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Edited Transcript of ORG.AX earnings conference call or presentation 17-Feb-21 10:00pm GMT

·66 min read

Half Year 2021 Origin Energy Ltd Earnings Presentation Sydney, New South Wales Feb 18, 2021 (Thomson StreetEvents) -- Edited Transcript of Origin Energy Ltd earnings conference call or presentation Wednesday, February 17, 2021 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Anthony Lucas Origin Energy Limited - Executive General Manager of Future Energy & Business Development * 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 ================================================================================ Conference Call Participants ================================================================================ * Baden Moore Goldman Sachs Group, Inc., Research Division - Research Analyst * Ian Myles Macquarie Research - Analyst * Mark Samter MST Marquee - Energy Analyst * Max Vickerson Morgans Financial Limited, Research Division - 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 ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you for standing by, and welcome to the Origin Energy Presentation. (Operator Instructions) I would now like to hand the conference over to Mr. Frank Calabria, CEO. Please go ahead. -------------------------------------------------------------------------------- Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [2] -------------------------------------------------------------------------------- Okay. Thank you very much. Good morning, everyone, and welcome to the Origin 2021 Half Year Results Presentation. Thank you for joining us. We have a presentation this morning where you'll hear from me and Lawrence Tremaine, and followed by an opportunity to ask questions. And in that regard, we're joined here today by all members of the leadership team at Origin. I do recognize that this is a busy day for many of you. I'm aware that Santos and Woodside report their results immediately after so we will move through the presentation reasonably swiftly to give an opportunity for you all to ask questions. So now just moving through to performance highlights. I'm now on Slide 4, the half year financial summary, and you'll see that the statutory profit and underlying profit were both lower on subdued economic conditions and lower commodity prices that flowed through to our returns. We had a very strong operational cash flow at $669 million. And what that's done has enabled us to invest in some growth opportunities, continue to reduce our debt by a further $460 million in the half and also the Board has declared an unfranked dividend for the interim of $0.125 per share, so continuing to provide distributions to our shareholders. I did reference those economic conditions impacting key commodity markets. And on the next slide, we've highlighted the east coast gas and electricity demand for the calendar year 2020, and you can really see the impact of COVID-19 and also the milder summer, which really exacerbated subdued demand and also reduced volatility, particularly in the case of electricity as you head into the final quarter. We've obviously also had ongoing increase in supply of renewable energy into the system that's continued to place further downward pressure on electricity prices. You can see really that COVID impacting electricity by the difference between the business' electricity demand and retail energy demand. That's played out clearly into the key commodity markets. And what we've seen is both LNG and oil markets were volatile. And I did reference the subdued domestic energy prices, and I'll just touch on 3 of these commodity prices that have a key driver impact on our business. The first is the JCC oil price, and that, obviously, flows through to our APLNG, contract LNG prices, but on a lag basis. So you're seeing that what really dipped in that April to, I suppose, October period is actually flowing through into this -- it has flowed through into this half. And what we've seen is that recent strength over the last month or so will flow through to the second half. In the case of the middle chart there, we've really highlighted the JKM netback price and also Wallumbilla spot prices. And our market has really been closely correlated to those JKM prices. And the reason we've highlighted it here is that, in our energy markets business, we supply -- we buy increasing amounts of supply from both those oil/JKM linked prices as well as fixed price and then selling into the domestic market. And really, what we've seen is those have dislocated really through that very cold winter spell, and you can see they're recovering back now. But that has impacted in a time where also domestic contract prices have remained low. The electricity forward price is, I think, self-evident. That's the one we've got there. And that in the appendices, we've got all of the states. We highlight this one because really, that's where we've got a large part of our generation, fixed generation portfolio that you can see. We've referenced there the 16 terawatt hours, and that's really the Eraring asset combined with our relatively fixed cost PPAs there as well. Those wholesale prices now are below the cost of new build firm generation. I would go as far to say those wholesale prices are unsustainable. There will be a supply response, and it's just whether it's planned or unplanned. And that's really where the market is at today. When I think about the operational performance, though, I think there are many highlights that show the strength in that first half, firstly, in Integrated Gas. Really just reinforcing points we communicated to you recently. We had record production in December quarter. We've had record low CapEx and OpEx in the half. We were able to distribute $260 million from APLNG to Origin at a time of low commodity prices, our hedging program protected us by a further $96 million in that weaker commodity price environment and we've had encouraging initial results from the Beetaloo, which we'll touch on further in the presentation. Clearly, energy markets is experiencing those low commodity prices, which has had an impact that flowed through in the half. I am pleased to see the strong cash conversion in the half. We've been out there winning business customers despite that lower demand. We're on track to achieve our $100 million retail cost savings with $85 million now achieved. We've held our customer numbers really balancing that share and value, and we achieved our first target of having 50,000 customer accounts on Kraken at December, and that's continuing to grow. It is important for Origin, and I think all companies today that you deliver on -- deliver for all stakeholders. I'm now on Slide 8. And by that I mean, delivering for our customers, communities, our people and also the planet. In the context of customers, it's been all about COVID support that's been in place for those that have had difficulty paying, and that's in place to at least the 31st of March of this year. Victorian residential electricity prices reduced on the 1st of January by an average of 11%. And I'm also pleased to see that we are providing more and more customers the opportunity to participate in demand response to our Spike product, with customers now up at 28,000. Supporting our local communities through regional procurement is important, supporting indigenous suppliers is important. And what we do is we continue to increase our spend there, and our people continue to volunteer in those communities. For our people, it's been all about health, safety and well-being this year through COVID-19, and that continues to, obviously, be a time of uncertainty. I've been very pleased to see the response that's been made, but it is something that we continue to focus on, as is our safety. And you can see there a recordable injury rate of 2.8 and also equally important is that we continue to prevent serious harm to our people. Origin was, once again, awarded the Best Workplace to Give Back. We've communicated that we have both the short-term and long-term commitments and ambition regarding emissions. And this year, we've advanced it further through linking that emissions target to our executive remuneration in terms of our short-term incentive. And there are just 2 examples of how we move to a low-carbon future, a first step in terms of bringing capacity in the form of batteries on Eraring has been to go out and seek an expression of interest for 700 megawatts, and we continue to advance the green hydrogen and ammonia initiatives. In Slide 9, that is a slide we presented to you at the Investor Day. And all I really want to say to you is that Origin is a customer-focused energy business that is positioned for a low-carbon future. And the highlights there really are having those leading assets and capabilities, being in the preferred position for the energy transition across the capabilities and those assets we have in the business, a robust capital framework, which Lawrie will touch on further. And you can see we've reduced our adjusted net debt-to-EBITDA down to 2x at December. We expect our free cash flow yield to be in excess of 10% for this financial year. And we have a moderate near-term CapEx requirement in our business, and I'll touch on how we're reducing that further. From a maximized value and pursue growth, it's all about how do we continue to add value and grow our customer business. And you can see there that, that's coming through capabilities of technology, but also simplification, culture, and that's exciting us as we go forward. We've touched on the renewable fuels and also the fact that we go -- continue to maximize the value from our upstream assets and crystallize that in an orderly way. Just a framework we showed shareholders was really that focused on strategic priorities and maximizing the value of the existing businesses and pursue growth in customer value and low-carbon solutions, and I'll now take you using that framework into the next 2 slides for each of our businesses, starting with Energy Markets on Slide 11. In the case of Energy Markets, thinking about the maximizing value of the existing business. I'm sure that's on everyone's minds given what's happening in that marketplace. The first thing is being a low-cost retailer. We're delivering the $100 million. We've got $100 million to $150 million further costs coming out as we really do leverage our technology position through Octopus, but also the culture we've established of reducing costs over the last several years, whilst continuing to improve customer experience. And that's a capability that, I think, is going to serve us well and increasingly important as we go forward. This Energy Markets, it's all about having capacity available when you need it rather than average energy. And that's because as more and more renewables come in, average energy is competing at lower and lower levels as you've seen in our forward prices and that's what we continue to have in our peaking generation. And also, we have a very strong gas portfolio through the transition. We have Eraring, our single coal asset, and we really are very much focused on how we manage cost and being reliable when we need it and managing it differently from today. In terms of transforming that customer experience, as I said, that capability we built, but also the strategic partnership with Octopus has got us an opportunity to take that further. And using those experience, we think, as we converge on energy and data, as we go to those growth opportunities, it's really all about growing the scale of the customer base, but also those offerings. And we do that in a low-cost way as increasingly we are connecting more and more distributed assets, combined with the capabilities of managing the wholesale position of centralized energy supply. The other aspect of growth that continues to excite us is that Octopus is growing rapidly in the U.K. and has also now announced a Japanese joint venture, where they entered the market with Tokyo Gas and Tokyo Gas has become a shareholder as well. And clearly, with the announcement of policies like New South Wales, there is the potential for us to now partner and invest under those policies as the energy supply market evolves and coal leaves the system. In the case of Integrated Gas, our priorities are maximizing the value of the business and really starts with APLNG, and I've touched on that record production and the low CapEx, OpEx noting the $2.9 that's been achieved in the half year. And that, we had previously, and I'll touch on this a bit further when we talk about that outlook, targeting an average total CapEx OpEx of less than $3.50 through to '22 and '24. I'll provide some more context and information on that later in the deck. For us, on the exploration portfolio, it's actually really moving through that program, and particularly for Beetaloo. We'll give you an update on its progress, but also that we are very much focused on how we do that and farm down, managing timing and value. We have commenced exploration in the Cooper-Eromanga, and we've announced a farm-in to the prospective Canning Basin, meaning we've now got a well-diversified shale position in addition to the strong position we have in APLNG. And we continue to look at a clean energy future, and we continue to progress. We did touch on these in more depth, and I won't go into detail today, but the hydrogen and ammonia projects, which are led by customers, particularly out of the Japanese market and also emerging domestic opportunities, and we're just working through FEED for those projects this year. The last point is that there will be reducing emissions across all of our operations, and really, that's a big focus within the Integrated Gas business. So on that note, I'm going to pass over to Lawrie, who will go through the financial review. -------------------------------------------------------------------------------- Lawrence John Tremaine, Origin Energy Limited - CFO [3] -------------------------------------------------------------------------------- Thanks, Frank, and good morning, everyone, and thanks for joining us on what, I know, is a very busy day. I'll start with our financial overview on Slide 14. As Frank has mentioned, our financial results for the half have been impacted by weaker commodity prices across wholesale electricity, gas and oil. Due to the lag in the pricing of APLNG offtake contracts, our first half results reflect the low point in the oil price cycle from March to June in 2020. These results also reflect the step down in electricity and gas tariffs from 1st of July 2020 across most states, with Victoria repricing from January '21. COVID has played a role in these results with weaker demand, particularly across our C&I and SME customers and especially in Victoria. Free cash flow and continued debt reductions are the highlights. Free cash flow was down less than 4% half-on-half despite underlying EBITDA being down 27%. Pleasingly, net debt was reduced by a further $460 million. Turning to Slide 15 and the statutory to underlying profit reconciliation. The statutory result for the half was a profit of $13 million compared to the underlying result of $224 million after backing out the impact of the number of noncash items, a cash item we expect to recoup in future years and some minor one-off items. Firstly, we've adopted a strategy in relation to the timing of the surrender of large-scale generation certificates whereby we've elected to incur a shortfall charge that is refundable when we surrendered certificates in future years. The $112 million reflects the difference between the shortfall charge and the estimated future costs of these certificates. Secondly, last year, we recognized an onerous provision for our Cameron LNG contract. We're now required to mark this contract to market. And consequently, we booked a noncash gain of $47 million that is excluded from underlying profit. Finally, and consistent with other periods, we've backed out of our statutory results, the noncash revaluation of a range of financial instruments. I'll -- next, I'll expand on the LGC strategy on Slide 16. Delays to a number of renewable projects have resulted in a near-term tightening in the LGC market, but our expectation is that this market will be oversupplied from 2022. The legislation provides an option for companies to under surrender certificates and pay a shortfall charge of $65 per certificate, which is refundable if the certificates is surrendered within 3 years. With the forward price in steep backwardation, this presents an attractive economic opportunity. A shortfall charge of $152 million was accrued in our statutory result in relation to around 2.4 million certificates. This is reduced to $40 million in our underlying result based on the weighted average of the forward price and the price secured through a proportion of certificates acquired to date. Currently, the shortfall charge is not tax deductible, but the refund is accessible. Federal treasury is supportive of correcting this asymmetry and legislation is drafted and are waiting introduction to Parliament. Moving now to our underlying profit bridge on Slide 17. Underlying profit was most significantly impacted by lower oil prices and APLNG earnings. This negative impact was partially mitigated by Origin's oil hedging gains. Energy Markets' underlying earnings were also lower, reflecting lower commodity prices and one-off network costs. Our corporate functions continue to deliver cost reductions. However, this good performance is obscured in this period by a noncash FX revaluation associated with our U.S. dollar cash balance and costs associated with our ERP replacement project, which is on track to go live on the 1st of July. We have reported higher depreciation and amortization expense, which arises due to the accelerated amortization of our retail IT systems as we implement the Kraken platform, and higher amortization of restoration assets in generation following an increase in this provision last year. Next, I'll drill into Energy Markets on Slide 18. Energy Markets' earnings were down $88 million or 12%, with the decrease coming from both electricity and gas businesses partially offset by ongoing retail cost savings. Electricity gross profit decreased $46 million, driven by lower wholesale prices flowing into retail and business tariffs, higher network costs not factored into the regulated retail tariff. These partially offset by a lower unit cost of energy, reflecting lower fuel and maintenance costs in generation, lower green scheme costs and benefits of our short energy position. Gas gross profit was $56 million lower, mainly due to lower C&I contract pricing outcomes, only partially offset by lower gas supply costs. And the foreshadowed roll off of long-term transportation capacity sales contracts. Our retail cost-out program is well underway, with cost to serve down $13 million, and we remain on track for $100 million cost reduction by the end of this financial year against the 2018 baseline. Turning now to integrated gas on Slide 19. Our upstream businesses continue to deliver reliable and flexible field and operational performance. Underlying earnings were $340 million lower, largely due to lower oil prices flowing into LNG contract pricing. The realized oil price for the half was USD 38 a barrel compared to USD 69 for the same half last year. This was partially offset by lower royalty costs and lower gas purchases. Lower APLNG earnings were partially offset by Origin oil hedging gains, lower LNG hedging and trading losses and lower upstream overhead costs, the latter due to expenditure to reduce Beetaloo overriding royalties in the prior period. APLNG cash distribution on Slide 20. By the end of January, 97% of the financial year JCC oil exposure was already priced in at USD 43 a barrel. Based on this price and lower forecast breakeven, we expect the full year cash distribution from APLNG of between $575 million and $675 million. The benefit from Origin hedging gains is additive to this. In challenging economic conditions, APLNG has distributed over AUD 700 million to shareholders and repaid USD 241 million of project finance on a 100% basis. Next, capital expenditure on Slide 21. Capital expenditure for both the half and the full year, excluding the Octopus investment, is expected to be substantially lower than the prior year, largely due to the targeted reductions in generation spend, particularly at Eraring reflecting its changing role. We expect this trend of lower generation sustaining capital will continue into the future with some of the capital being redeployed to fund growth. The full year outlook includes ongoing activity at Beetaloo, system changes to meet the 5-minute market settlement initiatives and our ERP implementation. Turning to Origin cash flow on Slide 22. Free cash flow was $655 million for the half, slightly lower than the half year 2020. Lower tax and interest payments, lower capital expenditure, reduced working capital requirements, including deferred green certificate purchases, and improved outcomes from Origin's oil and LNG hedging and trading were all contributors to the strong result. These partially offset the impact of lower Energy Markets' EBITDA and lower distributions from APLNG. Cash conversion from Energy Markets was 119%. However, we expect this to partially unwind in the second half with the payment of the LGC shortfall charge. for the full year, we expect our free cash flow yield to be over 10%, well ahead of the ASX 200 average. Finally, I'll move to our balance sheet on Slide 23. We ended the half with net debt at $4.7 billion, with debt-to-EBITDA at the bottom end of our targeted range at 2x. With lower Energy Markets' earnings, we expect to rebound to the top of the range despite our successful debt reduction efforts. We continue to balance the commitment to our credit rating with funding growth, such as our investment in Octopus Energy and also delivering returns to shareholders. We continue to believe we can achieve all of this but need to progress with caution given the prevailing business environment. It's in this context that our directors declared an unfranked dividend of $0.125 per share, representing a 34% payout ratio of free cash flow and an annualized dividend yield of 4.7%. With regards to shareholder distributions going forward, the Board continues to target a 30% to 50% free cash flow payout, and we'll consider a combination of dividends and/or on-market share buybacks. This change is consistent with our commitment to maximizing economic returns to shareholders. With that, I'll pass back to Frank came to discuss our operational performance. -------------------------------------------------------------------------------- Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [4] -------------------------------------------------------------------------------- Thanks very much, Lawrie. And just now turning to operational performance, we're now on Slide 26, commencing with a few key slides on Energy Markets. First is really the lower wholesale prices that are impacting our margins I referenced earlier. In recent years, you can see electricity margins reflected those higher wholesale prices on the left-hand side. And that's really the benefit you capture through your baseload generation assets and those longer-term renewable PPAs, that's the 16 terawatt hours that's also shown on that right-hand side chart as well. As those lower wholesale prices, though, now flow in, they flow through to the retail and business tariffs that reprice in the case of business tariffs, as people recontract, and in the annual tariff setting processes for the retail business. It's reducing the margin on our 16 terawatt hours of relatively fixed cost supply. This will continue in FY '22. And what will partially offset that will be the low-cost renewable supply of Stockyard Hill wind farm coming online and also capacity contracts rolling off. What will also happen is that we will continue to optimize the swap and short position to capture the benefit of low prices and what are increasingly negative prices on larger intervals. In the case of domestic gas prices and margins on the next slide, you can see that they will be impacted into the second half, but show signs of recovery of the market really does link back into a forward JKM netback environment. The domestic prices have steadily fallen, but what's really happened in 2020 is that the demand impact and also, I think, the impact of demand for gas into the generation fleet has meant that there's been a lot of supply available in the domestic market, and that's translating into lower domestic prices, particularly as we recontract our C&I sales. And what we also saw is a dislocation, as I say, of the summer in terms of the markets for JKM, particularly with that very extreme northern hemisphere winter, which they recover -- the JKM is recovering from now. What that's meant, though, is that the JKM supply cost into the second half is expected to be lower than it was -- higher than it was previously. We're largely balanced on that across a large portfolio of gas, but we do have a net JKM exposure at the end of our last quarter there of 14 petajoules that's in our supply cost. And that's what we embedded into our guidance to you last week. We do expect that disconnect that's occurred recently to then -- to correct and that east coast forward prices will reflect JKM netback going forward. Probably just want to give you, therefore, on the next slide, just really how we respond to these markets in Energy Markets. And really to highlight the near-term and longer-term outlooks for the electricity and gas businesses respectively. The near-term outlook, I think, we've been clear about the flow-through to the FY '22 of those lower wholesale electricity prices on the 16 terawatt hours, and that we will have cap contracts rolling off, renewables coming in at a cheaper cost, and we'll continue to optimize that swap and short position. What I should add to that is that, not only will we be focusing on the longer-term operational strategies for Eraring, but the key aspect is that, that really is happening now. So in the near term, that's in the context of both reduced OpEx and capital expenditure associated with those plants, with that plant in particular. It also is about how we're running that plant. And even today, we have 1 unit not running. We're at minimum generation and that, I think, is going to continue to be accelerated in terms of how we operate because, increasingly, it's all about having the capacity when you need it, not the average energy for those assets, and that's where we're focusing our attention. In terms of the second point there on the longer-term outlook about exploring low-cost options, we're talking about very low-cost options that really do just add megawatts of capacity and just enhancements. One of those has been what we've recently done in terms of Mortlake, where we used some wet compression at very small dollars to actually increase that peaking capacity when the temperatures are hot. And clearly, the market, it's all about how does capacity -- the right capacity come into the market that's needed, particularly, as I said earlier, that wholesale prices now for baseload energy producers like coal, are unsustainable. It's really about getting that capacity in and that means both batteries, pumped hydro, in addition to what we have as peaking gas generation, and that's what we're actively involved and engaged with governments on today. In terms of the gas portfolio, talk about the near-term outlook on the slide prior to this, and it's really about how that timing of tariff repricing compared to supply cost plays out and the linkage to the JKM market. We have concluded a number of our price reviews, but we still do have a price review outstanding with Beach Energy. And so that's really the -- whilst we're partially repriced, and we've got competitive gas supply secured from those, that remains one of the key outstanding that will be progressed in the second half. At the same time, we've mentioned previously to you, it's all about the longer-term supply of gas, and we are actively engaged in discussions with both domestic supply alternatives and LNG inputs -- imports. And so that's no different that we progress that in what is a rapidly evolving market. And really, the fact is that we're continuing to have capacity available in a market that's going to be, I think, less predictable over time, is important, and therefore, having our peaking generation assets and available and the way we run them as coal retires remains a key aspect of how we manage the portfolio going forward. Turning to retail. Origin consistently keeping churn lower on a percentage basis than market. We seek to win share. We've continued to do that based on customer value and value-based approach and really focusing on products, pricing, channels, renewals and responding and actively competing. We've had -- you can see we grew our customer base by 4,000 overall, and we've had a strong start to this calendar year by adding a further 9,000 electricity and gas customers. Very pleased to see the growth we've had in revenue streams, in particular, the CES business. And for broadband, it's all about demonstrating that we can give them a very good customer experience before we then take on further scaling of that business. We continue to transform our retail business. You can see it's increasingly digital. There's increasingly better response coming from the app ratings. You can see there, there's more products. You'll notice the Everyday Rewards has landed very well with our partnership with Woolworths. And you can see that we continue to have improvements in our strategic NPS, as an example, the December result of plus 5. You need to do that in this world, but also have to do that at low cost. I've touched on it earlier, but you can see the commitments and the progress that we're making towards being that low-cost, but very, very customer-focused retailer. And you can see on the right-hand side, how we continue to grow our solar and community energy services businesses. The gross profit is growing. We continue to add megawatts and customers to our virtual power plant through products like Spike. We're adding that as another proposition and moving through to propositions to help customers transition to EVs, and we just see that, that future continues at pace and an exciting one for our sector as we look further ahead. Worth touching on Octopus because it certainly is growing rapidly. It has obviously a very ambitious strategy to have over 100 million customer counts on its platform Kraken. It currently has 17 million. It gets the benefit of licensing revenue of GBP 300 million over the next 3 years, which is very, very strong. But what's also happened since we made the acquisition of our 20%, you can see it's growing. U.K. customer accounts at almost 100,000 a month, well in excess of our expectation to now have 3.53 million customer accounts in the U.K. It continues to do that as, I think, the lowest cost and the best customer experience in the U.K. market. And it's now launched in a modest way in the United States, it's in the German market and is launching in New Zealand, and I referenced earlier, the Japanese partnership with Tokyo Gas. The implementation is progressing well for us. We've now got 51,000 customers as of December 20. It's grown since then. And all of the stuff that we see, even though that went through -- that was a minimum viable product, is continuing to reinforce that we can see and have confidence in that experience and lower cost and simplification of our business as we go forward. When it comes to Integrated Gas, I really am just reinforcing some of the earlier points I made about the strong production, the ability to respond in the market and underpinned by that quality resource. And in addition to that, to have a 99.8% gas processing facility reliability does mean, not only the ability to bring back the resource when the demand is needed, but also to be able to deliver on it through those facilities. The record low-cost continues and being at $2.90 a gigajoule, that's a 17% improvement compared to the equivalent half last year. And it really is underpinned by strong field performance, reduced activity and I'll give some further comments on how we see that going forward. The realized oil price, you can see dipped in this half, which has really translated, but it really does show that with the recent recovery in all markets, we'll expect to improve the revenue in the second half of this financial year. The next slide really, on Slide 34, is just demonstrating the flexibility because we were able to turn down production in response to the lower demand to COVID-19 really between that May and September period. And I think demonstrating this flexibility is a very strong feature and underpins the resource and also the capabilities. You've seen our ability to be able to ramp up that production over the last quarter. And we've been able to achieve that record production in the final quarter of 1,614 terajoules a day. And on the back of that, and the current market conditions, we did lift our guidance for production, and that was in our guidance recently. We're seeing strong demand from our long-term buyers also as the market shifts rapidly. The guidance update included on Slide 35 is the same guidance that we issued last week. So there's nothing that's changed in relation to that guidance. So I won't endeavor to repeat all of the words. You can read them below. We're not giving guidance for FY '22. But consistent with Energy Markets, I thought I'd give you some commentary around how we're seeing the strong momentum build into the next financial year. That strong momentum is underpinned by 4 things. The first is that the field performance continues to improve. And we gave some detail to that at the Investor Day. And all I can say is that, that has continued to improve since then. We've got the low cost coming through that you can see through that $2.90 a gigajoule in the first half. And that low cost is coming through lower well costs, lower workover costs and also a lower workover frequency. The third is just to build on the previous point I made in that having facility reliability being very strong means you're also able to capture that through operational excellence as we go forward. And obviously, the fourth point about that is, well, we'll never know how to predict commodity prices, but with a strengthening oil price every day, that bodes well as we head into the next financial year because some of those prices you're seeing now on a lag basis will start to emerge in the next financial year. I'll just quickly touch on exploration and really how that links between what opportunities we're pursuing, and also to just reinforce the capability and experience we've leveraged from through our APLNG experience over a long period of time in CSG. And we've done that through -- obviously, that strong history is through identifying the early gas resource, moving through how we commercialize, building our domestic supply and then finally landing to a reserves position that enabled LNG and continues to be in a -- we continue to be in a position where we're replacing produced reserves. And on the bottom part of that left-hand slide -- the bottom left-hand side of that slide shows that there are continuing highlights that show that this resource is building. The material resource from the current fields -- below the current fields is sustained. We've got really strong sustained gas loads from those pilot wells of greater than a terajoule a day. So that's very exciting to us. The 3 plays, the Peat flank, Ramyard and Spring Gully East has matured from appraisal to development, meaning 900 petajoules. And we've also got positive gas shows and a new prospect thereby the Carinya 11 well. So very good to see that exploration continues to yield benefits in the APLNG and continues to show how high quality of that resource is and with a further opportunity. That capability we're now taking into clearly a leading shale portfolio that you now see extends across 3 large basins, the Beetaloo, Canning Basin with our recent farm-in position there and Cooper-Eromanga where we have prime acreage position there, and we've recently drilled a vertical well, which we're testing the maturity and evaluating that log so that it can inform a horizontal well. I'll touch further on the Beetaloo opportunity in the next slide, particularly as the progress regarding the Kyalla well. And you can see there that we have met our objective of getting goal of our liquids to rich gas opportunity through those Kyalla shales. The initial announcement, which is based on early data, is lodged -- we have to lodge that in accordance with the northern territory regulations. The initial results are encouraging, but we've got further work to do on that. But you can see there that one of the key things that we had to work through was just that we were confirming really that there are unassisted gas flow rates and it's liquids rich. And you can see the composition there through the various methane, ethane and the higher C categories there. But what we've also been contending with is a very large amount of water production that you can see as a ratio of 1,000 barrels to million scf. So that's what really we were working through. We will continue that cleanup phase, and we expect to commence the production test as we hit the dry season into the quarter 4. And then following extended production testing, we shift to the commerciality through well optimization and also high-grading those areas, identification of them. So there's work to be done there, good initial signs, more work to be done. And the next thing that you should be looking forward for us is really that extended production test, and we'll keep you informed. That's all we had on the operational review. In terms of outlook, I just really would say that we -- the updated guidance that we're referencing on that right-hand side of Slide 39 is consistent with what we communicated to you last week. I think there's only one minor change, and that is that the LNG oil hedge and trading might be a slightly different number for the mark-to-market. Otherwise, everything is identical to that. And so I won't spend time necessarily going through each of those, but you can see there where that revised guidance, particularly on Energy Markets through those commodity prices, but also the upgraded guidance over time through production, CapEx, OpEx and distribution breakevens that have occurred in the APLNG. The guidance is really supported by the commentary on Slide 40. I won't go through all of the points on that slide because I think it is just going to repeat the points that we communicated to shareholders last week, but very happy to take questions on any of those aspects. So on that note, I will now be very happy to open up to questions, and we can take it from there. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from Tom Allen with UBS. -------------------------------------------------------------------------------- Tom Allen, UBS Investment Bank, Research Division - Director in Equities Research & Lead Analyst of Utilities [2] -------------------------------------------------------------------------------- Lawrie, you mentioned that the Board will consider a combination of dividends and on market share buybacks. Can you share some color on how you'll pitch to the Board, the relative merits of paying a high div versus buyback? -------------------------------------------------------------------------------- Lawrence John Tremaine, Origin Energy Limited - CFO [3] -------------------------------------------------------------------------------- Yes. Look, I think, Tom, the context of this is we've got a well-established capital management framework, and we've got a dividend policy that was -- that's out there. So that -- and the first thing I want to say is that we remain committed to the 30% to 50% payout ratio. So that's like a -- that's a baseline position. But as we look at our share price relative to our valuation, if our share price is too far below that valuation, then we think directing that cash to buybacks could be the best economic result for our shareholders. And so if we make that assessment in future dividends, then we want the ability to make that decision and without taking shareholders by surprise. -------------------------------------------------------------------------------- Tom Allen, UBS Investment Bank, Research Division - Director in Equities Research & Lead Analyst of Utilities [4] -------------------------------------------------------------------------------- Okay. And just one more question, if I may. This is on the Beetaloo. Just after some more color on your plans this year for drilling in the Beetaloo. So the flow rate that was announced of 400,000 to 600,000 standard cubic feet, it sounds akin to a decent coal seam gas well, but well below what you'd hoped for a shale well. And I guess similarly, the gas composition indicating 2.7% condensate sounds a little softer than you're hoping for. So how does that data influence your plans this year? -------------------------------------------------------------------------------- Unidentified Company Representative, [5] -------------------------------------------------------------------------------- Well, I mean what it does is that it encourages us that we actually quite like. We like to think the composition is really strong, actually, would be my first point. I mean check out the ethane number there. So it's quite -- it's quite ethane rich. Lots of LPG, if you multiply by the flow rate, total flow rate you'd be expecting from a field development, that it swamp any other LPG production volume in Australia. And then what I'd say is it informs our way forward just because we need to go back in now. Once we get back into the dry season, we'll go there with some different, I guess, equipment. And we'll flow test the well properly for about 60 days after we do a solid clean up activity. I mean the point is that the well was very much still in the cleanup phase. It was cycling. It was flowing unassisted and then loading up. And we need to get out of that phase unloaded and then let it flow properly unassisted for a period of time. -------------------------------------------------------------------------------- Tom Allen, UBS Investment Bank, Research Division - Director in Equities Research & Lead Analyst of Utilities [6] -------------------------------------------------------------------------------- All right. And so is the plan after that extended flow test, you then move on within this calendar year across to the second liquids-rich target down in the southeast of the block? -------------------------------------------------------------------------------- Unidentified Company Representative, [7] -------------------------------------------------------------------------------- Yes. So we've got the well paid already to go. We've got the approvals. That's the Velkerri one on the flank. The plan would be, at this stage, to drill a vertical well there, and just confirm what we think is there is actually there. But we'll probably come out with that a bit later in the year exactly what the plans are for that -- for the Beetaloo development. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Your next question comes from Rob Koh with Morgan Stanley. -------------------------------------------------------------------------------- Robert Koh, Morgan Stanley, Research Division - VP [9] -------------------------------------------------------------------------------- Can I just ask about the LGC short surrender strategy? If you could perhaps just run through the kind of benefits and risks. I guess the benefit is, is your underlying profit, you're recognizing the cost of $17. Does that mean that, as you make good on the short surrender, you're accepting mark-to-market risk? And I guess you also run the risk that the refund gets taxed if that legislation doesn't get through. Is there any other things that we should be thinking about with respect to your underlying results in the coming years from short surrender? -------------------------------------------------------------------------------- Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [10] -------------------------------------------------------------------------------- Yes. Thanks, Rob. I'll start. I think Greg will finish off if I miss anything. So I think you've identified the 2 risks. One being -- as we look at this -- as we look at this arrangement today, we've got a spot price that's much higher than the forward price. So that looks like an opportunity. We've started to purchase on the forward market, the figures that we need, but there is some residual risk around the remaining certificates. And then there is this matter of the tax situation now. I'd be more worried if it wasn't for the fact that legislation is being drafted. The ATO and Treasury are supportive of the legislation to remove that asymmetry, as I described in my speech. And the fact that the legislation is sitting there ready to go before parliament. So I think that gives us a reasonable amount of confidence that we will be able to capture the economic benefits from the strategy. Anything? -------------------------------------------------------------------------------- Greg Jarvis, Origin Energy Limited - Executive General Manager of Energy Supply & Operations [11] -------------------------------------------------------------------------------- And Rob, it's Greg here. From a market perspective, firstly, we've locked some of these certificates away. We still have more to buy. But there is a massive oversupply of certificates as these wind farms and solar farms come into the market. So it's a very oversupplied market, which is indicative of where the prices are today. -------------------------------------------------------------------------------- Robert Koh, Morgan Stanley, Research Division - VP [12] -------------------------------------------------------------------------------- Okay. Yes. No, that's clear. All right. My next question is, I don't know, perhaps for Mr. Briskin. We had the draft DMO default market offer released by the energy regulator yesterday. So I guess, just broadly, any initial reactions, the wholesale cost allowance within the DMOs is down a lot year-on-year. And also, I guess, specifically, if the draft determination for the Endeavour network gives you any relief on the network charges, that was the unfortunate thing happening this year. So yes, if we could get some color on that front? -------------------------------------------------------------------------------- Jon Briskin, Origin Energy Limited - Executive General Manager of Retail [13] -------------------------------------------------------------------------------- Yes. Thanks, Rob. So the DMO, probably the first point I'd make is you can see that the prices are coming down somewhere around [$90 to $135] in New South Wales, a little bit less in Queensland, a little bit more in South Australia. The wholesale component in there around probably a bit under $20 a megawatt in New South Wales. It is a draft decision. So we will await the final decision and any catch-up across the wholesale costs. The DMO itself is applied, as you know, Rob, only to our standing offer customers. For our market offer customers, historically, we've -- you can see that we've applied pretty consistently for those nondiscounted customers. Over time, though, we've got to look to make sure that all of our input costs are recovered. So the network costs that you referred to were not included in the DMO determination, draft determination yesterday. However, that and any other further input cost changes that we have, we would look to include that for our market-based customers as we think about our pricing into FY '22. -------------------------------------------------------------------------------- Robert Koh, Morgan Stanley, Research Division - VP [14] -------------------------------------------------------------------------------- Okay. That makes sense. Can I maybe just a follow-on because you make a good point about the difference between standing offer and market offer customers. I guess just as a broad statement, within the competitive dynamic, do you feel like you're able to recover your costs with the current competitive environment? -------------------------------------------------------------------------------- Jon Briskin, Origin Energy Limited - Executive General Manager of Retail [15] -------------------------------------------------------------------------------- I mean there's no doubt, Rob, that we're operating in a competitive market, although we have seen our churn rates lower than -- almost historically low at the moment. And I'm not prepared to see share in that competitive environment. But what you can see there is that our focus on making sure we are absolutely the lowest cost retailer, making sure that we continue to manage the discounts across the whole portfolio of customers that we have, continuing to grow margins in solar and CES as well. And then going, again, with the implementation of Kraken and Retail X. I think that they give me, I guess, more optimism around the growth of the retail particular margins as you look forward. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- Your next question comes from Ian Myles with Macquarie Group. -------------------------------------------------------------------------------- Ian Myles, Macquarie Research - Analyst [17] -------------------------------------------------------------------------------- So if I think about your Energy Markets guidance for FY '21, it implies EBITDA for the group is down about 40% in the second half '21. So how should we be thinking about this into 1H '22? Is that the right sort of run rate then taking into that first half and the pressure on the earnings? -------------------------------------------------------------------------------- Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [18] -------------------------------------------------------------------------------- Yes. I think I'll let Tony go through that for you, if that's okay. -------------------------------------------------------------------------------- Anthony Lucas, Origin Energy Limited - Executive General Manager of Future Energy & Business Development [19] -------------------------------------------------------------------------------- It's Tony here. So really, the fall-off in the second half is a mixture of 2 things. Firstly, the CDO, which Lawrie have seen in Victoria reprices from one hand. So getting that drop in revenue from the Victorian portfolio, which is about 2.9 terawatt hours cost a whole year. And then the second impact really coming from those lower C&I prices, which Frank alluded to in the presentation. So as that market becomes wide competitive and bought to -- we deferred after a reprice, quite a lot of customers reprice sort of going to the (inaudible) in the second half, and that (inaudible) the second half. With respect to '22, I'd sort of point you to comments that Frank made in the presentation, which like the higher forward curve really to roll out of the mass market tariff, which we] alluded to in the DMO numbers with the (inaudible) numbers are in line with our expectations. And then we also got C&I repricing that will happen in the second half of this year so we expect that to [fall to a point to forecast this year] (inaudible) -------------------------------------------------------------------------------- Ian Myles, Macquarie Research - Analyst [20] -------------------------------------------------------------------------------- Okay. So much of that actually then is all going to roll through into first half '22 because VDO will come through full price. You'll have a reprice in the retail and you've got to reprice in the C&I. So that earnings pressure coming, which we're seeing across energy markets collectively is going to hit again other than the gas one-offs you had in the second half and the network adjustment charges? -------------------------------------------------------------------------------- Anthony Lucas, Origin Energy Limited - Executive General Manager of Future Energy & Business Development [21] -------------------------------------------------------------------------------- Yes. That's correct. We'll try -- we'll try and recover some of the network cost adjustment that we under recovered this year, but that's pretty much how you should think about it. -------------------------------------------------------------------------------- Ian Myles, Macquarie Research - Analyst [22] -------------------------------------------------------------------------------- Okay. And then if we think about it from a generation point of view, Eraring, we're seeing, obviously, major change in the forward curve. How cash profitable is Eraring now? And has actually changed the way you think about the asset and how it fits within the portfolio. Appreciate it provides a base, but do you actually need to be there? -------------------------------------------------------------------------------- Anthony Lucas, Origin Energy Limited - Executive General Manager of Future Energy & Business Development [23] -------------------------------------------------------------------------------- Yes. So I'll have a shot at that and then maybe to (inaudible). Look, I think current forward curve and spot prices, when you look at Eraring, the earnings profile is pretty lumpy to be -- this year. And so there's months where you earn sort of minimum, if you like, gross margin out of that plant. And then there's months where you earn a great deal. And so that really is about being around for those months where you are needed, and need from that perspective. And trying to minimize the (inaudible) low carriers. So that's really our focus from now on. And maybe, Greg, if you want to... -------------------------------------------------------------------------------- Greg Jarvis, Origin Energy Limited - Executive General Manager of Energy Supply & Operations [24] -------------------------------------------------------------------------------- So Ian from an operation point of view, I know I said this in the Investor Day but Eraring already followed through to running at -- in the middle of the day. We've already taken a unit off. So that capacity is available to the market if required, that just enables us to really radically take our stay-in business capital. So that plant is being run very differently today, and that will continue to happen going forward. So big changes to that asset. Ian, probably the other point here is that, I think, this is going to be a feature of the market, which is all about reliability. And yes, ] we are able to (inaudible). -------------------------------------------------------------------------------- Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [25] -------------------------------------------------------------------------------- I think what you are highlighting, Ian, is it needed for average energy? The answer is no. Is it needed to be -- capacity available when you need it? The answer is yes. And you've, therefore, got to just change the way you run it and manage the reliability and continue to manage the cost reduction and CapEx reduction and achieve that. And I think that's what Greg's highlighting is a feature of going forward and the difference between having capacity when you need it versus average energy, and it's playing out faster. -------------------------------------------------------------------------------- Ian Myles, Macquarie Research - Analyst [26] -------------------------------------------------------------------------------- Yes, which sort of leads into a couple of questions, I'll take one off-line. But you make a comment about the forward curve being too low and sustainable. I guess there's a bit of a game of chicken within the market happening here. Everyone says that, but no one is reducing capacity. And with government policies it is, why will that overshoot of where the curve is correct itself? -------------------------------------------------------------------------------- Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [27] -------------------------------------------------------------------------------- Yes. I think we could -- we have a deeper answer to that. And you're absolutely right, that gets into how people operate. I think you should think about the fact that we have already reduced capacity. We don't have the coal, a take-or-pay position and everyone will have their own of those. And you're right, subject to that. I think people -- when I say unsustainable, as I think that, that could be also unplanned, by the way, if people have to continue to actually reduce cost and take CapEx out as well. So you're right. I think it's going to be -- people are going to watch how that plays out. I just think it's actually going to be a pretty messy period of time. And I think it's all about -- you will see us running our generation less in Eraring. I mean that's what you're seeing now. And we have to do enough to keep capacity available when it's needed and manage within the flexible sort of window of that asset. But that's going to be a feature. -------------------------------------------------------------------------------- Ian Myles, Macquarie Research - Analyst [28] -------------------------------------------------------------------------------- Yes. One final question. On your gas and your JKM hedging strategy, has there been any review of that? And is that how you will -- are you continuing the same type of strategy going forward given what's occurred in the last couple of months? -------------------------------------------------------------------------------- Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [29] -------------------------------------------------------------------------------- We've been deploying a strategy of obviously managing JKM supply for a while now. And as the markets have linked and cliff, certainly, that's what you're buying more and more of your gas to that. So the answer is, we haven't reviewed our strategy around that. It's all about -- I think the key thing is about how you manage that through the seasonal period of time and particularly the northern hemisphere summer. And that's probably where you can see that exposure has been. And then I think it's really about us assessing the market, Ian, as to whether you -- we hold the belief that those markets are going to connect and stay connected. There's a strong force for that. Certainly, we will assess strategy if we feel that there's a change to that. That strategy certainly benefited us over a period of time. Clearly, we highlighted when we did the guidance because of what's occurred in December that that's meant that it's higher JKM than where we would have thought it would be. That's why we highlighted that. And as you know, that's a pretty dynamic environment, and that's reduced a lot even since then. So that's how -- yes. So we continue to assess strategy, but we haven't reviewed our strategy per se based on the events to date. -------------------------------------------------------------------------------- Operator [30] -------------------------------------------------------------------------------- Your next question comes from Mark Samter with MST Marquee. -------------------------------------------------------------------------------- Mark Samter, MST Marquee - Energy Analyst [31] -------------------------------------------------------------------------------- One for you, Frank. Just when we think about, and I guess this is partly in relation to what AGL said. But I guess it's something that you guys have probably been thinking about for a lot longer with potential breakups of the business. I mean do you see any synergies to the collective? Or are there actually dissynergies from the collective ownership of assets that you have? And I guess I'm particularly interested in how you think about the balance sheet and what you need to see the balance sheet look like if the merger ever did become a more active consideration for the business? -------------------------------------------------------------------------------- Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [32] -------------------------------------------------------------------------------- Yes. Thanks, Mark. I probably want to -- there's probably a few limbs to that. And the first one you've highlighted is certainly relating to balance sheet. You can see the benefit of the diversification of those cash flows. And even as we head into the second half, Mark, we're going to get a strengthened position from APLNG, while you've got further headwinds in energy markets and that shouldn't be lost on our position, and we've continued to be able to reduce that. And that funding is absolutely a consideration for us, and therefore, we would want to continue to see that debt reducing. I won't comment on specific amounts of that -- what that debt is, but it's obviously improving every day. I think that's a consideration. You then look at the business portfolio we have. And I think we're pretty clear, and I hope it's not met with any residual doubt, we consider ourselves to have 2 businesses. Remember, APLNG is -- we're only 37.5% of that. And then we run a separate business in the gas portfolio. So we don't see that as a dissynergy, but I don't want you to overstate synergies between the 2, if that makes sense. So we do generally run that. We do think -- and so as a result, we're very much focused about maximizing the value of those individual businesses and then how we take each of them forward. So I think, therefore, I would also just raise one other thing in that. I know AGL made some comments. We have a, I think, a much -- I think it's a different portfolio. I think it's a portfolio that really is much stronger around gas all the way through that chain. And clearly, we do have a coal, single coal asset, but we're working through it rapidly changing and transitioning now. I'd always make the comments, though, that -- and I've said this before, that the portfolio will continue to get reviewed. I heard comments recently made by AGL. There's no doubt the wholesale price formation in the electricity markets is changing to the extent that more that governments are going to underpin contracts like the New South Wales policy. I think that's playing out for energy right now because you can see renewables, it's having that impact right away on coal. And I do think it's still playing its way out in terms of how capacity sold. But all of those go into the mix, I'll be honest, Mark, and therefore, it means we continue to actively look at portfolio and also consider that in the context of the financial position we have as well. I mean I'll be quite open about. I think it's a changing world, and we continue to review those circumstances, including how people think about the funding of different asset classes. They're all very active in our minds. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- Next question comes from Baden Moore with Goldman Sachs. -------------------------------------------------------------------------------- Baden Moore, Goldman Sachs Group, Inc., Research Division - Research Analyst [34] -------------------------------------------------------------------------------- Just a quick question on one of the call out items that you flagged on the Energy Markets business. And I guess it goes to a previous question around the run rate from the second half and into FY '22. You flag a swap and short position benefit, I think, coming through. And there's a lot of the moving parts around in New South Wales versus Victoria and wholesale prices. And I was wondering if you could give us a guide on is there a benefit or a material benefit that we're seeing from that trading that's reflected already in the guidance? And how sustainable that might be into '22? -------------------------------------------------------------------------------- Anthony Lucas, Origin Energy Limited - Executive General Manager of Future Energy & Business Development [35] -------------------------------------------------------------------------------- Yes. I can take that. Yes. So in year '20, we had a really low average swap price. So you'll see a step-up from fin year '20 once we play out through the second half of fin year '21 between our swap book. And then those contracts, which we've brought roll-off through the '22 period. So there's sort of a roll-off happening throughout '22, but the full impact of the sort of roll-off of those sort of swap contracts won't occur until we get into fin year '23. -------------------------------------------------------------------------------- Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [36] -------------------------------------------------------------------------------- Yes. So we're not seeing any trading benefit. But if you're thinking there's a trading benefit embedded into the half -- second half of a swap position, I think the answer is no. It's just how -- and I think Tony has described, there's just a progressive roll off, but it will play itself out over the next 18 months. -------------------------------------------------------------------------------- Baden Moore, Goldman Sachs Group, Inc., Research Division - Research Analyst [37] -------------------------------------------------------------------------------- Got it. And just on Octopus, it seems to be progressing in line with your business case. You've also got another co-investor there. Can you talk about how maybe your view of the medium-term investment is playing out? Are you a longer-term holder there now? Or do you think it's still something that you're watching? -------------------------------------------------------------------------------- Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [38] -------------------------------------------------------------------------------- No. I'm not certainly -- I wouldn't be flagging to you that I'm looking to exit that investment now that there's another investor there. We're certainly very happy with our investment. We do see it as a long-term investment. We'll obviously always review that from time to time, Baden, but I wouldn't leave with the view that, that's something under review today. The fact that, that market is playing out in the U.K. rapidly, Baden, there's a big rationalization occurring. You have literally got, I think, Octopus at a very low cost to serve relative to its competitors. It's able to grow very rapidly in that market. And remember, it's also benefiting from strong cash flows based on its technology platform that represents another opportunity. So we do see that growth and its potential as even more exciting than when we actually purchase that as part of, obviously, leveraging its benefits into the domestic market. And very confident about its ability to fund its position, at least based on its licensing revenues that's only strengthened in recent times. And remember, they've now got a cash injection from a new shareholder as well. -------------------------------------------------------------------------------- Operator [39] -------------------------------------------------------------------------------- Your next question comes from Peter Wilson with Crédit Suisse. -------------------------------------------------------------------------------- Peter Wilson, Crédit Suisse AG, Research Division - Associate [40] -------------------------------------------------------------------------------- Just in relation to the comment about the capacity hedges rolling off in FY '22. So that only, I guess, really matters to the extent that your capacity hedge cost is falling more than the market's hedge cost. So can you confirm, I guess, whether you are going to get a bigger step down than the market? And how material you think that net benefit will be in FY '22? -------------------------------------------------------------------------------- Anthony Lucas, Origin Energy Limited - Executive General Manager of Future Energy & Business Development [41] -------------------------------------------------------------------------------- Yes. So with the capacity step down, it's really around not having to recontract some of that capacity as part of it. So we don't really have the impact of having to buy an alternative contract. And some of that's come through upgrades to plant, which gives us that capacity or it comes from -- to put things on virtual power plants and actually do that at a much lower cost. So a bit comes from that. I think into '22, I think it would probably be around $20 million step down. -------------------------------------------------------------------------------- Peter Wilson, Crédit Suisse AG, Research Division - Associate [42] -------------------------------------------------------------------------------- Okay. And that's a $20 million step down in your costs, not necessarily kind of a net margin benefit? -------------------------------------------------------------------------------- Anthony Lucas, Origin Energy Limited - Executive General Manager of Future Energy & Business Development [43] -------------------------------------------------------------------------------- Yes, just purely in costs, which would flow through to margin. -------------------------------------------------------------------------------- Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [44] -------------------------------------------------------------------------------- We think that flows through the margin. Because if you're asking a relative thing, that's about our own position rather than a market position. So we -- I think what Tony was referencing it was out... -------------------------------------------------------------------------------- Anthony Lucas, Origin Energy Limited - Executive General Manager of Future Energy & Business Development [45] -------------------------------------------------------------------------------- I think about that as a net -- a net... -------------------------------------------------------------------------------- Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [46] -------------------------------------------------------------------------------- Benefit. -------------------------------------------------------------------------------- Anthony Lucas, Origin Energy Limited - Executive General Manager of Future Energy & Business Development [47] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Peter Wilson, Crédit Suisse AG, Research Division - Associate [48] -------------------------------------------------------------------------------- Okay. Got it. And then on retail operating costs. So a large fall in churn, has that fully flow through to your operating costs? Or is kind of inbound core rate still kind of elevated you to COVID or some other factor? -------------------------------------------------------------------------------- Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [49] -------------------------------------------------------------------------------- Jon, do you want to take that? -------------------------------------------------------------------------------- Jon Briskin, Origin Energy Limited - Executive General Manager of Retail [50] -------------------------------------------------------------------------------- Yes, sure. So what we are still seeing is that cost to acquire, that hasn't dropped by the same extent as cost to maintain. So the underlying activity in the business has reduced, but we still need to invest in channels certainly to invest in marketing. And so we'll continue to do that whilst it is still a competitive market. Insofar as then over time, if we start to see some of that competition come in, then we can easily flex that cost to acquire really some of that goes into third-party channels and advertising, which you can adjust relatively quickly and respond to the market. -------------------------------------------------------------------------------- Peter Wilson, Crédit Suisse AG, Research Division - Associate [51] -------------------------------------------------------------------------------- But Jon, that activity level is continuing to come out if you thought about it on that cost to maintain and technology, digital volumes of coals, that's continuing to provide you benefit? -------------------------------------------------------------------------------- Jon Briskin, Origin Energy Limited - Executive General Manager of Retail [52] -------------------------------------------------------------------------------- Yes, correct, correct. I mean you can see on the charts in the presentation that core volumes are way down. FTE is following that. So the underlying cost structure in the business is materially different and the underlying operations of the business in a digitized way, certainly less labor-intensive has all changed over the last few years. -------------------------------------------------------------------------------- Peter Wilson, Crédit Suisse AG, Research Division - Associate [53] -------------------------------------------------------------------------------- Okay. Good. And just one last one on generation costs, operating cost to CapEx, so it has come down in the first half. Where do you think you're adding in terms of that journey? Is there more OpEx, CapEx costs you can take out of both the coal power station but also your gas power stations? -------------------------------------------------------------------------------- Anthony Lucas, Origin Energy Limited - Executive General Manager of Future Energy & Business Development [54] -------------------------------------------------------------------------------- Yes. We are well on that journey. To give some quantum across the generation fleet, I think, we can reduce by 50% stay in business CapEx. -------------------------------------------------------------------------------- Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [55] -------------------------------------------------------------------------------- That would be in Eraring. There'll always be a bit of a lumpiness around the gas-fired because there might be a major overhaul. But I think, from an Eraring point of view, we think that the sustained CapEx can come down materially. On an OpEx basis, Greg? -------------------------------------------------------------------------------- Greg Jarvis, Origin Energy Limited - Executive General Manager of Energy Supply & Operations [56] -------------------------------------------------------------------------------- Yes. So we're well progressing on that journey as well in taking more OpEx out. Look, we still have to quantify that, but it's on the trajectory down, that's for sure. -------------------------------------------------------------------------------- Peter Wilson, Crédit Suisse AG, Research Division - Associate [57] -------------------------------------------------------------------------------- Okay. Good. And last comment on 50% reduction in sustained CapEx. So it's -- I guess your FY '21 guidance, it's more than halved already versus FY '20. What's the kind of the base we should be using or ]? -------------------------------------------------------------------------------- Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [58] -------------------------------------------------------------------------------- Given Eraring number of what you think that can go forward is on Eraring. Because it's a reference to a Eraring, there's always going to be a bit of that. So do you want to think about? -------------------------------------------------------------------------------- Greg Jarvis, Origin Energy Limited - Executive General Manager of Energy Supply & Operations [59] -------------------------------------------------------------------------------- Yes. So I mean look, it's how we run that plant. And so it's dependent on market conditions. But look, again, on Eraring, we think we can take that plant down on a sustainable basis, by 50%. So... -------------------------------------------------------------------------------- Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [60] -------------------------------------------------------------------------------- from -- what's it running at? -------------------------------------------------------------------------------- Greg Jarvis, Origin Energy Limited - Executive General Manager of Energy Supply & Operations [61] -------------------------------------------------------------------------------- Yes. So down to, say, $30 million. Down $30 million in the year. -------------------------------------------------------------------------------- Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [62] -------------------------------------------------------------------------------- Per annum. Yes, on Eraring. And the reason why we just -- the only reason we are just making sure we get clarity here, we don't need to draw it off the entire sustained CapEx base because there will be -- Eraring is a big portion of that, as you know, Peter. We think that there's quite a bit we can do there. By the way we run it, we can space out the way we need to do the overhaul and the maintenance. And I think we should give you that base. And then we'll have some lumpiness oversight over the other. Yes. -------------------------------------------------------------------------------- Lawrence John Tremaine, Origin Energy Limited - CFO [63] -------------------------------------------------------------------------------- So we've guided in the past, the generation sustaining spend would be about $150 million. We can see the future -- the ongoing spend in the future being quite a bit lower than that. However, we also have some planned refurbs that are coming -- some overhaul, major overhauls that are coming up over the next couple of years. And so that sort of complicates the story, which is why we're trying to find that. So I would say the ongoing, you can expect a number more like $100 million, $125 million in that sort of range compared to that $150 million, except you will see sort of major maintenance cycles from time to time, which will look different. -------------------------------------------------------------------------------- Peter Wilson, Crédit Suisse AG, Research Division - Associate [64] -------------------------------------------------------------------------------- Just to be clear, we're not expecting 1 of those in '22, but they will happen, probably '23, there might be 1 of those? -------------------------------------------------------------------------------- Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [65] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Operator [66] -------------------------------------------------------------------------------- Your next question comes from Max Vickerson with Morgans Financial. -------------------------------------------------------------------------------- Max Vickerson, Morgans Financial Limited, Research Division - Analyst [67] -------------------------------------------------------------------------------- My question is -- look, you may need to hedge an answer this, but I'm just trying to understand where you see the pressures in the coal supply fleet across the NEM. But my numbers suggest that with low prices in Queensland, there will be a fair bit of pressure on those assets, but given the state government ownership, they may not be as responsive to those market signals. I've read some other speculation that maybe Victoria might be under more pressure given the less flexible ramp rates than some of the brown coal generation units. Is that how you said you think, given New South Wales is maybe not as under as much pressure as those estates? Or is that not necessarily the case? -------------------------------------------------------------------------------- Greg Jarvis, Origin Energy Limited - Executive General Manager of Energy Supply & Operations [68] -------------------------------------------------------------------------------- Look, just a broad comment, just with the amount of renewables coming to the system, if you're an inflexible baseload power station, you're competing against very low prices in the middle of the day. So if you're inflexible, there's some serious issues, and they'll be looking at plant. I don't want to speculate on what that plant is across the NEM. But there is -- I think the first one is the inflexible baseload plant would be at risk. But that's probably as far as I'd go to speculating which plant comes out. -------------------------------------------------------------------------------- Anthony Lucas, Origin Energy Limited - Executive General Manager of Future Energy & Business Development [69] -------------------------------------------------------------------------------- I mean the thing to look out for is the inflexibility comes from either the plant being quite old and not that flexible which would be like the brown coal, I guess. And then the other thing is your fuel position. So on that basis, Eraring is both very flexible and has very low take-or-pay coal, so enabling us to really try and cycle that plant perhaps more than others can. -------------------------------------------------------------------------------- Max Vickerson, Morgans Financial Limited, Research Division - Analyst [70] -------------------------------------------------------------------------------- Okay. If I can just ask a follow-up then on the -- for Lawrie, probably on the cash conversion for energy markets EBITDA obviously up quite well this half. I don't think I might have missed it maybe -- I don't think I see any commentary on the impact of what futures margining might be doing. Is that something that might also reverse in the second half? -------------------------------------------------------------------------------- Lawrence John Tremaine, Origin Energy Limited - CFO [71] -------------------------------------------------------------------------------- Yes. I sort of summarized in my presentation -- I summarize the whole post of individual items. But yes, there could be a movement in the futures collateral. There could be movement in working capital. There will definitely be an outflow associated with the LGC strategy. So yes, 119% not sustainable, obviously. So yes, it will be lower in second half. -------------------------------------------------------------------------------- Max Vickerson, Morgans Financial Limited, Research Division - Analyst [72] -------------------------------------------------------------------------------- Good stuff. And just one final question I have left for you then. On that slide, on Octopus Energy, you highlighted that the entry into the U.S. market, and it looks like Texas is one of those markets you're in. Is there any impact from what's going on over there? I've said about other new entrants in that market backed by, I think, Macquarie, that might be struggling a bit in the extreme conditions we're seeing over there. Is there anything that's impacting Octopus or do you have any concerns? -------------------------------------------------------------------------------- Frank G. Calabria, Origin Energy Limited - MD, CEO & Executive Director [73] -------------------------------------------------------------------------------- No, their entry strategy, Max, is really into a very small retailer for 3,000 customers. It wasn't a large acquisition. So their position is very modest, and as a result, you shouldn't be reading into a large impact in that market. And then you might say, why 3,000. That shows you a similar entry strategy into Germany because they'll actually progress their technology platform and make it fit for purpose for that market and evolve it. But yes, there's not a big exposure at all. Well, thanks very much. I understand there are no more questions. I really do appreciate your time. Recognize many of you are moving straight on to other calls. I look forward to discussing with many of our investors over the coming days. And really appreciate your time this morning, and thank you for your questions. Okay. Thank you. -------------------------------------------------------------------------------- Operator [74] -------------------------------------------------------------------------------- That does conclude our conference for today. Thank you for participating. You may now disconnect.