator look at just] year after year, we've seen -- chips away at some of these more marginal fields. And how much more do you think we should see this occur over the next few years? Or do you hope we're largely done now?

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Mark Schubert, Origin Energy Limited - Executive General Manager of Integrated Gas [84]

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Yes. I mean I think -- just probably I think we don't really -- I'm not sure I share that view exactly. I mean I think you've got to remember we're -- if you're thinking like 2C is going down, well, 2C goes down. And we convert 2C to 2P, for example. A great example of that would be Mahalo. I'm not going to get into a disclosure event with comment around this, so I'm not going to say what the numbers are. But for example, this year, we have taken Mahalo into the development plan. And so that converts resource to reserves. I think there will always be some reclassifications, but more of what we're saying is we're seeing improved fuel performance. We're seeing fuel extensions. You talk about Mahalo. You know what, I think the reserves and resource performance looks pretty good. Is there something specific that you're targeting at, Mark?

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Mark Samter, MST Marquee - Energy Analyst [85]

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I mean just because with -- over the last couple of years, we have seen -- I'm just wondering how much of this is -- would be downward revisions within the lower-quality acreage. And I guess we have seen over last couple of years being contingent on the 2P side, some downgrades on those more -- the lower-quality acreage. I'm just trying to get a feel if we think that process has largely played out or if it's something we could continue to expect.

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Mark Schubert, Origin Energy Limited - Executive General Manager of Integrated Gas [86]

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Well, I think there'll always be movement is what I'd say. We -- our plan is to have more movement towards reserves than to resources, the other way, but I don't -- I think, as we learn more about the marginal fields, of course, some of those will drop out, but also we've got a big exploration program. I think that's been pretty successful. One way to think about that is we've added sort of 500 petajoules into the development plan. Finding costs for that is sort of like $0.50 a gigajoule. So we've got a good exploration program that we've run in the past. We're tying to see that -- some of that play forward. We're getting through those material plays that we've talked about at Investor Day, and we're hopeful that, that will lead to reordering of the stack as we bring forward some exciting acreage into the portfolio.

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Operator [87]

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Your next question comes from Daniel Butcher, CLSA.

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Daniel Butcher, CLSA Limited, Research Division - Research Analyst [88]

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Just a couple of follow-up questions to other people's questions really. And first one, just on APLNG CapEx. Can you maybe just sort of describe -- high CapEx this year due to greater works and more wells. If you have any more in following years as well? And when -- what sort of level of boost in production do you expect to achieve, and over what sort of time frame?

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Mark Schubert, Origin Energy Limited - Executive General Manager of Integrated Gas [89]

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Yes. So I think a similar answer to before, but I'll say it again. So production FY '20, we're saying sort of 680 to 700. I think I also said before that even at that sort of level, 680 to 700, we expect to have sort of 30 petajoules of ullage in the upstream processing facilities. And so that provides obviously an opportunity that we're eyeing off. And we're not guiding CapEx beyond FY '20, but what you are seeing us do in FY '20 is start to do some of the, I guess, early works that sustains that -- for that higher production plateau into FY '21.

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Daniel Butcher, CLSA Limited, Research Division - Research Analyst [90]

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Right. Okay. And I know you sort of buried away the question about the ERM takeover offer from Shell, but I'm just wondering whether you've sort of thought about what they're trying to do over in the U.K. in terms of aligning themselves with petro retail. Have you thought about doing something similar like that yourselves, firstly? And secondly, what sort of areas do you think Shell will target first to try and take market share away from yourself and other incumbents?

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Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [91]

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I think I'll -- let's talk about the domestic market. I think -- firstly, I think what Shell -- it look -- it's going into the large customer market. It -- ERM operates in that market, does a good job in the market. It's a good competitor. I think Shell would look at that being an opportunity, I think, when they've got their gas positioned. And so they'll, I think, endeavor to actually continue to operate in a similar fashion to what we do in terms of taking an integrated view between both electricity and gas. It obviously moves then into territory they've never been before, but they've bought that through ERM to actually compete in the retail space. Clearly, Shell has a -- everyone starts with a different position. And they've started with a -- obviously a retail fuel network. That hasn't been -- I mean that -- I mean we've looked at -- we're going to say "looked at." We've watched what they've done, and they've certainly articulated they're going to connect the two. I think that's not something we've really got in our sights at this particular point in time, yes.

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Operator [92]

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Your next question comes from Tom Allen, UBS.

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Tom Allen, UBS Investment Bank, Research Division - Director in Equities Research & Lead Analyst of Utilities [93]

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I just wanted to check in on a bit of a sleeper issue regarding the case brought against APLNG in the supreme court of Queensland by Tri-Star. If APLNG believes a trigger for reversion has not yet occurred, on your current forecast, assuming your current production rates continue and assuming your own long-term oil price, when do you think that revenue from the assigned interest in certain fields might trigger reversion? Because surely it might occur at some point in the future. And you -- can you share an estimated time frame?

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Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [94]

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We don't have a time frame associated with that. There's a lot of variables that go into it, but we certainly don't have a time frame. And it's not anytime soon.

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Unidentified Company Representative, [95]

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Yes.

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Operator [96]

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Thank you. There are no further questions at this time. I'll now hand back to Mr. Frank Calabria for closing remarks.

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Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [97]

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Okay. So thank you for your time this morning, and thank you to all of the questions we received. We look forward to meeting with shareholders over the coming days and also to have further discussions with our analysts as well.

So thanks very much. Look forward to speaking to you soon. Bye.