Genesis Energy Limited (GNE) Earnings Call Transcript & Summary

Kia ora, and welcome, everyone. Apologies for the slight delay, which I understand was the result of a dodgy link. But hopefully, you've all made it in, in good time. I'm Marc, for those of you who don't know me, the CEO. And we've got Chris Jewell, our CFO, who will tick tack with me through this presentation. Just starting on Slide 4 and 5 somewhat collectively. On many levels, FY '21 was a milestone year for the country, the sector and Genesis. The work of the Climate Change Commission was a dominant presence as the country prepared for transition to a lower carbon future, and we lifted the tempo in executing our Future-gen strategy and the transformation of the business while persistently low hydro levels and ongoing gas supply issues caused considerable stress to the market. We entered the year with good health, with underlying growth and performance strong, which was underlying this morning with our guidance for FY '22. We have set our sights on delivering more EBITDAF of over $400 million plus, which we set a target for in FY '17. But the surprise loss of an arbitration with Beach Energy on carbon liability, that with a high confidence of winning meant that wasn't to be. FY '21 itself was a challenging one for the sector as a whole, as I've said, with declining gas supplies and low inflows into the hydro storage systems. But Genesis stepped up to the plate with the Huntly Power Station doing what it was designed to do, fill that energy hole. It was an energy hole and not just an electricity one with large industrial starting to contract gas as well as electricity. And through this presentation, I hope to give you a better sense of the critical tasks performed by Genesis people and what you can take away around how we create value for our shareholders with our role at the apex of several energy vectors. The irony of Genesis unfairly being blamed in the immediate aftermath of the blackouts early this month was not lost on a company that prides itself in having avoided 10x more market issues than we saw on the 9th of August through the actions we took to support the chronic energy shortages observed this year. Our Future-gen strategy is moving at pace with several announcements over recent weeks. I previously said that we will remove 1.2 million tonnes of annual emissions from the electricity system by 2025. It is incumbent on us, however, to have an honest conversation with government, regulators and consumers across New Zealand about how the importance of a reliable electricity system to underpin New Zealand's decarbonization journey is important. We've been calling for an energy strategy for a long time now, and the 9th of August was an early warning in what lies ahead of us if that strategic thinking is not done. Our reported results of $358 million and a final dividend of $0.088 and free cash flow of $191 million belied a business with a strong underlying growth driver delivered through a strategy set out in FY '17 when we delivered only $332 million of EBITDA. That year, we purchased an additional 15% of Kupe and an LPG operation off Nova and put in place a number of initiatives to optimize, innovate and invest for the future. At the end of this presentation, when Chris has taken you through the FY '21 results in more detail and I've talked you through the operational dynamics that drive them, I'll reemphasize how our new strategy for the next 5 years is important. This was first communicated to our shareholders in late December, and now it powers us towards the mid-2020s. To this point, I'll hand over to Chris to go through our financial performance.

Hello, Marc. That's a good summary. And I must say, well done on your industry communications over the past few weeks. It was important that the Genesis perspective is well understood. We've always said that the energy transition New Zealand is aiming for won't be straightforward, and there will be some rocky moments. A healthy dose of pragmatism and remaining focused on all legs of the energy trilemma of security, affordability and carbon will be very important. So just looking at Slide 7. This provides a summary of our performance against all of the key financial metrics. We have additionally presented the results as adjusted for the 2 large one-off impacts in financial year '21, being the decision to utilize the fixed price carbon offer, which was a one-off opportunity; and the prior year Beach arbitration results that Marc noted. I would reinforce Marc's comment that Genesis is in good heart. The underlying results continue to be strong, and this is evidenced in the metrics in front of you. And I'll step through a number of these components in the next few slides. So just looking at Slide 8 in relation to our dividends. So today, we announced a final dividend of $0.088 per share, which took the total financial year '21 dividend to $0.174 per share. This was the seventh consecutive year of dividend growth and represents a gross yield of 6.7%. Looking through the one-offs this year, an adjusted payout ratio of 76% remains sustainable. So Slide 9 provides the EBITDAF trajectory from financial year '17 and also gives a breakdown of how the growth was delivered across segments. The increase in costs are now review of the ownership of Kupe, the transfer of staff from our retail segment to corporate, Meremere B provisioning costs. We took a slightly larger provision to -- on Meremere and higher employee incentives. That is the slightly larger cost base this year than prior years. But as you can see from that chart, we've grown retail. We've grown wholesale, and Kupe is relatively flat. So on Slide 10, we have continued to deliver EBITDAF growth across our 2 key segments. Kupe has experienced a small decline of -- as production fell away this year. And wholesale, the thematics of Future-gen, and legacy gas contracts rolling off are both evident. And we've been waiting for a number of years for these legacy gas contracts to roll off. These are themes we have signaled for a number of years. Future-gen relates to the full year impact of the volume from Waipipi, offsetting what would otherwise have been thermal generation. And the legacy gas contracts relates to 6-month impact of the OMV contract rolling off. There remains some legacy customer contracts also to roll off in financial year 2022. The wholesale segment saw some challenging but favorable conditions this year with high spot prices and long thermal volume supporting hydro deficits and our competitor catchments. In FY '21, we provided a record volume of energy for our swaption partners of 820 gigawatt hours. Offsetting this was a year-on-year loss relating to our active trading and market making. The absolute loss this year was $12 million and reflects the value that Genesis foregoes to comply with market-making obligations and ensure there is a transparent and liquid forward market that provides equal opportunity for everyone to purchase off the market at competitive forward prices. Just looking across to the retail segment. We've continued to see growth in all 3 verticals of residential, business and LPG. We call out LPG separately as it continues to be a key differentiator for our retail offering, and it remains a key vehicle through which we are driving growth. Offsetting these was a further $21 million operating cost required to deliver this growth, and we'll break this out a little bit more in one of the coming slides. Just looking to Slide 11. So NPAT was lower this year than in FY '20, which was primarily the result of the recent arbitration decision and the valuation of derivatives, primarily the swaption contracts that are heavily impacted by short-term swings in forward prices. Based on the recent round of events, this will be recalibrated if valuations were undertaken today. Pleasingly, our average interest rates continued to fall, and interest costs were $10 million less this year than last year. Underlying earnings was up $22 million on financial year '20. So just looking at Slide 12. Operating costs are up on financial year '20 with moneys being spent across a number of categories. Starting at the left-hand end of the chart, we continue to invest in our data platforms, business energy services, supporting the growth in the LPG segment and also in our Future-gen activities. This spend is aligned with our core strategies. We've had some increase in expenditure in our core business such as software costs, increased insurance costs and costs to bring the third Rankine back into service. Additionally, we spent $9 million this year partly on the Kupe strategic review, the cost of the arbitration for both ourselves and Beach. And we've taken an increased provision to reinstate Meremere site for when the lease is completed and returned to the landowners. So following reduced spend in financial year '20 during a period of economic uncertainty, we've also had increased cyclical spend on a number of large generation projects. Additionally, we've started the spend on the billing system replacement, and we expect to see further spend in this area in the coming year. Pleasingly, these costs have been offset by lower bad debt charges, which is a real highlight during the year that had a higher default risk due to the risk of economic pain caused by COVID. We had taken larger provisions at the end of financial year '20, which did not end up being realized. So just looking at Slide 13. Stay in business capital in financial year '21 was $55 million with total capital spend at $84 million. This is consistent with spend over the last 4 years. Larger projects included the Kupe compression project, which is due for completion in September; completion of the Tekapo gate project; nearly $20 million per annum on retail systems and products; and the large Unit 5 annual outage. This year, we also moved into our new 6-star building at Kenehi@Wynyard. Slide 14, our capital structure. So just adjusting for the fixed price offer carbon transaction and the prior year arbitration impact, net debt to EBITDAF fell to 2.8 this year, which was anticipated, and we expect this will continue to fall in the coming years as earnings continue to grow and debt is reduced. A highlight this year was the start of the commercial paper program with $260 million now on issue, which continues to allow us to take advantage of low short-term interest rates. This will also mean an increase in current liabilities, offset with a decrease in noncurrent liabilities due to the lower revolving credit drawdown for those who have eagle eyes on our annual accounts. So at this point, I'll now hand back to Marc to run through the operational highlights. And I'll come back at the end and give you an outlook.

Thanks, Chris. So starting with Slide 16. Across the range of metrics, our retail business continues to perform well. Netbacks and sales volumes are up. Cost of serve is down, and [ most ] fuel customers are also up. The EBITDAF growth over the last year is a combination of all of these drivers and a retail energy business which is momentum-driven. These results have been driven over time through consistent effort across many facets of what we do, and the next few slides break some of these successes down a bit. So moving on to 17. Engaging our customers to put them in control of their choices has always been a strategic goal. Energy IQ as a platform and Power Shouts as a feature have been how we have sought to achieve that, particularly for residential customers. Those engaging on a monthly basis with one or more tools has grown 15% year-over-year. Features such as bill insights, usage breakdown and energy-saving tips remain popular, and customers can now rate their favorite and most useful tip through the app. The newly launched Power Shouts hours, which is -- which this year really puts control in our customers' hands by allowing them to use the free hours when it suits them, not when it suits us, has started to show through in retention stats. As you can see on the bottom left, later this year, Energy IQ will be refreshed with a new interactive graphics, allowing customers to choose the image of a house that most represents their home. And we've used some of these graphics in the presentation as a teaser. On Slide 18, Te Tira Manaaki o Kenehi, the Genesis Customer Care program, has also demonstrated it's not just bells and whistles engagement we're focused on but also supporting those more vulnerable and less able to pay. After the COVID lockdown last year, we significantly increased our focus in this area, becoming more proactive in recognizing the causes of bad debt. The result of earlier interventions and collaboration with government agencies has been a 40% reduction in disconnections and a reduction in bad debt. The bottom-left chart shows the normalized impact of bad debt after removing the higher COVID provision in FY '20 -- in FY '21 that Chris referred to earlier. On Slide 19, another of our key strategic objectives has been to grow the business energy services we offer large businesses to both become more efficient with our energy use and to decarbonize. Our goal this year is to have 20% of our business customers engaging with an energy service offering. That has been achieved whilst also growing energy sales volumes and netbacks across the segment. Energy services are increasing in importance to our energy supply customers and, in some cases, have been sold without an energy supply deal as a stand-alone product. We continue to focus on higher value channels and maintain a margin over the wholesale price curve. On Slide 20 and LPG. When we decided to buy Nova's LPG operation 4 years ago, we knew LPG was the fastest-growing retail energy fuel. New and renovated housing growth and consumers' desire for gas, water and cooking solutions in the home have contributed to strong growth in residential demand alongside growth in commercial users. Genesis' brand positioning and a smaller set of LPG players have seen us achieve customer growth of 45% over 4 years. Also, during this time, we have sought to optimize the operation we bought and bring cost to deliver down through an investment in technology, distribution tools and improved customer experiences. As a result, netbacks and sales are up, while cost to deliver has fallen. We are conscious of climate change-related headwinds for LPG and natural gas. But as key components of the energy pie, we believe they have a role to play as we transition. And we intend to give customers the knowledge they need to make their own decisions on which energy fuel best suits them in the future: Electricity, natural gas or LPG. Also, as New Zealand transitions to a low carbon future, the New Zealand gas industry is actively working on how it transitions itself to low or 0 carbon in the form of bioLPG or green gases such as hydrogen. Genesis is actively involved in these discussions, and we will in time form our view as to what role we may choose to play. To a large extent, the market story of FY '21 was the way thermal generation came to the rescue of renewables. With 5,500 gigawatt hours generated compared to 3,270 in FY '17 and 4,460 in FY '20, FY '21 was a massive year for Huntly as we support its swaptions and out-of-market demand. You can see the impact of higher trading margins in the Waipipi PPA on the bottom right driving underlying growth. And I'll now break down some of these dynamics for you as I just did for the retail segment. Slide 22 tells the coal story. Coal is a fuel which polarizes views. We all know its climate impact. But the fact it has a high energy density, can be stored relatively easy and is the only energy relief that New Zealand has in a 12-month period when hydro inflows are down, gas is short and wind is what it is, coal is the only energy fuel for electricity generation that can be imported in times of domestic shortage. The chart on the left-hand side shows the amount of energy in gigawatt hours that was generated with coal in FY '21 compared to the last 5 years' average and where that demand came from. If there was any doubt that this is an industry challenge, not just a Genesis one, this slide should remove that doubt. The right-hand side of this slide gives us hope, however. With Genesis' future-gen program and other new renewable bills coming online over the next few years, our modeling indicates coal use has peaked for electricity generation. Even in a drier scenario this year, FY '22, we're unlikely to see the same demand for coal as we did in FY '21. The trend is definitely down for the next 5 years. Questions still remain over how New Zealand will back up its highly renewable system and how that backup will be paid for later on this decade. And that's where Genesis has plans to put our strategic thinking over the next few months. So flicking over to Slide 23. One of the reasons we can now have confidence in the downward trend in coal use is that the gas purchases made this winter from Methanex in balance have enabled Genesis to shape a gas portfolio to see us through the next 18 months with a stronger gas book than we had earlier this year while new renewables are being built with much more certainty that gas can do the heavy lifting. This slide demonstrates how we use the large tranche of Methanex gas coming to Huntly for 2 months to do 4 things. First, we ensured Unit 5 and Unit 6's gas turbines could maximize generation. Second, we used a little bit of the gas to optimize Rankine running. We attained a higher heat rate and operating range, enabling higher peaking capacity when gas is used alongside the coal. Thirdly, we were able to sell gas to industrial consumers through the rest of 2021, confident that our own needs are being met. And finally, we sold surplus winter gas to competitors and swapped them for future periods that suited our portfolio more. This is how Huntly has been able to provide an energy backbone for New Zealand this year, not only for the electricity sector but also gas consumers; not only for this winter but for future high-demand periods, too. It would have been very difficult for another market participant to take so much gas and distribute it efficiently to the highest value users. It would also have been difficult for Methanex to play the role Huntly played in shaping the supply contracts to meet different needs. Our fallback position is always to run gas through Rankines to displace the coal, but that would have been a lower value outcome for Genesis. Since taking that risk, we've enabled energy security for several months and created value along the way. So Slide 24. As we've communicated on a number of occasions, our carbon hedge position is made up of a number of inputs over time. Our stake in the DrylandCarbon joint venture will start making contributions in the mid-2020s. Earlier this year, we made use of the last opportunities in the year with the fixed price option to pay $35 to come from our 2020 carbon liability on the belief carbon prices would rise despite our weighted average hedge position being $24 at the time. The spot price has since risen, taking that decision -- making that decision look like an even better one. The recent announcement on refinements to the Emissions Trading Scheme settings indicate that the carbon prices are likely to continue to rise. Kupe on Slide 25. The story for FY '21 was Genesis' strategic review. We ran a thorough review, and the team now know more about Kupe than we ever did. Such is the nature of these processes. If the review had ended up in a sale, Genesis would have still been buying the gas. I would urge shareholders who told us that the Kupe sale would result in a lower risk profile for Genesis to reconsider what a sustainable energy company looks like in their ESG filters. Gas at Huntly is roughly half the emissions of coal. It's a key transition fuel as we work out how far off the renewable curve a market like New Zealand can get when it's so dependent on the weather. And without nuclear or coal, it's really hard to see how New Zealand can back up a highly weather-dependent system without some gas. And yet if we manage the transition well, electricity can do much of the heavy lifting in New Zealand's decarbonizing journey. The inlet compression project at Kupe is progressing well, and the first gas is expected over the next month, bringing Kupe back up to maximum production level of 77 terajoules per day. And longer term, developing Kupe East could be critical to ensuring New Zealand has the gas it needs in the second half of this decade. From Genesis' perspective, Kupe remains a high-quality gas asset and will continue to play a key role in New Zealand's transition to a lower carbon future. On Slide 26 now. Everything we've achieved over the last 5 years is a credit to the people of Genesis. We talk internally about our adaptive and engaging culture, and this year has certainly demonstrated the need to be adaptive. Whether it's supporting our customers through lockdown with LPG deliveries, energy security and supportive customer service or changing shift patterns and canceling holidays in order to bring a third Rankine back online or managing complex multiparty supply chains from Indonesia to Tauranga, our people have stepped up to be counted. Across the business, we continue to focus on gender equity, diversity and inclusion more broadly and the continued safety and wellness of our people. As a result, our people are happier, enjoy working here. And therefore, our customers are happy and enjoy staying with us. I'd like to shift gears a little now and remind you all of where we're going with our strategy on Slide 28. Whilst FY '21 was a key year of delivery for our last 5-year strategy, it was also a transition year into a new 5-year strategy. We laid this out to a range of stakeholders at our multi-stakeholder day event last December in Auckland. We introduced our business purpose, which is to empower New Zealand's sustainable future, and several strategies we have focused on to deliver more from the core, build for the future and navigate the transition. I won't talk through every 1 of the 11 initiatives on the right-hand side now, but I hope some of you will want to understand more about them as we road show. The next few slides, though, are some of the recent and future highlights that I'd like to talk about. Our commitment on Slide 29 is intended to put some spine in our back as we work towards a lower carbon future, both within Genesis and supporting New Zealand outside of Genesis. You won't get green washing from anyone at Genesis. We know better than most the challenges that lie ahead as this transition occurs. The outages on the 9th of August are an early warning of what is to come if we don't get the market settings right that ensure a stable, reliable source of low carbon electricity that can help other sectors decarbonize. We think removing 1.2 million tons of annual carbon emissions from our business between 2020 and 2025 will make us the single biggest company contributor this decade, but we're happy to be challenged on that claim. So if anyone can do more, please do. You'll hopefully have seen that with the recent PPAs we've announced and our intention to build solar that we mean it. And by delivering on these commitments, it also affords us the right to have an honest conversation with competitors, regulators, government, investors and, in time, our customers on some of the choices that need to be made. By saying we want to empower New Zealand's sustainable future, we're intending to empower our customers with the knowledge and bias they need to make the choices that matter to them. For investors, we hope you'll increasingly see why backing a company effecting change, why having that honest conversation, not greenwashing, and ensuring the transition happens in a measured and central way is far more productive than following a simple ESG checkbox filtering exercise that hasn't considered the bigger picture. So on Slide 30, what does the Future-gen -- what does Future-gen mean to us? Well, that slide summarizes the current state of play. Three wind and geothermal PPAs that have already been signed deliver about 1,200 gigawatt hours, and our intent to build 500 megawatts in solar will deliver another 750 gigawatt hours over the next 5 years. Collectively, that gets us over the goal we set for 2025 of 1,800 gigawatt hours, which aligns to the 1.2 million tonnes of annual emissions reduction. Of course, there is some execution risk in all that. However, we're confident in our competitors and partners to get projects built in that time frame. Future-gen isn't just a carbon reduction program, though. It is also a generation cost reduction program. As we contract to build more renewables, we are reducing our input costs. The chart on the top right gives some indication of what that means for us versus the alternative, which is modeled here as an $8 per gigajoule fuel price and a $70 per tonne carbon price. Investors and analysts will make their own view on what that means in their models. So on Slide 31. Our solar intentions are to codevelop. We've realized through the Future-gen RFP process that there's some really good international developers out there with the capability to design solar farms and source great materials through global supply chains. But we've also realized they don't have feet on the ground in New Zealand. In Genesis, we have experience in land access, grid connection, consenting and locally linked community relationships. Put together alongside our guaranteed offtake agreement, we believe we can create a strong partnership for success. We know there will be lots of questions on where, how much and what and who we'll be working with, and those announcements will come in time. In the meantime, some of the sites we've earmarked on land we already own and some isn't. But we're confident the locations make sense. And once we've made the final partner selection, we will be able to share more. So moving on to Slide 31. As all this baseload thermal is displaced, one thing no one seems to disagree with is that New Zealand will need a way of storing energy to back up the renewable system. The debate is how. So we're contributing actively to the New Zealand Battery Project with North Island ideas. We all had another warning last week on what could happen if we rely too heavily on the interconnection between South and North Island. While most of the demand is in North Island, most of the generation is in South Island. So as well as contributing to that government-led review, we're also doing our own work on what the role Huntly could play in the longer term, what role Huntly could play. If you were designing the location and infrastructure for large-scale energy storage in the 2030s, it would compellingly be Huntly. Located near the demand with good grid connection, a local workforce and a gas pipeline, it's designed for the job. We're all reminded about this year. And hopefully, some of this presentation has made that clear. How low carbon we can make from it remains to be seen and for all the reasons most of you will be familiar with, but we're going to go and explore and we're working on options. So this year, we will conduct a biomass trial in our Rankine unit. And there are 3 biomass work streams underway that will help shape our thinking, including how viable the Rankines might be beyond 2030, what plant modifications might be required and whether its supply chain for biomass could sustain regular demand. This is unlikely to be economically viable in the short term. But as a counterfactual to building Onslow, we think it needs to be taken seriously as an option by the government. So shifting gears again. With all that energy security excitement communicated, I'd like to touch on the retail digital transformation. We see our digital transformation program as critical to unlocking value growth beyond this immediate horizon. It comprises of 2 parts. The first project is Mahi Tahi. It's a new data architecture designed to rearrange our data to accelerate, scale and expand the various ways in which we drive value flowing. The second part, Project Rubiks, is the platforming of our sales, service and billing technologies. Our current billing system is reaching its end of life and created an opportunity for us to relook at a wider configuration of customer systems. We prioritize Mahi Tahi given its focus on data, and implementation of our new data platform is progressing well. The focus is now on creating the databases and analysis that focuses on specific customer and business problems. We are at the final stages of selecting a partner for Rubiks and expect to start its implementation during the second half of this financial year. So collectively, these programs are expected to substantially improve our agility, productivity and ability to serve customers. And we'll see improvements to KPIs such as our cost to serve, speed to market and customer experience scores. Our retail business has probably delivered most of what it can in its current form. And as we discussed with you late last year, this next phase will truly be transformational. So with that note, I'm going to hand back to Chris to talk about the guidance.

Thanks, Marc. So as has been our practice to have year ahead guidance at the time of the annual results, we continue to see EBITDAF growth in the year ahead. And we confirm our guidance is $420 million to $440 million EBITDAF. It is noted that we've yet to confirm the impact of the IFRIC standard for Software-as-a-Service, which will see some cash spend currently classified as capital be classified as operating costs and will thus impact EBITDAF. The cash impact is neutral, and we'll update the market at the point that impact is understood. FY '22 capital expenditure guidance is up to $95 million with the long-run outlook for stay in business capital remaining at $50 million to $70 million per annum. So just skipping forward to the next slide in relation to our dividend policy. Our Board of Directors have revised our dividend policy. Our existing dividend policy has served us very well since the IPO with an increase in dividends every year for the past 7 years. We now enter a new chapter for Genesis, as both New Zealand and Genesis faces into the necessary energy transition. We recognize the importance of dividends to our investors, and our aim remains to grow dividends over time in line with earnings growth. However, the aim of the revised policy is to ensure our dividends are more able to reflect the underlying business performance over time but also provide some flexibility, if required, to continue to invest more fulsomely in a lower carbon future through our Future-gen strategy. The new policy will see Genesis paying a dividend within a range of 70% to 90% of free cash. Today's final dividend represents a payout ratio of 76% of free cash when normalized for the one-off impacts mentioned earlier. So just finally, this set of results will be my last at Genesis as the CFO. And if I reflect over my last 8.5 years at Genesis, I will finish up at a very different business than what I started in. We were once described as a sleepy standard enterprise. Today, you have a very different business to when I walked in culturally, commercially, the leadership capability, our ambition and our competitive advantage, which is becoming increasingly apparent with the strongest and most innovative Tier 1 brand and our rapid progress on decarbonizing baseload thermal and finally, as our role as the backbone energy provider. I will walk out of a company that is in very good health. It's confident, and it's comfortable with who we are. And Marc and our exec team and all of our staff have a lot to be proud of. I'll leave you with a quote from Mark Carney, who was the Governor of the Bank of England and the Bank of Canada and now the Head of Impact Investing at Brookfield Asset Management, an investment company founded in 1899. He knows a thing or 2 about investing. His words were, "Run to where the carbon is." Mark understands the global energy transition requires capital, and there is value in this transition. If ESG investing is your preference, don't forget about the S for social in your assessment. The world will need to be much more nuanced assessing the balance of rapid carbon reduction and the consequential social outcomes. This is what makes the transition just. Look for companies that have ambition, a track record of progress and a clear social conscience that know how to balance the trade-offs. I'm confident that the team at Genesis considers these factors deeply. So at this point, we will open up for questions.

[Operator Instructions] The first question comes from Stephen Hudson from Macquarie.

Just a couple of quick ones from me. Just firstly, it looks like you've had a reasonably limited carbon trading activity this financial year. I just wondered what you were going to or what you were planning on for financial year 2022. Secondly, maybe one for Marc, just on the second phase of Future-gen around securing gas storage. I just wondered if you could update us on any progress in that regard. And then thirdly, again, possibly for Marc, just the post-Beach independent expert review. Has that been reported back to the Board? And if so, what did it find?

I'll start and I'll try all 3. Chris, fill in gaps on the first one, if you'd like. I mean, Stephen, when you say there's been limited carbon trading, you're probably thinking about our active book, I presume. And we've gone and purchased a whole lot of carbon fixed price offers. So we've probably done more this year than we've done in previous years in total. So I'm not quite sure I want to add that, but we don't disclose our intent going forward around carbon trading. It's -- obviously, it's a market, and there are multiple participants in that. And so we wouldn't want to guide to what our intent might be going forward. Chris, do you want to add anything to that?

Well, the other thing I'd add is we had a pretty good year last year, Stephen, this year, a more balanced year. And the forward outlook should be more similar to this year than last year.

Yes. I think, Stephen, you were referring to an active book upside in FY '20. In terms of gas storage, it's one of the pillars of Future-gen. Future-gen has 4 pillars, and you probably saw that in one of the slides I showed. It's not been the biggest priority over the last few months as we've been seeking to wrap up some of those PPAs, but we're back on to it. And as we contract and build more renewables, we are going to need more flexible gas. Where our thinking has probably shifted in the last year is away from one big gas storage deal potentially to several small ones. So we might do it [ intuitively ]. The challenge for us and I think for the sector is with the specter of Onslow on the horizon, if Onslow is going to be built, the economic returns on any new gas storage is going to need to be shorter. And that potentially presents problems. So one of the biggest risks to the sector around Onslow is not Onslow itself, it's just the specter that Onslow might be built. And until we have certainty around that, various participants might struggle to invest in that flexible gas storage. But you'll hear more about us -- more from us on that over the next year, for sure. And then no, we haven't had the final report on that. There's an independent review going on by an individual. It will now be presented to the Board in the next few weeks. I expect the findings, as we've contributed to that, I've contributed to that myself, to focus on communication of it. Could we have been more visible and transparent with the risk? We were under the belief that there was a high probability of success. So we couldn't make it a contingent liability in our accounts. For example, it ended up as the notes to the contingent liabilities. And there may be some learnings around the communication of it in the process. But if we had our time again, would we do it again when we were faced with the choice we had? We would and I'm confident of that, and I don't think the findings would change that outcome.

The next question comes from Cameron Parker from Craigs Investment Partners.

Just a couple from me. With regards to the swaption refresh or renewals and dry year risk coming in post 2022, other participants are suggesting that the tight linkage between carbon exposure and coal is a major hurdle there. Any thoughts about releasing that link and more dissolving that [ to your ] portfolio in terms of dry year risk rather than that direct link?

I'm having to read a little bit into what you're saying, Cam. I mean, what I can say is we're not in any discussions at this point with anyone about the swaptions beyond the end of calendar year 2022. So current agreements end then. No one's approached us. We're open for business, but we're not having any discussions. If linkage to carbon is a risk, then we'll always entertain that for anyone who wants to talk to us. But at the end of the day, there's a cost to that for us. So that will be a cost that's passed through to them. We're relatively relaxed on whether there are swaptions or not. We know the role that Rankines will need to play for the foreseeable future, and they will continue to play that role whether they're contracted or not. Yes, I'll end with that.

Okay. Just with regards to the $50 million in cost savings as Future-gen unfolds in 2025, is that solely around fuel and carbon costs? Or are there other sort of cost savings involved in that figure as well?

No. That's a comparison in weighted average cost of generation. So the difference between the costs we're paying for the Future-gen gigawatt hours versus what we'd be paying if we were running gas then.

I'll just build a bit on what Marc said. Cam, we haven't made any assumptions around retiring any plant and offsetting any operating -- other operating costs associated at this point. So it's about the variable running costs and -- yes.

Okay. Got it. That's awesome. And lastly, really, Kupe, I was just wondering if you could spell out what's in line for that in terms of CapEx requirements and development going forward post the compression project coming online.

Can you take that, Chris?

Yes. So we -- the next phase for Kupe is to assess whether or not there's another well or possibly 2 wells to be drilled. That process will occur over the next 2 years. The compression comes on stream in September this year. Parties will sit back and see what the results of that is and how the reservoir performs. And over the next 18 months, they'll make that decision. Well, they do the assessments and make a decision around future wells. If you were to drill a well, it could be up to $100 million per offshore well, of which Genesis has been under 50% of that. But that decision is a couple of years away.

Okay. That's great. And congrats on the new role, Chris, and best of luck.

Thanks, Cam.

The next question comes from Grant Swanepoel from Jarden.

First question for Marc is regarding recent staff turnover as we've seen Andre go and then Shaun and now Chris. You've hit your 2021 target after a few adjustments. I think this is your fifth year. How do we think of your role into the future, particularly with papering over these recent holes and longevity?

Great one, Grant, with 3 questions in 1. Look, I think as a team, we've been together for pretty much 5 years. And those of you that have followed us know that the executive team has been pretty stable, pretty consistent. And I think it's normal in a business like ours as we progress from one phase to another for some to move on to other things. And I'm always proud of people that move on to things that are better, where they built capabilities within Genesis that they can go on and flourish. And so I think that's fine. We've got good depth within Genesis underneath execs and others and people coming through, and I'm confident that new investors and analysts won't see a material difference in Genesis' performance as a result. From my perspective, I'm here, I'm happy. I'm looking ahead to the future. I'm feeling ambitious for Genesis and myself, and there's plan to get on with. So you don't need to read anything into other departures and think that, therefore, the CEO is about to depart. My priority for the next 6 months is to reestablish an exec team and make sure it's strong and ready for the future and, again, hit those Future-gen goals and reform and transform the retail business for the next decade. So plenty to get on with.

Next question, so your recent commitment to PPAs and the 500-megawatt solar build, it will come on prior or by calendar year '25. Does this now assume a lot of DY risk? And is this why the Board has decided to change the dividend policy?

No. There's no connection between DY risk if that's -- and the dividend policy. DY is always a risk, isn't it? My view is it won't go in 2025, and I don't really think it will. [ And not only am I ] in control of that, but we look at our Future-gen program as displacing baseload thermal, as you know, as our primary counterfactual. With -- our total goal for Future-gen is 2,650 gigawatt hours. And at this point, even with all our contracted PPAs of about 1,200 plus solar of 750, we're a smidgen under 2,000 of that. Genesis always has the option in the second half of the 2020s to be short as a retailer if there was a massive drop in demand and the wholesale market fell materially. So we have not yet contracted or committed to building or contracting the full 2,650 gigawatt hours, and we will look very carefully now. And it will somewhat depend on the speed and success of the solar builds. But we'll look very carefully on where -- how far we go with that over the next 5 years because of that DY risk. But no, our dividend policy shift is really just -- we've talked to many investors over time around it. Everyone loves the dividend, but everyone recognizes the weakness of the policy that was put in place at IPO. And I think it's good for Genesis and good for Genesis investors to see a little bit more flexibility there. It is our intent to keep growing dividend because it is our intent to keep growing the business, and our forecasts say the business will grow for lots of reasons we've discussed. But the flexibility to invest in solar, to transition or pivot if we need to, to something that makes sense for investors, we think is prudent at this point in our journey as a company but not related to DY.

A chance for Chris. Just on electricity netbacks, there were quite eye-watering increases over the last few years. Is there scope for much further netback improvement in the electricity side? And then on OpEx, at $271 million, I think about $10 million of it was non-normalized, a little bit of extra IT expense coming through. How do we think about OpEx over the next 12 months?

Yes. Grant, I think in the resi space, it's going to be quite hard to grow certainly revenues and pricing competitive netbacks. In the C&I space, you've still got a bit of a hangover of high prices in the next 2 or 3 years. The forward markets are still trading north of $120 a megawatt hour in electricity. Gas markets are still significantly elevated from where they were 12 months ago. So you could see some netback growth in those segments but less likely in electricity. In terms of the outlook for OpEx, look, we don't guide OpEx. We've obviously got -- I do expect a little bit more OpEx coming through as a consequence of a switch between the CapEx and OpEx for the IFRIC standard. We do continue to invest in some areas. So I think you'll see a slight uptick in OpEx. So you will see an uptick in OpEx next year, grant, but we don't guide specifically on OpEx.

And then my final question, with the electricity outage a couple of weeks back and the risk last week, also no real certainty around Onslow or 100% renewable policy, is there a developing argument that we -- that the market should be having a centralized capacity market or somebody who provides a centralized function? And have you changed your thoughts on that yet?

Our thoughts are the same thoughts that we've had for a while now, Grant, which is that as we transition further to become more renewable, the sector and our regulators are going to have to phase into that. Most mature electricity markets around the world have got a capacity market or some sort of thermoforming market, and we believe that's probably the direction we need to go. We first sprung that about 2 years ago in the renewable energy consultation, and we did. And the events of the 9th of August have brought that to bear again. So we are in active discussions on that. And we don't think the sector should be afraid of that. We don't -- I think one of the challenges we've had is that you can swing from one extreme to another. Is the market broken? Well, we don't think the market's broken. But that doesn't mean the market can't be tweaked and improved to create the right settings for the next decade. And between Future-gen and our competitor new builds, we are highly likely to be about 95% renewable in the second half of this decade. So we need to stop thinking as a sector and as a regulator and government. You start thinking about what are the right incentives to ensure that the backup will be there when it's needed, even though it's going to run less often. So we're very open to that. That's not new news, and we will continue to have discussions with anyone who wants to talk to us about it. There's various ways you can look at it, and there's various solutions that can be brought to bear. This morning in the AFR, the Energy Minister of Australia is talking about putting in a capacity market in Australia. So I think it's about time we just have that conversation in New Zealand and don't see it as a negative reflection of the current electricity market, which has done very well for the last 30 years. Let's not throw away the bathwater, but I think we can still improve it. And that's one of the settings we're interested in talking about. But Grant, the word centralized is not something that we like the sound of or anyone would. But at the same time, a market mechanism to incentivize backup is probably necessary.

The next question comes from Jeremy Kincaid from UBS.

Marc and Chris, firstly, just a couple of questions around the gas markets. I suppose could you give us some color around what the Genesis house view is around long-term gas prices? Obviously, there's been a few structural changes in the market. And I suppose whether or not your view differed to the view of potential suitors of Kupe and whether or not that was an issue in the strategic review process.

I'll start, and Chris can fill in if he wants. We don't really disclose a house view on our -- pricing of any market in the forward sense. That would be pretty risky and probably would be wrong. In terms of gas supplies, I feel the same way I did 6 months ago and a year ago. We're living through a period of short gas supplies. Demand is very tight. And unlike electricity, there isn't another unit you can just turn on quickly. So we are physically a bit short gas in New Zealand right now. And therefore, gas is going to the highest value users. And earlier in the year, that was -- electricity generation was a high-value user and methanol was a less -- low value user. But we -- the demand for gas exceeds supply right now. Over the next 2 to 3 years, we're going to see a bit more supply come online. Kupe itself will be up to maximum again by the end of September because of compression, and there's a bit of drilling going on by competitors. And so I think we will see some relief in the 2- to 3-year horizon in the short term. In the meantime, every time we have low hydro levels, low lake levels in New Zealand, we're going to see an inflection in electricity pricing because of that short gas position. So yes. And in terms of Kupe, Chris, you can add to this. But the gas price was not the most relevant thing in anyone looking at Kupe because we wanted to contract all the gas anyway, and we had determined the price of those GSAs. That wasn't a real big issue when it comes to the value of Kupe. The real issue is perspectives on future development opportunity. And that's where we're quite positive, partly because of what we know about New Zealand's needs for gas over the next 5 to 10 years.

Yes. Nothing to add to that, Marc.

Second question, Chris potentially, could you give us some color around how much headroom there is with your hybrids before you start breaching the credit rating thresholds?

Well, the hybrids are based on being a BBB+ credit-rated company. So if we -- if that was no longer to be the case, next time they come up for a reset, they could be repriced. So the BBB+ credit rating band is typically 2.4 to 3. On a normalized basis, we're about 2.8 and heading down. So it's not something I'm concerned about.

Right. But is there a limit to how many hybrids you can have before that threshold gets breached? Or am I mistaken?

Sorry. We're at the limit in terms of the hybrids that were -- are on issue at the moment, Jeremy.

The next question comes from Andrew Green from Forsyth Barr Investment Services.

Marc, can you hear me now?