Genesis Energy Limited (GNE) Earnings Call Transcript & Summary

Good day, and welcome to the Genesis Energy Fiscal Year '20 Full Results Briefing. Today's call is being recorded. [Operator Instructions] On today's call, we have Marc England, Chief Executive Officer; and Chris Jewell, Chief Financial Officer. Now I would like to turn the conference over to Marc England. Please go ahead, sir.

[Foreign Language] Good morning, all of you, important people who follow Genesis Energy, and welcome to our 2020 full year result presentation. In a moment, I'll take you through Genesis' highlights and achievements throughout the 2020 financial year. Then Chris, our CFO, will take you through our financial performance and FY '21 guidance. Followed by which, I'll provide an update on our strategic progress to date and explain some of the dynamics that could emerge from a Tiwai closure in the way that Genesis sees the market. So starting with Slide 4 and our results at a glance. Our FY '20 EBITDAF is down $13 million from $369 million in FY '19 to $356 million for the year just gone. FY '19 has been restated up by $6 million from the reported $363 million due to changes in IFRS 16 accounting standards. And of our 3 reported segments within Genesis, the standout performer is the retail segment, up $24 million on FY '19, but more on this later. Final dividend of $0.08675 per share has been declared, bringing the full year dividend to $0.172 per share, and this represents a gross yield of 8% per annum on the current share price. Our FY '21 EBITDAF outlook gives us confidence in continuing to increase the dividend year-on-year in line with our progressive policy. Pleasingly, our controllable operating expenses have been held relatively flat at $250 million for the year. So on to the business performance. We continue to see the benefits of our insight-led strategy pay off in a highly priced, competitive retail market. Gross customer churn, defined as the total number of customers instigating a trader switch or home move, is down a further 3.5%, while the number of customers choosing to have multiple fuels with Genesis is up 3% to over 121,000 customers. Our netback value mix in all 3 fuels continues to improve across both residential and business segments with all netbacks increasing by 7% to 10% year-on-year. And over 77% of our customers are now choosing to interact digitally and our cost to serve sits at $138 per ICP. We focused heavily during the April lockdown on putting in place additional safeguards for our customers on top of the vulnerable Care Package we launched in 2019. This included creating a dedicated service channel for vulnerable customers, offering tailored payment plans so that debt doesn't get out of control as well as pledging $250,000 of funding and ensuring awareness of the support available through government and budgeting advisory services. We expect the long tail of COVID-19 and its economic consequences to resonate throughout FY '21, however. Generation volumes for the year were flat on FY '19. However, the mix of generation was vastly different given adverse hydrology conditions as well as planned market and generation plant outages. However, it was the 6 months in January to June, during which the North Island experienced its second lowest inflow sequence in 95 years and coincided with a major HVDC outage between the islands that impacted the segment's performance most. Our backup thermal filled the gap left by the lack of rainfall with thermal generation up 12%. However, reduced margins and resulting in a portfolio fuel costs rising 20%. As a result, average thermal fuel costs were up 7% year-on-year, however, have commenced the decline, down 3% on the half year to $79 per megawatt hour. Importantly, Genesis' cyclical investments in Kupe and its generation assets such as Tekapo have been completed successfully. And Tekapo's Intake Gate Project has reached an important milestone halfway through its construction. Kupe production levels were down 10% on the prior year, primarily due to a 30-day planned statutory outage in November, announces relating to the perforation work carried out in February. The total production uplift from perforation work is estimated to be 1.4 petajoules over the next 12 months. Importantly, Kupe's Inlet Compression Project is on track for completion in 2021 and we're pleased to see Kupe's 1P reserves upgraded by 33% to 250 petajoules equivalent. Welcome news that demonstrates the strength of the asset and operator in a sector that has faced considerable supply disruption over the last 18 months. I'm going to skip past Slide 5, as Chris will cover our results in more detail shortly. So moving on to Slide 6 and 7, where we lay out our continued progress in the retail segment with netbacks by fuel broken out separately for the residential sector on Slide 6 and business sector on Slide 7. We're proud of the progress made over the last few years to refresh the Genesis brand, reduced churn, increased netbacks and increased multi-fuel offerings. Competition remains tough, and New Zealand's consumers are ultimately the beneficiary as more focus from large and small retailers goes into innovation and creative ways to attract and retain customers. Pleasingly in electricity, the most competitive fuel, residential sales volumes have stabilized while B2B sales volumes have grown. Much of the B2B volume growth year-over-year was due to our foray into the dairy market with the launch of For Dairy, a product over a year ago. Natural gas sales volumes have come under pressure in both residential and business sectors as a constrained wholesale gas market over the last couple of years has fed into higher wholesale prices for the retail segment and tough competition from those holding long, upstream positions. LPG sales continues to grow in both the residential and business sector as a much less competitive part of our energy sector than electricity. Netbacks continue to grow particularly in the residential sector. With dual fuel churn down in the mid-6 percentages for both sectors, we continue to focus on finding ways to offer our customers a multi-fuel offer that creates a range of needs for them. Slide 8. Our investment over the years in giving customers much more control through analytics-driven insight is giving us an edge in the way we engage our customers, shape our products and services and how we understand them. The slide provides some of the insights we now have about our customers and the information they give us about their homes through Energy IQ, the way they engage with the features we provide, how that helps them make decisions and ultimately what really matters to them in their lives. Putting all that together to improve our customer experience will continue to be a big focus for us over the next couple of years. And I believe we now know our customers better than we did a few years ago, which will enable us to adapt as their needs change, too. Slide 9 states the obvious, really, that understanding customer needs is important and that not all customers are the same. And it's the key to unlocking what they would consider to be excellent service. Whether that is an experience through the app, moving house, joining Genesis or support, paying a bill, the experience we provide needs to be seamless, provide choice and enjoyable experiences for our customers. If we can provide great service, inform and engage our customers digitally first, then this will also drive lower cost as the stat show to be the case over the last few years. Going forward, we will be balancing short-term costs with longer-term value as we seek to further enhance our service experiences in a refresh retail focus for FY '21 and beyond. More on that later. Moving on to Slide 10. Low rainfall in North Island in the second half of the year has been well reported. Fortunately, inflows picked up towards the end of June and our July position this year is much better than the same time last year. Significant outages at Tekapo also limited hydro generation from our South Island plant. However, again, that has given us a good starting position for the beginning of FY '21. Charts I'd like to draw your attention to on Slide 10 is the one in the bottom right. This shows our long and short position for the last 3 months of the financial year and the margin in $1 per megawatt hour line across each of the 3 months. The point to take away from this slide is how during the Level 4 lockdown in April, we were able to get short during low prices and make more margin than we do at average prices. This ability for Genesis to use discretionary thermal to get short and get long and adapt to market circumstances is what I'll come back to you later in this presentation when we talk about the impact of the Tiwai smelter closure. I won't spend long on Slide 11 as it's an update to a slide we presented in our half year results and the information should be familiar to most of you. The key takeaway I'd like you to have is Genesis has just come through 2 years of high fuel costs and more recently, low hydro inflows. Fuel costs are now falling and we always expect hydro to revert to mean over time. Our weighted average portfolio fuel cost is, of course, a factor of the mix of fuels and the cost of thermal fuels. We said in February that the cost of thermal fuel would fall, and it has. However, with less water in the lakes, thermal paid a bigger role than expected, which drove average costs up. As we move into FY '21, we expect average hydro generation and lower thermal fuel costs to improve the overall weighted average cost. On to the next slide. The last 2 years have also included a number of large outages across the Genesis portfolio. In FY '19, it was a 1 in 12-year outage for unit 5. In FY '20, it was a 30-day Kupe outage and a number of other outages across the fleet. With all those largely complete, we expect availability of both gas and electricity plant to be higher over the next few years. Kupe is in good shape. We announced a reserves upgrade this week in sync with other joint venture partners, which means P1 (sic) [ 1P ] reserves are up 33% at the same time last year, and 2P reserves are also up 7%. This is the third upgrade of reserves at Kupe and demonstrates the value of the asset in a gas market that is otherwise declining. The additional perforations put in place in February have enabled a short-term increase in production while the Inlet Completion Project remains underway and due for completion at the start of FY '22. I'll now hand over to Chris to talk you through our financial results before I come and talk about the long-term outlook. Chris?

Good, Marc. [Foreign Language] I'm on Slide 14, financial highlights. As Marc mentioned earlier, relative to financial year '20, this year has had 4 important factors that have influenced the headline result. Positively, we've had continued momentum in our retail segment, and this has been offset by some very low inflows impacting hydro production, which has been very well reported, elevated coal costs that flowed through from historic high commodity prices and a 30-day outage at Kupe. And these factors have flowed through to NPAT, underlying earnings and cash flows. The controllable factors of operating costs, capital costs, net debt are all being managed to levels similar to financial year '20. Weather factors and commodity prices are cyclic, and it's important to understand that the core cash-generating assets of the Genesis business remained very strong, and we were pleased to be able to confirm a dividend that is growing on last year. So looking at dividends, Slide 15. Our final dividend of $0.08675 per share brings our total FY '20 dividend to $0.172 per share, which is another increase on financial year '20, and it's the sixth straight year of dividend growth. Imputations remain at 80% with a supplementary dividend paid to nonresident shareholders of $0.0122 per share. And we continue to offer our Dividend Reinvestment Plan at 2.5% discount. For our shareholders, this represents an effective way to reinvest dividends. And for Genesis, that remains an effective approach to acquiring additional equity. The payout ratio at 106% of free cash is a bit higher than last year as we've had a couple of large one-off, stay-in business capital projects, which we'll talk to soon. And as I mentioned earlier, some lower commodity cycle and weather-related earnings. So adjusting for these, the one-off CapEx payout ratio is 94% -- or would have been 94% adjusting for the one-off capital items that I mentioned. In financial year '21, this ratio is expected to fall below 90%. So Slide 16, financial year '20 EBITDAF. Our EBITDAF was $356 million, which was $13 million down on FY '19. Continued momentum in our retail segment has delivered a further $24 million in value with wholesale being affected by reduced hydro production and higher fuel costs, which impacted it by $24 million. Kupe was down $15 million on the prior comparable period due largely to the planned 30-day outage. Slide 17. So looking at the performance of each segment in a little bit more detail. So at a retail segment level, there are a number of very pleasing components, which Marc talked to earlier. This has translated into an increase in earnings in financial year '20. Residential margins have improved, which is the result of continued digitization and reduced cost, reduced churn both at a gross and a net level, improved netbacks across all fuels and for the period of lockdown, which temporarily improved residential demand. The performance in our business segment was slightly down this year. Businesses demand was hit harder during the lockdown period and price competition has been elevated. And whilst netbacks have continued to grow, which is overall net positive for Genesis, margins have not been as strong. Some of the positions we've taken on in the business segments such as our For Dairy product, will deliver stronger margins in time in a very good hedge in a post-Tiwai environment. Turning to the wholesale segment. The extreme low North Island inflows are being well reported. And combined with the planned outages at Tekapo, these have had an impact on hydro production this year. Additionally, the unit pricing of thermal fuel used to replace hydro production was 7% more expensive than the prior year due to higher commodity prices a year earlier and increasing carbon costs. We're now through the top of this commodity cycle, and thermal costs were down in the second half of financial year '20 and are forecasted to be down again in financial year '21. And importantly, our carbon -- forward carbon portfolio is well hedged for a number of years at prices close to the old cap costs of $25 a tonne. Solid portfolio management combined with a flexible asset and fuel portfolio have been able to defend much of this value. Wholesale operating costs again are down on last year, and this is partly due to the deferral of some project maintenance due to the lockdown period, which will be completed in financial year '21. Kupe as an asset continues to perform very strongly. The 33% 1P reserves upgrade announced recently as a testament to this. Kupe production in FY '20 was down as a result of the 30-day adage, some well intervention work and lower demand through the lockdown period. Realized oil price was also down a little bit to -- down by $12 a barrel on the prior period, and oil yields were down slightly, which also impacted the Kupe results. So Slide 18, NPAT and underlying earnings. So below the EBITDAF line, the key features include a $7 million year-on-year reduction in interest costs resulting from lower hedged interest rates, an increase in depreciation due to the generation assets being revalued in financial year '19 and a reduction in depletion charges due to the recent Kupe reserves upgrade. Underlying earnings are down $11 million on the prior year. Slide 19, controllable operating costs. Operating expenses are flat on financial year '19 and remain $11 million down on financial year '18. The normal salary, software and inflationary pressures are being absorbed by continuing to become a more efficient and digital business. There are many examples across the business of efficiency being created, reduced cost of delivery in LPG, reduced cost of service in the retail segment, reduced acquisition costs also in the retail segment and reduced corporate overhead costs. Slide 20, capital expenditure. Capital expenditure in financial year '20 was $89 million, which was the same as financial year '19. Stay-in business capital was $69 million. There were some significant projects delivered or progressed this year that leave our assets in a better position than a year earlier and continue to demonstrate our commitment to being strong asset managers. Tekapo has had one runner replaced at Tekapo B, and the second due in financial year '22, a transformer was refurbished to Tekapo B and the runner and generator refurbished at Tekapo A. We commenced the first year of a 3-year $20 million refurbishment project -- program at Waikaremoana and the new gate structure at Tekapo continues to deliver a significant reduction in the risk of an uncontrolled water release from a seismic event. So that project has been commenced and is due for completion in financial year '21. In addition, Phase 2 development was commenced at Kupe, which involves the installation of an onshore compressor equipment which will enable enhanced production. And this is due for completion in financial year '21 also. Slide 21, capital structure. At the end of the financial year, Genesis had $175 million of undrawn facilities. And a further $100 million was added in July 2020, which included a $50 million 2-year bank line and a $50 million 2-year wholesale bond. Debt levels are similar to the end of FY '20 and net debt remains at 3.1. Standard & Poor's continue to reaffirm our BBB+ credit rating, which was last reaffirmed in January 2020. We do expect to see a reduction to below 2.8 at the end of FY '21 in line with our earnings guidance. We continue to offer the Dividend Reinvestment Plan, again, which is a cost-effective way for investors to reinvest and for Genesis to continue to strengthen its balance sheet. Slide 22, FY '21 guidance. FY '21 EBITDAF guidance is $395 million to $415 million, with the goal of delivering greater than $400 million EBITDAF in FY '21. And this has been the target since FY '16. And as a team, we remain committed to delivering on this target. There are a number of drivers of this uplift in FY '21. The rolling off of the existing third-party gas supply contracts and the associated out-of-the-money gas sales contracts in the second half of FY '21. We are expecting a return to more normal hydrology conditions. As we've talked about a number of times, reducing thermal costs with the stockpiled coal being at a lower cost than FY '20 levels. And we do have no plans for any major plant outages like the ones we saw in the last 2 years. The last point on guidance is FY '21 CapEx guidance is up to $95 million. So I'll now hand back to Marc, who will run through our strategic update. Thanks, Marc.

Thanks, Chris. So moving on to the strategic update, starting on Slide 24, doing what we said we'd do. So for those who have been following us for a number of years, you've heard us talk about the $400 million target many times over. 4 years ago, we set a goal, we knew it was achievable through a mixture of acquisitive, organic and mechanical growth. And we said at the time, we delivered total shareholder return on average over 5 years, equal to 14% per year. Roughly split, it's half in dividend and the other half in share price growth. Even with the recent share price pressure, which we believe is partly to a lack of understanding of Genesis' ability to adapt to the Tiwai closure, more on that shortly, we've delivered an average of 18% total shareholder return per year over the last 4 years. There are many things, however, we didn't know back then that we know now, and I'm not going to pretend we could have predicted exactly how we would get to $400 million. However, we're as confident as we can be at this stage in the year, the usual hydro volatility aside. I'm confident that we should be able to achieve over $400 million of EBITDAF in FY '21. What I hope you'll take away from the next few slides is a sense that at Genesis, we see opportunities if the Tiwai smelter were to shut as well as the obvious risks. There is no doubt the foundations that underpin valuation models in the sector is shifting and like you all to take away from this presentation how we at Genesis see it. On Slide 25, I'd like to start with a clear outline of our Future-gen strategy. We referenced this last year and at the half year, but perhaps not as clearly as we will now. Building on our call statement in February 2018, our more recent stated goal is to displace 2,650 gigawatt hours of baseload thermal with lower-cost baseload renewables. We started that process in 2019 when we announced the Waipipi Wind Farm partnership with Tilt, which will provide 450 gigawatt hours of energy, leaving us with another 2,200 gigawatt hours to find. The greater possibility of Tiwai closing has meant we have paused work on a pipeline of future potential projects while we assess whether there is an opportunity to displace the remaining 2,200 gigawatt hours of baseload thermal faster with long-term contracts from South Island. We have little interest in short-term contracts as they won't provide long-term certainty. And the spot market, short-term CFDs or ASX Futures might be a more attractive flexible alternative while we consider longer-term portfolio options. We're also in the market for gas flexibility or storage and more long-term carbon offsets. If Tiwai does shut down, the need for gas flexibility comes closer and the need for carbon offset stretches out further, but the goals are similar to those we envisaged last year. If Tiwai doesn't shut down, these goals and this strategy will be delivered in different ways. So when we've displaced the 2,650 gigawatt hours of baseload thermal, it will remove 1 million tonnes of carbon from an already highly renewable electricity system, which we think is a compelling proposition for the electricity sector as it will make it somewhere between 90% and 95% renewable. However, Genesis modeling indicates that in order to maintain a reliable, low-carbon and low-cost electricity system, backup thermal generation will remain for some time to come. It will run much less and prices will be more volatile. However, it will be required in order to maintain a stable system and chase the bigger prize of electrification of transport and industrial heat, which collectively contribute an order of magnitude, more carbon emissions than electricity does today. Slide 26 contains information that is probably familiar to most of you now, including the location of the Tiwai smelter relative to Genesis generation locations and the majority of demand in the upper North Island. There is no doubt that if the smelter shuts, it will take some time to build the grid upgrades required to move the power north. Whether that is the best use of capital over period, we're gaining real momentum on the electrification of industry as apprised within New Zealand's grasp, and who the real beneficiary would be of those power upgrades, and therefore, who should pay the bill will no doubt be much debated. Genesis is well positioned should that eventuality happen. And as Slide 27 shows, we currently have more demand in the South Island than the supply and plenty of discretionary thermal plant in the North Island. As you've already heard, in the medium to long term, our strategy is to displace that baseload thermal anyway. And Tiwai closing in May open up an opportunity to strike a long-term supply deal with Meridian to displace it faster. In the short term, as we experienced during the first COVID-19 lockdown and demonstrate on Slide 10 of this pack, our ability to turn our thermal plant to get short in the market at short notice gives us the ability to benefit from an oversupplies market and low prices. Our modeling of the price distributions that will occur in the market when Tiwai shuts indicates that prices will more often be lower as illustrated in the center chart. The right-hand side shows that Genesis makes a margin when we are short at low prices and long at high prices but not in between. So it won't be a surprise to some as the marginal thermal generator prices often sit just below our thermal running costs. And once Tiwai is gone, the oversupply situation will push thermal out of the market. And more often than not, it will be cheaper for Genesis to purchase a spot or sign very short-term, over-the-counter contracts as mentioned already, which will be below the cost of running baseload thermal today. Our backup thermal capacity will then increasingly run only during high-volatile and high-priced periods. On Slide 28, we show how the distribution of our gross margin breaks down. 30% of our gross margin is currently from Kupe or gas and LPG sales. Our exposure to South Island retail electricity margin specifically is relatively small. In total, 5% with only 1% in South Island B2B electricity retail. Of that 1%, a subset is in the C&I contracts coming up for renewal in the next 3 years. While we are acutely aware of the competitive pressure coming from long generators in the South Island, we are also aware of our strong position in the North Island relative to South Island generators. So we intend to defend our position rationally but with our competitive advantages in mines, which include our multi-fuel proposition with energy management products and services around it. The capability Genesis built -- has built up over the last few years to compete with multi-fuel energy services and across both islands means that whilst we fully expect price-led competition to intensify, our customers will not be easy pickings. And so now on to the backup thermal capacity on Slide 29. Much has been said and written in recent weeks about how much thermal will be left in the market if Tiwai shuts and all the grid upgrades are consented and completed somewhere between FY '25 and FY '27. Our modeling says something different to others who appear to leave out 3 dynamics in their analysis, underlying demand growth, residual spill and line losses. We assume TCC will shut as its capital investment requirements far exceed other thermal plant. And in a world of uncertainty, it will become harder to make that case. And when you add the Tiwai demand shock to the new wind already committed to come online, there will be roughly 6 terawatt hours of new supply coming online. Looking at the demand side of the equation, we have assumed demand growth of 5% over 7 years, which is lower than we've had over the last 7 years, line losses and natural spill and, of course, the TCC closure. After which we conclude that about half of today's thermal generation will still be required in a normal year before considering what a dry year looks like. But it's still a big reduction and will leave thermal at about 7% of the supply in the market versus 16% today, a roughly 93% renewable electricity system. We called out 6 months ago that thermal baseload has had its stay in New Zealand, and we still believe that to be the case, with no new thermal baseloads to be built in the next 10 years, perhaps ever. However, the sunset could go on for a while. A lot has also been said and written about the gas market in recent weeks. Slide 30 sets out our view in the gas market as a whole and also Genesis' gas book. When we look at the current gas supply in New Zealand from existing fields, most of which are in decline, and compare that to the existing demand, offset by lower thermal generation discussed in the prior slide, we still see a healthy volume of untapped industrial gas demand to soak up and surplus supply -- any surplus supply. Genesis has been wholesaling gas in New Zealand for close to 13 years ever since the company found itself with take-or-pay gas agreements and no generation demand for the gas. We have relationships with the wholesale customers and have a pretty good idea who needs gas and for what. We're looking forward to our long gas book becoming shorter over the next few years as our own supply agreements roll off, and we're not so worried about demand reductions from electricity. Between falling production at the large fields and untapped demand, we're confident in Kupe running at maximum for the rest of the 2020s, particularly as it's at the bottom of the cost curve for gas-producing fields. Moving away from the Tiwai dynamics for a bit, Slide 31 called out the fact we've adopted the task force on climate-related financial disclosures framework this year. We found it a useful framework and lens to look at our business priorities through and so decided to frame almost the whole of our annual report through that lens. If you get a chance, I urge you to have a look at what we've done, and I hope you'll see that we've achieved more than just ticking the TCFD box but reflected the whole of our business activities through the framework. Final slide in the pack displays the executive team at Genesis. And effective September 1, there were some small job title changes for each exec, but also importantly, a job role refresh for both Tracey Hickman and James Magill. Having recently reviewed our retail strategy and looked at what could accelerate our progress to date and defend our market position in what will no doubt continue to be a highly competitive market, Tracey is becoming Chief Customer Officer accountable for residential and SME customers across all activities related to the Genesis brand. While James as Chief Digital Officer becomes accountable for energy online customers, the C&I segment and development of our technology and data platforms to support all segments. That will allow them to dedicate their time to some key strategic priorities, which we will take you through later in the year at the Stakeholder Strategy Day currently earmarked for December 9, pencil it into your diaries. So as we wrap up the formal presentation and move to Q&A, I'd like to summarize the year's results and key themes from this presentation. For me, there are 4 themes. First, the retail segment's momentum continues to deliver growth through execution of its customer-centric strategy, and we're now pivoting to focus on some new initiatives which we'll take you through later in the year, but we're confident of continuing to deliver in retail. Second, Genesis' adaptive portfolio has defended value well in a wholesale market affected by market outages, hydro and gas market shortages and, of course, COVID-related demand changes. And the third being Genesis is well placed to deal with the impact from closure of the Tiwai aluminum smelter with a North Island-dominated flexible fuel and generation portfolio as well as a retail business able to compete on more than just price. And finally, Genesis is on track to achieve a $400-plus million FY '21 EBITDAF target, which we set 4 years ago by the end of this financial year. With that, thank you for listening, and we'll move into Q&A.

[Operator Instructions] We'll go ahead and take our first question.

Can you hear me?

We can hear you, Grant. Hello.

A couple of questions. First of all, on CapEx, this is your fourth year with the outlook of being about $20 million above normalized CapEx numbers. Should we be thinking about increasing our stay-in business CapEx from $60 million to $80 million towards the top end of the range?

Hi, Grant. No. Our long-run guidance is $50 million to $70 million on -- for capital expenditure, and that is -- remains, and we're confident in that number. We are in a period of, say -- or a moment of -- so we are in a moment, Grant, of some elevated capital and for the reasons we've outlined earlier.

And then on retail, you've got some good price increases through the year. The speed went backwards. Can you talk why that occurred and whether this is just because you guys are trying to pick up share in that space?

Yes. I mean if I'm -- you captured it. We made a big play into the dairy sector with our For Dairy product, which was a lower-margin product on average in the first year or 2. But we're confident the product, which engages customers in a deep and meaningful way, will deliver value over time. So it had an impact on the weighted average margin in SME.

And then just on the future, what is your thinking around Huntly? And then around those questions, how do you get long-term gains -- sorry, storage, 20 PJs of storage, where are you looking for that? You're talking about potential geothermal PPAs. Is that with Tauhara and Contact? Then you talk about potentially getting a long-term South Island contract with Meridian if Tiwai goes, would you consider a South Island node as the benchmark for that sort of PPA?

So I'm going to disappoint you a bit, Grant. I mean we're laying out the targets. The direction is clear, whether Tiwai shuts or Tiwai doesn't, those are our goals. But we're not going to create an ongoing market commentary around who we're talking to about what. But rest assured, we're having conversations on all of those goals and have been for some time with various parties.

[Operator Instructions] We'll go ahead and take our next question.

Andrew here. A couple of questions from me. I guess following on from what Grant was -- I think just around Slide 25. I just wanted to confirm a couple of things. First of all, so the gas storage that you're talking there of 20 TJs looks like around about 4 hours' worth of storage, so very much to support gas peaking, I'm assuming. And just a question, are you looking at options outside of Ahuroa and maybe sort of looking at some other alternative gas storage and/or gas fuel or something like that?

Yes. Andrew, the Slide 25, there was a typo. It's 20 PJ, not 20 TJ, apologies for that. It was corrected this morning. So it's 110 terajoules per day of flexibility with 20 terajoules, not -- sorry, 20 petajoules, I'll say it again, of storage.

Okay. I thought there might have been an issue.

And yes -- and yes, we are considering options outside of Ahuroa storage in enabling that.

Okay. What sort of time frames are you looking at? I presume it's kind of linked -- would be linked to smelter closures and various other things, transmission construct relief, et cetera?

Yes. I mean there's so many scenarios here. I'm not going to speculate on them, but we still don't know if the smelter is actually closing or not. The way we look at it is -- probably, we're looking at -- if the smelter doesn't close of its business as usual, we'll be delivering that Future-gen strategy over the next 5 years. And we're going to commit to a timing. But that's our plan over the next period of time, it's definitely this decade. If the Tiwai smelter closes, we think there are opportunities to accelerate that.

Second question also on Slide 25, just around the coal commitments. I just wanted to get a better understanding of what the timing of existing coal contract commitments actually are.

There's no timing on the coal contract commitments we've got. I mean we've got local coal contracts, and we've got international coal contracts. Some are short term. Some are long term. We've got no constraints.

Okay. So you could terminate those tomorrow, if you wished?

I don't know which ones you're talking about, they're all different. We've got flexibility. I mean we've deliberately built flexibility into our fuel portfolio. That's always been our priority, and that's one of our advantages.

Yes. I guess I was just trying to get a sense of whether those coal contracts effectively mean the Rankines need to stay open for a certain period of time. Otherwise, you've got no use for that coal?

No, we're not worried about that. That's not a driver.

Okay. Next question is actually just, I guess, on your thinking around the smelter remaining open. And what sort of probability are you actually putting on it and staying open? I sort of noticed some of the wording that you've been using, I guess, sort of feels a little bit more optimistic than probably what we've heard from Meridian and Contact, in particular.

We don't have a probability. We have 2 scenarios, 1 they shut on the -- 3 scenarios: 1, they shut quickly; 1, they shut slowly; and 1, they don't shut at all. So we're maintaining flexibility to better react to all 3 scenarios, but we're not picking it. I said if they shut and there's an opportunity for Genesis and Meridian to enter into a long-term supply agreement to address our Future-gen goal, then we're interested in that, and that could bring some long-term certainty. But if it doesn't shut, it's different. I guess the point -- it doesn't really affect our FY '21 point maybe. It doesn't affect our FY '21 guidance anyway, Andrew, and we're not guiding beyond FY '21.

Yes, yes. Sure. Last question I just had was on Slide 29. And in terms of the demand growth scenario, I'm assuming that's just what you see as underlying New Zealand demand growth, therefore, doesn't take account of possibilities of dairy conversion or I guess on the other side, [ refinery/NZ Steel ] closure?

Exactly. So we think it's relatively conservative. It is the underlying demand growth we've seen over the last year with a margin of conservatism added to it. And the reason is there has been some underlying demand growth over the last year when you exclude the fourth top line coming out. So if you include the fourth top line, it looks like you haven't seen any demand growth, but underneath that, there is. We haven't made any assumptions on either further closures of industrial plant or any electrification of any material nature.

[Operator Instructions] It appears -- oh, I'm sorry. We'll go ahead and take our next question.

Just a few questions from me, which were really just -- to elaborate a bit further on earlier questions. In terms of the long-run, stay-in business CapEx guidance, can you break out from $50 million to $70 million number how much relates to the Rankines and Kupe?

Yes. Obviously, it's more than Rankines, Kupe and there's more assets in our book than just those 2 assets. But no, we don't give you any clarity on that.

You can't? I guess I'm just thinking. Obviously, those are parts of the stay-in business equation, we look out for longer term. I'm just wondering if a lower number is possible depending on your choices around -- particularly around the Rankines, but also potentially Kupe.

Yes. I mean -- I think we've previously identified the ongoing costs of capital for the Rankines, it's quite small. I mean it's on a 4-yearly cycle at the moment. It could be longer than that. It's small maintenance overhauls of the Rankine. So it's very different to a gas turbine, a big, single-shaft gas turbine that has a big, one-off number on more regular -- on a more regular basis. In terms of Kupe, yes. So I can't be more explicit on Kupe. But again, the stay-in-business capital is not a significant number. So I just can't be more explicit than that. We obviously got a JV on Kupe as well.

Understand. Just an elaboration question on 110 TJs a day. Is that anywhere between 0 and 110 TJ offtake? How should we think about that number? Is it plus or minus 55%? What's the best way to think about it?

Yes, good question. It's flexibility of 110 TJ today -- TJ per day. So yes, it is -- you could look at it as 55%, plus or minus. May clarify that later, if you want.

Yes, that would be useful. Just a question then to the Rankine. Obviously -- I mean you're making the call of expect -- sort of the right call to make, which is you can't lock down your decisions yet. But I'm interested if you can offer any color as to the potential choices around or preference around Rankines versus Unit 5 if you do have to withdraw capacity.

Yes. I mean we won't signal ahead of time that we're shutting anything in or mothballing it, I mean, within reason. I mean one of the dynamics to be aware of is when we talk about our future and strategy, we're talking about displacing baseload thermal since the majority of baseload thermal out of Huntly comes from Unit 5. So we see a future where Unit 5 might become -- run more intermittently, hence the gas storage requirement. And that's how we look at it. The Rankines can come in and out of the market. They'd either hokeypokey every now and then, and they're quite flexible. And the fuel storage is cheap. But we will balance a range of different needs as we map out the next decade on what's going to be required in our portfolio. But there's just too many unknowns right now, including whether Tiwai is going or staying, for us to even potentially guide on that?

No, that's good. That makes sense. Just continuing in the flavor of Tiwai impacts. It makes sense. I imagine Meridian would be willing to sell sort of some kind of baseload contract. And there will be a million options about where that's located. I'm interested, though, we should presume that on the list, the menu, the large menu you can choose from, one of the items there is you could sell back to [ 1P ] cover if they sell to you in the North Island on a baseload basis. So...

So that would -- that's maybe one -- yes. That's always possible. We're open for business.

Right. So I guess the only answer's -- really I can ask are -- any questions we could really ask is whether or not there's anything ruled out. I wonder is the -- or in that vein, would you rule out the potential for divesting Kupe if that proved to be nonstrategic?

We're not ruling that out. The only thing I would probably rule out right now is what I've seen reported by some that Genesis somehow might sign a medium-term supply agreement with Meridian, the declines in volume over time. And if you look at the choices we have and you look at the Future-gen strategies we've laid out, that would make no sense to Genesis because it wouldn't give us any long-term certainty on what kind of storage we need, what kind of plant we need. So if that's all that's on the table for Genesis, Genesis will be better off reacting to a lower spot price and maybe signing some short-term CFDs but no medium-term contract. What we're looking for in our Future-gen strategy is 10 to 20 years of commitment. And so we put on pause a pipeline of opportunities that we were looking at, which would be below the cost of baseload thermal for us today while we assess that situation. But if the -- if that's not on the table, we may, at some point in the future, have to come back to that pipeline.

Okay. That's very useful. And on that point, so -- I mean that gives us a good horizon for potential kind of contracts you've got in mind. Thinking to the PPA, you've gotten Waipipi. That sort of -- our understanding of that is sort of roughly a decade, there's a [ locked-in price ]. But over time, that has some flexibility to move with how the forward curve is moving. Would you anticipate a similar kind of deal with a [ South Island ] generator?

Yes. That's the structure we like.

[Operator Instructions] And it appears we have no further questions. At this time, I'd like to turn the call back over to today's presenters for any additional or closing remarks.

All right. Thank you all for listening. I'm glad we were so clear that we didn't raise too many questions. I'd just summarize this. Look, we're pretty excited at Genesis. We think there's some more -- some opportunities out there for the next 5 to 10 years in this market. We're relatively relaxed whether Tiwai stays or goes from a portfolio perspective, from a retail perspective. We see risks, and we see opportunities, and we're looking forward to mapping a pathway through them. Thank you for listening. We look forward to talking you in more detail later.

Once again, that does conclude today's conference. Thank you very much for your participation. You may now disconnect your phone line.