Genesis Energy Limited (GNE) Earnings Call Transcript & Summary

Kia ora koutou, and welcome to Genesis Energy's First half of FY '22 Results Presentation. I'm Marc England, the CEO; and next to me here is Emma Oettli, the acting Chief Financial Officer. We'll take you through this in stages. I'll give you a few highlights, hand over to Emma to talk about the financial highlights, and then I'll come back and talk about operational and strategic matters. So starting with our highlights on Slide 5. It's been a strong half for Genesis, really proud of the EBITDAF performance, $210 million and an NPAT of $85 million. Emma will explain the vagaries of that and the ups and downs as a result of various movements. We're announcing an interim dividend of $0.087 per share this morning, which is a gross yield of 8.3%. And our operational highlights of customer loyalty and partnering on solar and the first year -- or first half year full generation from Waipipi Wind Farm are things we're all very proud of too. Emma will also talk about the sustainable finance framework in a slide later on, which is something we believe we are a market-first on. What we're highlighting today as well is our social achievements through the half. And calling out 3 in particular, the Nga Ara Recreating Pathways initiative, which for us is an evolution from our long-running School-gen program, which focused on primary school aid children's STEM education, now focusing through that pathway is the more senior secondary school education system and sponsoring kids, particularly in our communities that we operate in through special courses. We also use those relationships we had earlier in the year when there was a big push on vaccination drive across the country to engage in the communities and support them with the information they needed to make the choices they wanted to make around vaccinations. Our Power Shout program, which has been running for a long time now, took a step forward in the last half with its gifting where we offered customers the opportunity to gift their Power Shouts to communities or people who are struggling to pay their bills. And 15,000 opted in for that, and that's great, and we're going to double that as Genesis -- and it'll be about 130,000 hours offered for winter. And those Power Shout hours, which will be free power, will be given when it's needed most, which is when demand is highest during winter and for high-demand hours. We do have an ambition to eventually allow our customers to donate their Power Shouts to individuals, family members who they believe they want to support paying their bills, too, but that's not yet there, but this is the beginning of it. Manaaki o Kenehi, which we've talked about before, was really important in the last half, supporting customers who are struggling to pay their bills. And not only referring those customers to wins and FinCap for support, but also ensuring that as long as they kept paying a little bit of their bill over time, we would stick with them. We wouldn't disconnect them. And through that, we've generated a lot of loyalty, which is probably also driving some of that net churn and brand NPS up. So when you take this holistically, you're seeing a high-performing business, socially responsible and focusing even more so than we have been in the past on a more renewable future for New Zealand. So with that, I'll hand over to Emma to talk about the financial results in more detail and then come back and talk about some of the other operational highlights. Emma.

Wonderful. Thanks, Marc, and good morning, everyone. On to Slide 7, which shows our half year financial summary. Genesis has delivered a strong first half. EBITDAF of $210 million is slightly down on pcp. But it's worth noting that half year '21 was a record. And prior to this, Genesis EBITDAF for the first half had never been over $200 million. So it's great to see us heading above this threshold again. FY '22 is a year of investment, and our increase in OpEx is primarily driven through investing in our strategy. I will provide more detail on this later in today's presentation. Today, we announced an interim dividend of $0.087 per share. This is an increase of 1.2% on pcp and reflects our strong first half and FY '22 outlook. Genesis continues to play its part in ensuring New Zealand's energy security, rebuilding the stockpile after a heavy draw last winter. Consequently, inventory has grown, which has had a knock-on impact to operating cash flow and net debt. Slide 8 highlights that for the half, we are reintroducing the Dividend Reinvestment Plan. Our desire to grow through the transition and deliver on our strategy requires investment both in OpEx, as I've already mentioned, and CapEx. Our plans are moving forward, and directors said that now is the right time to reintroduce the DRP to strengthen our balance sheet and ensure that it can deliver on our future ambition. The half year dividend of $0.087 per share is set to half of the FY '21 full year dividend and a similar trend to what we have done over the last few years, recognizing the importance of dividends to our investors and are aim to grow dividends over time. The dividend remains 80% imputed, and we continue to pay a supplementary dividend to non-New Zealand residents to ensure tax equalization. Notably, the dividend as a percentage of free cash flow remains relatively stable at 60%, and the resulting gross dividend yield remains competitive at 8.3%. On Slide 9, you can see that Genesis delivered EBITDAF which is roughly equal to H1 '21 once an adjustment is made for emissions costs as a result of the Beach arbitration that should have fallen in the pcp. Momentum in our retail business continues with netback up across all fuels. And our wholesale business proved once again its ability to flex and deliver value in changing market conditions, running short into low prices and long into high prices, which helped support an energy margin increase between the periods. But the half was not without its challenges. The events that unfolded on the 9th of August created a short position, where Genesis was forced into the reserves market at very high prices, and this created a one-off type of headwind. Slide 10 looks at a bit more detail in each segment. Changes in headline segment performance largely reflect changes in the transfer price between the periods. Our retail segment includes all sales to customers of electricity, gas and LPG. Financial performance has been driven by improved netbacks across all fuels as a result of improved pricing, and sales momentum continued in our LPG business with customer connections up 8% on pcp. Our Wholesale segment covers all of our spot market activities, wholesale sales and generation. After adjusting for the movement and transfer price, the August 9th event and half year '21 emissions, wholesale performance is broadly flat on pcp. On the back of rising commodity prices, a continuing tight gas market and rising emissions, the weighted average thermal fuel cost has increased by over 20%. Rising thermal fuel costs have been partially offset by our portfolio's ability to flex and a full half of Waipipi in operation. This is a great example of our Future-gen strategy in action as Waipipi displaces higher-cost thermal fuel. Kupe EBITDAF is down on pcp and reflects a reset of prices for the sale of gas and LPG between wholesale and Kupe. Following the successful completion of the inlet compression project, we are expecting a good result from Kupe in the second half due to increased production and higher oil prices. On Slide 11, you can see that NPAT is up in the half due to a net favorable movement in the fair value of our swaptions and PPAs and a realized cash gain related to coal hedging. We monitor our underlying earnings as a better measure of profitability as our reported NPAT numbers regularly had noise resulting from changes in forecast asset values and fair value adjustments, as I've just described. Removing this noise, underlying earnings of $60 million is equal to the pcp underlying earnings of $60 million. Slide 12 illustrates that as we deliver on our strategy, this investment is reflected in the OpEx growth across the period. The key drivers of this increase include planning for the future of Huntly, progressing the biofuels trial, discovery work to replatform our core billing system and supporting growth in LPG. During the period, we implemented the updated accounting policy in relation to Software as a Service costs. This resulted in some CapEx being reclassified as OpEx. And of the $3 million impact in the half, around $2 million of that relates to work to support our retail digital transformation, again, reinforcing the message that our key driver of operating cost increase has been strategy. In addition to the inflationary impacts through salary, software and insurance, Genesis has spent over $1 million to keep its people safe and maintain effective operations throughout this phase of the pandemic. And lastly, in the half, we incurred around $8 million of expenses that we would term one-off in nature, which include digital transformation project costs, energy online rebranding and planning for the future of Huntly and solar development. Slide 13 talks to our capital investment. Over the period, we have spent slightly less on capital than pcp due to the completion of several significant projects and the accounting policy change. Full year, we anticipate capital spend of up to $84 million. We distinguish our capital expenditure between stay in business and growth. A number of very important stay in business projects were undertaken this half, including investment in thermal resilience to ensure the long-term continued reliability of New Zealand's thermal backup; a major upgrade at Tekapo B, which will future-proof it for decades and improve plant efficiency by 2.5%; and at Piripaua, work commenced on the overhaul of the power station's turbines, one this summer and one next, which will increase plant efficiency by 3.3%. And we continue to invest in projects that create growth. Completion of the Kupe inlet compressor has been a key contributor, ensuring gas resilience and a return to full production capability. And in our retail business, the Power Shout program is increasing customer engagement. And as our LPG business continues to grow, this is supported with additional capital. Slide 14 covers our capital structure. Despite net debt increasing, we are seeing debt-to-EBITDA fall due to higher expected earnings in the full year. This provides some headroom, which is supported by the DRP being reintroduced to fund our investment pipeline. Importantly, S&P have reaffirmed our BBB+ rating in February, and financing costs are flat, with the increase in debt, offset by the mix of debt shifting towards floating, which is at lower rates, and the roll-off of higher-priced debt. And lastly, Slide 15. This is 1 highlight I am personally very proud of in so far as what we have delivered through the sustainable finance framework, but also what this represents for Genesis, a company that stands for a just transition and gives due considerations to climate, social, community and people aspects as we transition to a more renewable future, and is willing to put some skin in the game via its sustained linked loans, which come with higher interest costs if we don't meet our targets. Since its inception, the team have worked really hard. And as at today, 35% of our financing facilities are covered by this framework. This includes $250 million of debt facilities linked to the delivery of our sustainability targets. And now I'll pass it to you, Marc.

Thank you, Emma. So in the next section, I'll talk about some of the operational context behind those results and then move swiftly into a strategic outlook. So moving on to Slide 17. We've talked about engagement before, but at Genesis, I think you all know, engagement for us is core to our retail vision. It's about giving customers a reason to engage beyond the bill. We've been focused on it for years, and we're starting to see some of the fruits borne from that. Energy IQ continues to be -- to grow in numbers with all the interactions we had in the last half equal to 71% of the full year from FY '21. So we're really proud of that. You saw on the highlights slide that our brand NPS is up to 26, and the chart on the top right here shows the trend in that. And most pleasingly, that growth in brand NPS has been driven by a reduction in detractors and removing the reasons that customers choose not to stay with Genesis, which should be playing into a lower churn number, which you've seen. As we move forward, Energy IQ continues to play a really important role, and we will continue to focus on it, and I'll come to that in a [ moment's ] time. Next slide, so Slide 18. We're giving you more data on LPG this time, a less visible market to many of the analysts in the sector who report a lot of electricity and not very much about gas and LPG. So we're showing you here for the first time the sector LPG growth. We've often said it's the fastest-growing energy retail fuel in New Zealand, and it is. And also the dynamic of the wholesale production of LPG shrinking slightly as the demand in the market grows at retail has meant that more LPG is being imported. And you can see on the right-hand side, bottom right-hand side, 2021, 21.9% of the retail demand for LPG was imported LPG. Why is that important? Because imported LPG is about twice the cost at wholesale of indigenous LPG production, and therefore, Genesis' advantage as it was 4 or 5 years ago when we started to invest in LPG is our vertical integration to Kupe, where most of the LPG we need for our customers comes from. So as LPG netbacks have grown, that's one of the dynamics that's causing it and allowing us to be competitive and grow margins as we go. Residential numbers continue to be up, and we're proud of the growth we're seeing there, too. Moving on to Slide 19. The Energy IQ app is about to go through a big refresh. And by the end of March, customers will see a different Energy IQ. That shift from what we call Energy IQ 1.0 to Energy IQ 2.0 is to move the emphasis to be centered around the customer's home. So the image you see here on the top right is what customers will see when they open up their app. They will be able to select a home image that most represents their home and their style and architecture of home. And if they have other home energy functionality like solar panels, LPG, EVs, then the image will demonstrate that as a real example of what's in their home. And the features that they start to see will start to reflect what matters to them to help them manage their home. So you can see that, that shift is going to be quite meaningful. It's going to be even more engaging. And it's because of the growth in numbers of Energy IQ users that we've been able to get confident about that and to really transform what we think will be not only a market-leading, but probably an industry-leading app engagement going forward. On Slide 19, we talk about the EV products that -- sorry, Slide 20. We talk about the EV products that are now in the app. If you're an EV customer at Genesis right now, you get about a half price discount between 9:00 p.m. and 7:00 a.m. in the morning. And what we've seen is about 40% of our EV customers have been engaging with that on a regular basis, and we've seen about a 7% shift in demand to the evening hours on one of those customers. And I promise you, when you know you're going to pay half the price after 9:00 p.m., you start to put your dishwasher on, your pool pump and other things on at night and you can shift. And so it's been a great experiment in human behavior as well for us. We've captured lots into another phase of our EV pilot, where we're testing dynamic charging where the customer can choose in their app when they want their car to be charged by and we decide for them the most economical, cheapest or lowest carbon period during the night to do it. If it's overnight, it gives them that insight at the end of it as to what they'd get active or from a cost perspective, for having had that choice made for them. So it's a controlled function, but it's also got a huge value for the consumer. It's just to -- continuing to engage customers in energy management, which is about giving them the choice that matters to them and their lifestyle and their home or also their business. So on the bottom right-hand chart here, you can see the growth in energy services being sold with C&I. We said to you, our investors, over time that we see that as a competitive advantage. The more services we can sell with energy, the more we can differentiate the energy product. And we're winning customers now from competitors or retaining them against competitors who are offering cheaper prices because we're offering a service around decarbonization or energy efficiency that companies want. And so that's a really important differentiator for us as we go forward, and this summarizes our energy management ambition collectively. So on Slide 21, we're just showcasing Frank Energy. So if you haven't caught news of it, Frank relaunched a couple of weeks ago. It's the old Energy Online. It's got a new brand persona, and it's creating waves in the market. And we're really excited about it. We're giving it enough oxygen to run on its own. But it's not just about the brand, it's not just about -- this is also about digitizing the brand and digitizing the experience. You can see the journey started long before we refreshed the brand to become digital. And we've got some tough targets there to hit, and we hope we will hit them over the course of the next year or 2. We obviously measure Frank versus the Tier 2 in terms of churn, which generally has higher churn than Tier 1s, and we think it's going to do really well over the next couple of years. We're excited to see its growth. The third brand in our portfolio is Ecotricity, which we talked about a year ago, and Ecotricity was at 60%. As of today, we've become 70% owners. We manage it at arm's length, and the numbers from Ecotricity are not reflected in our consolidated numbers. They are in our accounts but not in our operational numbers. We sit on their Board, but ultimately, we let them run the business on their own. They are a 100% renewable-certified retailer. And whereas they started life very much in the residential space, which you can see by the light green parts of the bars here, selling to customers who wanted solar panels on their roof, maybe a battery in their garage or EV, they've got a high penetration of that type of distributed energy technology in their portfolio. They've seen real success of late in converting large businesses, many of them in this Auckland and Wellington area, to their product because those large businesses can then claim they've got 0 emissions in their Scope 2 emissions. So a really important proposition. It's signed by a government body called Toitu, and Ecotricity continued to push the boundaries and stretch the definition of what 100% certified is, and they're going to continue to push it and continue to push it such that it becomes an even more robust measure, and they're really committed to that and making sure that where the wind is not blowing, there are offsets to make sure that it is definitely 100% renewable. So growth targets abound, and they've also been successful not only in large corporates, but also with some of the data centers recently that you've seen announced, with solar sleeving products as part of the package. So companies that want to put solar on their roof or want solar to be part of their mix. So a really exciting proposition, and we will stay close to them. So moving on from Ecotricity to Slide 23, back to the generation portfolio. As Emma said, one of the features of the first half of this financial year was the flexibility in the portfolio. And if you saw our Q2 operational report, we covered it in that, and we want to reinforce the point here, which is that is the strength of Genesis' portfolio. We can run along in high prices with our thermal plant, and we can turn it off in low prices and buy off the market. And the chart on the right -- top right-hand side here shows how we did that in December. It's not perfect in every day and every period, but in general, we were running short at low prices, reducing our weighted average cost we pass through the retail business. Another message coming from this slide is that the deal we did with Methanex last winter to buy a lot of gas, which was a lot of gas for Genesis to swallow. And we demonstrated it in our full year results for FY '21 as how we absorb that fuel into Huntly Power Station. What you see on this chart is that we swapped the future periods, so we swapped it into the next winter 2022 and also some of it into 2023, which means we've got a very full gas book going into the next 2 winters, which means Huntly's Unit 5 and Unit 6 will be run at maximum capacity, and that has put us in good stead for the next couple of years. Moving on to Slide 24. As well as gas as a key fuel and coal is a key fuel, we look at carbon. And carbon in the past, we've disclosed the top-right chart, our carbon hedge position, but a new disclosure this morning for analysts and investors is the carbon hedge price. So we're not giving you the exact prices in a band, but the bottom right-hand chart shows you our hedge position through to FY '28 versus the spot price for carbon. We think this is really important because it's a competitive advantage. But of course, the market operates at spot prices and a lot of our contracts pass through the spot price, but our cost base is based on the hedge price. So that's really important. On the bottom left-hand side, we're calling out the total storage capacity of Genesis, including coal. We're heading into winter in a really good position, as seen in our quarterly report. This coal stockpile is the highest it's been for a long, long time. And that coal was purchased before last winter on long-term contracts with shipping agreements, which means we're getting it at a price way below the spot price or the market price globally for the last 6 months. Many of you will want to know what that price is, but we can't tell you. We're not going to tell you. It's competitive information that we're just not willing to disclose at this point. So don't waste one of your questions later asking because we can't disclose it. Moving on to Slide 24. So as we move forward, energy security continues to be an issue, obviously. And Kupe is playing an important role in that. We had a successful project with Beach to build the compressor, which started to come online end of September, early October in the half. and Kupe now has the capacity to produce 77 TJs a day, again, which is awesome. And you can see the long-term gas production forecast on the bottom right-hand side, which we often get asked in meetings about, but we haven't necessarily shown so visibly before, and you can see the impact of compression on that. And there's work going on right now about a fourth well at Kupe. We expect to be through FID, if there is approval for it, around the middle of this year, maybe the third quarter. So that's exciting and that will have a strong business case with it if we move ahead. Obviously, the crude oil price in the bottom left-hand corner here is way out of date since Russia decided to invade Ukraine. Moving on to Slide 26. Keeping people safe is a key priority at Genesis, always has been and no more so than in the last 6 months to 12 months as COVID has ramped up. We feel really well prepared for Omicron as best we can be. We have a COVID safe workplace plan in place. And we were one of the earliest companies to start testing our employees as they came to work. That started with saliva PCR testing at Huntly last August and then migrated into not only PCR testing, but also rapid antigen testing in all our sites from around November. We have a good stock of supply. And actually, this slide is also slightly outdated. As we move to Level 3 or Phase 3, we now have to test daily even coming into our offices, but our offices have been open throughout the period throughout the red phase. And as long as you test daily and you test negative, you can come into the offices. But we're still running PCR tests every Monday at the Huntly Power Station as well as the saliva testing. So we've done a huge amount, 14,500 PCR tests and 15,000 rapid antigen. We've got a good bit of infrastructure set up around it. On the bottom right-hand corner, our injuries are trending up, which is a worrying sign. We've been tracking this for a while. The only silver lining is they're relatively low-impact injuries, many of them in LPG, what we call slips, trips and falls, but we are concerned, and we're keeping an eye on it. And it's a function of the role, to some extent, the hard work that men and women of LPG are putting in to making sure bottles are delivered on time, and we're keeping a close eye on that trend up. Out Employee Net Promoter Score is still solid, slight dip in December off a peak. But across Genesis today, we've got a very engaged workforce who feel protected by our COVID safe workplace plan, who are doing their 50% to make sure they look after their peers as well, and we're going to this Omicron outbreak in good shape. So moving on to a strategic outlook now looking forward. Now there's a number of slides in here that take all of absorbing. So don't worry if it doesn't all make sense right away. We'll have discussions as we roll around our road show on some of this. But moving on to the first one, we've just reinforced here what our Future-gen strategy is. Now our vision in the Wholesale segment of our business in the market is to be an active enabler of New Zealand's energy transition. And we've said that before, but the word active is really important. We're not going to sit back and just wait for things to happen. You'll see Genesis proactively engaging stakeholders in a number of different ways but proactively disrupting ourselves in some cases and making change happen. With renewables, value from flexibility and reliability and transitioning Huntly are all really important and we won't talk about it all today, but you will have seen things from us in the past, and you'll continue to see things from us around those 3 pillars. And when we say transition Huntly, we often get asked, is Huntly going to shut down? And will it ever shut down? And I'd just remind everyone, I think most of you on this call will understand it is an incredibly important asset to New Zealand sitting in a really important geographical location, right near the Waikato River, with a gas pipeline from Taranaki, with a coal mine nearby, next to the grid, with great grid connection, with a very well-trained workforce in the community and in the key demand center of New Zealand. So we don't talk about where the honey is going to show, we talk about what Huntly's future role could be and what the right role is for Huntly as we transition. So with that, on Slide 29, we're sharing with you today 4 scenarios for 2030 and 2025 that we've created recently. And there's a couple of really interesting insights from this. The first is while they all came from different places with different assumptions, one, a relatively balanced scenario of demand and supply; another one when we have regulated 100% renewable target; one where demand is exceeding supply, and supply can't keep up because of build delays; and the other one, oversupply. They all coalesce to say by 2030, this market is going to be between 96% and 98% renewable. I think that's quite insightful. It's really positive in one sense, because there's not much is going to happen even in the pressure cooker scenario, 96% renewable by 2030. But it's also insightful because we need to start thinking about what we need to be true in order to have a reliable electricity system in 2030 when we're 96%, 98% renewable. So if you click on to the next slide, 20 -- 30. The insight here, and it's not new, but we're calling it out really loudly is when you look at a 98% renewable market, we're going to be spilling a lot more water. So the black line shows the percentage of renewability. The thermal generation obviously comes down, but the pink line shows the amount of spill in the lakes goes up. So our lakes will be higher and they'll be spilling more often. The challenge of getting from 96% to 98% to 100% is that the more wind and solar we build, the more water we displace, and it makes it really hard or really expensive to get that last 2% or 3% or 4% of renewable out of the system -- or thermal out of the system. And the chart on the right shows what that means in a percentage of the year terms. But effectively, what it's saying is that in that zone of 98%, we're going to need 2 things. We're still going to have the risk of a dry year, which is when the lakes are low. We have limited storage in our lakes in New Zealand. They're not massive dams, and that risk will still exist. It won't exist as often, but it still exists. And then we're going to need megawatts capacity to fill in the gap when the wind doesn't blow and the sun doesn't shine in that cold winter's night and winter comes along. So when we look at that, we say we need to start having the right conversations in New Zealand about how we solve those problems collectively across the industry, but also with government and regulators together. So we click on to Slide 31. The good news is some of the insight we're gaining from our biomass work could solve one of those problems, which is the seasonal storage or dry year risk problem. It is not going to solve the peaking capacity problems. As we found out in August last year when there were outages, we cannot turn a Rankine on really quickly. And New Zealand is going to need some fast-response peaking capacity, much more than it has today. Some of that will come from batteries, but possibly not all of it because batteries are very short-duration. But this biomass trial is starting to show us that actually it may be possible for biomass to play a role in the 2030s as a dry year storage filler. The Rankines could run until 2040. They're in relatively good condition to many other plants like theirs around the world, and a number of reasons for that. One is they haven't been running baseload for very long. They used to run a lot on gas, which is much easier and less corrosive to the boiler and burn. If they were running on biomass, that would also be obviously less corrosive than coal. So they have a possible future but the challenge is going to be the supply chain. We're going to be doing a trial burn in May now at Huntly, and we'll announce the date of that when we get nearer. But getting the torrefied pellets, which we believe are the best pellets for the job, from the global supply chain is hard, but they definitely don't exist in New Zealand today. So we're going to have some discussions in collaboration with others and government on, is it possible to create a viable biomass supply chain for the 2030s in New Zealand? If it becomes so, then it should be possible to provide dry year cover through a Rankine in the 2030s. There'll be more on this as we go through the next few months, and there's still much more work to come. Looking on to Slide 32. We actually have a slightly different take to some of our competitors on the regulatory environment. We think the risk is low. We think the opportunity though is high. Most of the reviews that happened have not amounted to major interventions from the regulator or government, and I think there's a lot -- too much made of the risk. As we move forward through this year, it's a pivotal year, we're going to have emission reduction plans coming from the government in May. We're going to have a budget that allocates capital to climate change initiatives. And if we work together on the solutions, I think we'll come up with some of the answers to make sure that electricity can play a really critical role in decarbonizing New Zealand through the 2020s and into 2030s. It is the moment for the electricity as sector to step up. It's awesome to see all the great new builds coming online, and we'll bring our own with solar in due course as well. But there's plenty of capacity for renewable electricity, we just need to make sure the market can operate in the environment I've just described and it can provide reliable secure electricity to a decarbonized energy system into the 2030s. So moving on to the next slide on to solar and our Future-gen strategy. We've made great progress contractually. We've got the Waipipi Wind Farm. We've had the first full half, as I said, of generation. We've signed contracts for Kaiwaikawe and Tauhara, which is a repeat of one we showed in the full year last year. It shows the trajectory of that as they come online. And the solar builds will follow quite quickly behind. I'm afraid -- I know there'll be lots of questions on it, but we can't give you locations. We can't give you pricing. We've got a pipeline, and we're working on it, and we will announce projects as and when they're certain. And we're not going to be speculating on them because there's too much of confidentiality involved in it as we move forward. But we have moved forward with FRV, an awesome global leader in solar. We've signed contracts now, moved beyond term sheets and they are working with us on the pipeline in New Zealand. And there will be announcements through this year. Moving on to Slide 34. We are considering what further long-term carbon commitments we can make. We do have a science-based target to 2025, which I remind you is aligned to limiting climate change to 1.5 degrees of global warming. We do have plans in place that will go beyond that. And you can see that in these charts here. The star is the target. The line is the forecast. Obviously, there's going to be ups and downs with hydrology through years, but that's the forecast. What we're thinking through now is, can Genesis make an even longer-term commitment beyond 2025? It might be net zero, but the 1 commitment we're going to make, and we're making it here today, is we will not make those commitments unless we have strategies in place to achieve them. So what you won't see from Genesis is a 2050 net zero target with nothing behind it. So we're working on plans. We're working on strategies when we have them. They won't be perfect and have solved every single problem, but they will be fundamentally clear in the direction we're heading. And if we do, we will then make the commitment. And that's what we've done to date, and that's what we'll continue to do going forward. But we're sharing these charts because we think for our investor set, this is a really important direction to observe. It's really important to see the downward trend. And it's much more than a single point target, it's a momentum that we're building in Genesis across our Scope 1 and our Scope 3 emissions. Moving on to Slide 35. Just briefly on retail, I've spent a lot of time on the wholesale strategy, but to remind you that our vision in retail is to be customers' first choice for energy management. That's been around now for about 5 years. The pillars underneath here are relatively recent in the last year or 2, and we've talked through the operational update about some of the successes. So I won't go through them all. But our vision remains the same. It's to engage customers in a different way, way beyond the bill, to some of the choices they have in their hands when we give them the insight. So the next slide, on 36, just talks briefly to the digital transformation piece of it, because we've mentioned this to our investors before, but it's well underway now. And we really have the 3 pillars of it, which is Mahi Tahi, which is about data; Rubiks, which is about systems; and Bowie, which is about operating model. And as we work through these, we do expect to see a reduction in churn, cost to acquire and cost to serve over the next few years. But more importantly, this program sets Genesis' retail business up to be a formidably more innovative and fast-paced business in the next 5 to 10 years than it has been over the last 5 to 10. So all the success to date, which you've seen come through the financials, have been through a lot of hard graph on existing infrastructure, but the teams are really excited now about what the new infrastructure and the new way of working is going to give us as we progress forward into the 2020s and 2030s. I won't go through the use case example on the right. It just explains how we're looking at the operating model changes and how it affects customers, our people who are working with customers and obviously, even our head office staff to some extent, too. And that use case is just one of many we have in the business going forward. So moving on to the last slide before I hand over to Emma to talk about guidance. Really proud that we could now announce the full executive team. This is a really diverse team, not just in gender but in terms of experience, baseline where people have come from, different markets they've worked in and different career trajectories. What I think I'd like you to take away from it is it demonstrates the depth of experience we have in Genesis, that we've had 3 internal promotions, and that depth of experience extends beyond the exec. And an awesome example of that actually has been Emma, over the last few months standing in as CFO and has hardly missed a beat. The company has kept running really well. The finance team has kept running really well. And I think you as investors and analysts have been served really well. So we have that depth of experience, which is awesome. James Spence is an external appointment who's coming in and will start tomorrow officially. He's coming in with experience of gen tailors in 3 different markets. He was CFO in Canada of Direct Energy, which is a Centrica subsidiary; CFO of one of the big 3 in Australia, EnergyAustralia; and then he was also CFO of ERM Power, based in Brisbane, before he became CFO of Gentrack. So he will bring different market experiences as well as depth of knowledge of our sector and obviously the finance disciplines. So across the board, really awesome team. Nigel Clark will step out around the middle of April as Rebecca steps in, and we're in a transition phase over the next 6 weeks until then. All right. So I think it's with that, that I hand over to Emma to take you through guidance for FY '22, and then we'll come back for Q&A.

Great. Thanks, Marc. Looking ahead, following a strong first half and a favorable outlook across the second, we are expecting to move towards the top of our FY '22 guidance range. Lake levels and contracted gas supplies are higher than they were a year ago, and we have sufficient coal to back up the system if it's needed. We are updating our FY '22 guidance range to $430 million to $440 million, subject to hydrological conditions, gas availability, one-off expenses and any other unforeseen circumstances. FY '22 capital guidance has been updated to up to $84 million, which largely reflects the change in accounting policy, which has seen more of that CapEx now reported as OpEx. Thank you.

All right. Thank you. And with that, I think we'll open up for Q&A.

Struggling to hear the volume in the room. But Tim, you could just repeat it.

Okay. Just to repeat it. Grant Swanepoel, Jarden. So is the additional costs -- sorry, the additional $3 million SaaS costs included in your FY '22 guidance?

Yes.

And is the...

Yes. The short answer is, and I think it's written on the slide, we have included the full year impact of the IFRIC change, and you can see it's $11 million in the guidance slide. It's now embedded in our new FY '22 guidance range.

And just a follow up for that one, a figure of spends for FY '23, OpEx changes as it relates to the FY '22 [indiscernible].

I default to that. We don't guide on OpEx. That would be further ahead than we'd like to look. I would say that the digital transformation project is multiyear and quite a lot of that $11 million relates to that project.

A couple of questions from me. First of all, just on the guidance upgrade, it's around about a [ $16 million ] upgrade, I think, from the midpoint once you factor in the Software as a Service changes. Can you just sort of explain what's driving that increase? Is it sort of a carbon trading gains expected in the second half? Or is there some other factors? Just bearing in mind, normally, I think the second -- first half is usually seasonally stronger than the second half.

Yes. I think we've just seen some continuation of momentum through the first half, particularly in the retail business, which we hadn't really factored through when we set our range, so that's coming through. And in the second half, I guess, where the lake levels are higher at the moment, we're going to see potentially increased flows-through our renewable generation portfolio and that will add more upside in the second. And the last one to note is we have had the roll-off of 1 more out-of-money contracts, and that's given us a bit of a tailwind in the second half. So that's why the guidance is looking more towards the top end of that range.

Great. And the next question I just had was just around transfer pricing. I noticed there's quite a bit decrease, I guess, on the Kupe prices but quite big increases on the retail side. Sort of feels slightly counterintuitive in terms of one business is going up and the other one going down, even though the whole market has, I guess, been pretty strong. Can you just sort of talk to why there is that, I guess, difference of approach we're seeing there?

Yes. I think it's worth noting that transfer price, as we said, it is very mechanistic. It's very methodical. We kind of turned the wheel on it. In the retail business, what is reflected through that movement, transfer pricing, is the higher wholesale prices over time. And that's why we've seen sort of an increase in wholesale retail. The one between wholesale and Kupe is more about a reset of prices that was done as we looked at, I think, through the...

Yes. When we were looking at Kupe, we rebased the prices we were selling gas to ourselves, so our equity stake in Kupe to market. So they had been tagged to out-of-the-money PPI-escalated gas prices over a long time. So that's why you're seeing some of the movement between Kupe and wholesale.

Okay. Because I'm calculating in the gas price of about [ $10 ] in LPG of $400 a tonne, which feels, I guess, very low compared to what we've seen, where we see spot market prices at the moment.

Yes. It's not -- don't look at spot gas. I mean, LPG is different. Don't look at spot gas. We were looking at long-term contract gas. Long-term contract gas was a lot lower than the contracts we had with ourselves between Kupe and Genesis. So we rebased those to more market-level contracts.

The next question comes through from Jeremy Kincaid from UBS.

Just the first question from me. On Slide 34, where you provide some of the color on what your potential Scope 1 and Scope 3 carbon emissions will be going forward. Just on that Scope 3 carbon emission charts. You have just Scope 3 carbon emission essentially halving over the next couple of years. Does that suggest output from Kupe for gas and LPG is going to have? Or am I interpreting that incorrectly?

No. So good question. We did say this last full year. The reality of that is that we are -- as I mentioned, we have one more coming off now. Our long-dated out-of-the-money industrial gas supply contracts have been rolling off. So from a Scope 3 emissions optics perspective, that looks quite good. Our emissions are coming down in our Scope 3 bucket for that reason. And then you can see it levels off, and the leveling off is our ongoing retail gas and LPG emissions. So we've always been very open about that. And the question we're addressing if we're looking out to FY '40 is what's the long-term trajectory of our retail emissions in Scope 3.

Great. That's very clear. And then just my second and final question on growth CapEx going forward. You've obviously turned the DRP on to strengthen the balance sheet. Could you give us an idea of some of the sort of big ticket items that you'll be spending and potentially a ballpark of the size of growth CapEx for each of those initiatives?

So no, we're not disclosing a forward CapEx spend, but they are going to be things like solar. So that's the primary reason. So we've signed the joint venture agreement. We're a 60% shareholder in that, which means all else being equal, each project we would invest in at 60%. We have some flexibility as whether we do or we don't going forward, but that's what we choose to do. So think about 500 megawatts of solar over the next 5 years, and that's the capital we're looking at spending. There's potential as well for more dry lands-type projects in terms of carbon offsets, which could take some capital too, and then a much smaller scale, the retail digital transformation is ongoing in the next 2 or 3 years.

Okay. Great. And biofuel is expected to be a large CapEx spend?

Not at this stage. It could be. But at this stage, we haven't got any numbers. The big question on biofuels is the supply chain in New Zealand, and I think it's going to require government and business working together to instigate that.

The next question comes through from Nevill Gluyas from Jarden.

Really just sort of a longer-term question for me. Very interested in where your solution for biomass for Huntly is going. I'm wondering what -- to set expectations, what kind of time frame should we think about as a possible replacement? Obviously, aware it's very, very early in the process, but what kind of time frame are you looking at there?

Yes. So just to recap, we've got 3 work streams ongoing. One of them was a review -- desktop review of supply chain considerations. Another one was a technical viability assessment, which involve some consultancies, and we've got the results of that. And the other one is the test burn. The technical assessment has given us confidence that these units could run beyond 2030 to 2040. The supply chain review has convinced us that actually New Zealand will need to start almost from scratch to build this up if we want to do it well. And some of that has also told us -- taught us that for Huntly, if we want to keep the capital cost down at the Huntly end of things, torrefied pellets or advanced solid pellets, as they're shown on this chart, are really where we're heading. And that's why we're going to do the trial burn with in May. And they are different to white pellets. They have some advantages in that they can be -- they can get wet. They can be stored for longer. They're easier to mill, and they have a higher energy density. And so all those things add up to them being the most viable pellets for Huntly if we wanted to use biomass. White pellets, which are more readily available, are challenged by the fact they can't get wet. They can't be stored for long. They deteriorate, and they've got low energy density and they're hard to mill. So we're really looking at the torrefied pellets, and that's what we've got coming into the country shortly, and we'll be trialing in May. We don't yet have a time frame for when this would make sense. What we are saying is it could. We're not saying it definitely will, but it's going to require us to work with others and the government to make it happen is my belief. We're putting it forward as an option. We're working with the New Zealand Battery Project on that. We're submitting everything to them. They want to see. We think it's a viable alternative once you get to 98% renewable. It's probably only 1 ranking's worth, and it's probably a transition between coal and biomass over time. So lots of unknowns in there, Nevill, I'm afraid, but we're working through it, and we're just wanting to disclose today the progress but not say definitively, we think this is a dead set, but we think it's definitely something worth considering, given the dynamics of the New Zealand electricity market and given the need for that dry year storage of energy, which is very hard to find another economical way to achieve the same thing.

Great. Very clear. Just a question on the terms of the green bonds. If we have a dry year and the rankings are called on heavy coal use, one presumes, does that in some way validate or put risk on the terms of those agreements?

No. The bonds, the green bonds are linked as a proceeds, so they are actually linked to our renewable generation assets. So there isn't any risk that I can see actually in relation to those bonds in a dry year.

You probably mean the sustainable finance environment.

Yes. So the sustainable loan is more we have targets, again, emissions and our pathways in the harder pathways. Potentially in a dry year, you might have some headwind against your emissions target, but it is balanced. And I guess people are open to the fact that there will be ups and downs as we go on this journey.

Okay. Great. So there is some provision that you can't get caught out sort of by a one-off [ agreement ]?

No. We've, that's -- it hit all our targets. There's volatility in the system. But -- so it's measured every year rather than one point. Sorry, go ahead.

It seems I get a delay in the lines. It always makes it hard to communicate. Sorry, a third and final question for me is -- which is now completely gone from my mind because of the delay, is whether or not you've had much engagement in terms of the swaption renewals or what's your thinking about the necessity for that? I get the flavor from what you've presented, that question marks to Huntly's longevity sort of the least prominent in your mind than perhaps they were 6 months ago. Can you give us some flavor for how you're thinking about this swaption process or even engagement in [ the book ] going ahead?

Yes. I'd say we've had some engagement on the swaptions, not a huge amount. As we've said previously, we're relatively open minded as to whether swaptions are signed or not for 2023. Obviously, the existing ones ended in the 2022. Genesis looks at it as we have done some analysis and work. We know what the capacity for backup is worth to the New Zealand sector and therefore, we want to make sure that Genesis gets a fair return for that. We're not looking at it as a class. We're looking at it as a value. And if other market participants are willing to share that and contribute to that, then we're open for doing contracts, short and long term, but we're not driving to 1 particular outcome. It's all about value. So we're open-minded. We've had some early discussions, but I suspect they will continue for a while to come. I would say because I've said it this morning already in another context that I don't think we should kid ourselves. The rankings on coal with a carbon price that's continually increasing is underwriting some of our competitors' profitability. And that's why some of our competitors don't get changed. But as we look through to 2030 and go, well, what does this market need in 2030 to be able to cope with the amount of decarbonizing required and to be stable and reliable? We are going to need to have discussions about adapting the market. And I don't think that the word intervention is often used. And I said, don't use the word intervention. It's okay to adapt to this market and it be more valuable for Genesis to work with an adaptive market to provide that backup in the future than to do single-point contracts with competitors. If competitors want us to do the contracts with them and don't want us to push other parts, then they need to step up. But if they don't step up, we see a potential other pathway to creating value for our shareholders with that capacity. Long answer to a leading question, Nevill, but I appreciate the question, and you want to know how we're thinking about it. That is how we're thinking about it.

[Operator Instructions] The next question comes through from Cameron Parker from Craigs Investment.

A good result for the half. Just 2 questions from me. Just wondering about the timing of the FID decision on Kupe's additional well. And on your intentions to retain the Castle Hill Wind Farm consent.

Good questions, simple answers. Timing of FID on Kupe is likely around the middle of the year. I can't give you an exact month, but it will be sometime this year, around the middle of the year. And we intend to extend the consent on Castle Hill, which I think runs out in 2023, otherwise.

The next question comes through from Grant Swanepoel from Jarden.

So what do you reckon the -- your share of the Kupe drill costs will be? Second question, why are you having so much difficulty in getting a further site up and running? Is that because of a grid connection or is it land that you can't find? Third question on when you actually are running short generation on purpose, are you tempted to sell some carbon credits and make a bit of a profit on that front? On Slide 4, you comment that at this point, that Contact doesn't have any North Island storage. Is that because you see them getting out of the Y-o-Y gas storage contract in the North Island and not having any thermal anymore? And my final question on -- actually second to the last question, how do you think about coal dispatch? Are you using the current spot prices through the roof or using your average cost of inventory? That's quite an important one. And then final question on your biofuel cost that you're looking at, so just give us some sort of insight at the dairy companies who are saying that renewable energy doesn't compete, maybe tell us, in their own business is actually a bit of a mockery because costs are lot higher than that.

By the time we get to the sixth one, you might have to repeat it, Grant. It would be easy if we just gave them in short bites. The coal one, which is your fifth one, working back up the list is simple. We price it based on spot or the future replacement cost. So we don't give away our cost advantage from a hedging perspective. Carbon storage here, maybe if we didn't -- of course, if we didn't need the carbon in the future. So if we decarbonize faster and we have surplus credits, of course, we would sell them at spot. Solar consent, I think you said, why is it taking so long? Well, it's not taking that long. But what we're doing is we're running in parallel. So we got -- we're running multiple potential projects in parallel and then saying let's run that all the way. And so that may feel when you think, but the pipeline will be very full and very fast after that. And we just also -- unlike -- I think often, I see commentary, there's a comparison to what Contact is saying about Tauhara. There aren't 50 Tauharas out there to compete with. And so Contact can talk about the long-run marginal cost, the build costs, et cetera, and it's not really competitively sensitive. There are a lot of solar developers all looking at solar in New Zealand, so we're going to keep it close to our chest until the point we know which project we're going to build. So I know that's going to be less satisfying for some of you that want more detail, but that's just going to be the way it is. What was the Kupe question, number one? RFID, 46%, that's our shareholding.

That's your share, so you don't have an assessment on what drill cost is going to be?

We've said in the past that our share of it will be in the order of $50 million. We've said that in prior rounds. Yes. Did I miss anything? Something about biofuel?

Yes. The biofuel costs that you guys show on your charts above the gas cost, the mockery of dairy companies indicating that maybe they can go biofuel and not go renewable energy to replace the coal boilers? Are your insights different to their views?

I think it's aligned, isn't it? I don't know why gas is relevant to that. So replacing -- what we're showing on that chart is replacing coal with biomass is trending towards being comparable on a variable cost basis because of carbon. So they're probably looking at something very similar and saying they can replace their coal boilers with biomass boilers at a similar variable cost in time. Gas is just there as a comparison. I don't think they're trading off gas with coal. Remember South Island, so there, if you're looking at South Island, you don't have a gas. So gas is not really an option.

Yes. My final question was on Slide 24, where you were going through that Contact doesn't have a North Island gas storage anymore in their build-out. Is that -- could you have some insight? Have they been putting out a variety of gas storage? Or is it just an oversight?

No. I think that's just an oversight, and we will have to apologize to them. We missed the gas storage off. We know this is...

There appears to be no further questions. So I'll hand back to our presenters for any additional or closing remarks.

All right. Well, look, thank you for listening. A complex pack, lots of information in here, but hopefully, you can see a business that's performing well, thinking several years ahead to the things we need to put in place now for them and also being ambitious from a climate change perspective and moving the dial across everything from customer engagement through to energy management to renewable energy and a lower carbon future. And we look forward to talking to many of you in person as we go around the roadshow. Thank you.