Genesis Energy Limited (GNE) Earnings Call Transcript & Summary

Kia ora, and welcome to the FY '23 Results Presentation for Genesis Energy. I'm Malcolm Johns, and it's a pleasure to be presenting the results for the first time alongside James Spence, our CFO. It has been an enjoyable first 6 months in the role, and as you'll hear from James soon, we've had a very strong financial performance in FY '23, and we are gearing ourselves up for more success to come. This past year has been wet and windy for many of the communities and regions we work in, this has brought significant impacts to life and property. We have worked with our teams in those communities to provide support where we can. I would particularly like to acknowledge the work of our team at Waikaremoana to not only provide the majority of electricity to Eastland and Hawke's Bay following Cyclone Gabriel, but also work to support the regions around and below our generation sites. James and I would like to now take you through our financial and operating results, before touching on the work we are undertaking on the direction of long-term strategy, the details of which we will share more fully in late November. Performance highlights for FY '23, EBITDAF of $524 million, a strong result driven by strong performance across hydro and trading. Net profit was down slightly due to the lower level of valuation gains relative to the previous year. We continue to pay a strong dividend, while recognizing the additional investment we have ahead to keep moving the business forward. We saw our customers grow across all of our brands. Generation costs were lower, mainly due to strong hydro inflows and our ability to flex plant and fuel. Solar gen continued to progress, with Lauriston nearing FID and 3 significant opportunities in the North Island now in the advanced stage. Carbon emissions were down 1.6 million tonnes. This was impacted by hydro, the market and our fuel flexibility. EV plans grew and we were able to continue to offer innovative products to customers and more than double the number of customers on an EV plan. We opened a regional customer service hub in Turangi, to support our main service center in Hamilton. This bought real full-time jobs to regional New Zealand. I will now pass to James to talk through the financial performance.

Thank you, Malcolm, and good morning, everyone. Thank you for joining us today. I'm going to talk through the key drivers of our financial performance in FY '23, starting with the headline numbers on Slide 6. So as you can see, revenue was down by 16%, which was driven by the reduction in generation volume and wholesale prices. The exceptionally wet hydro conditions in FY '23, meant that significantly less thermal generation was required by the market. Our thermal generation volume was down by around 1.5 terawatt hours to 2.2 terawatt hours, while renewable generation was up 0.9 terawatt hours. Average wholesale prices achieved were also down over 1/3 with the hydrological conditions. EBITDAF of $524 million is 19% up on last year, and there'll be more detail on this, on later slides. NPAT of $196 million is down 12%, following a substantial fair value gain recorded in the previous year. Operating expenditure and interest costs are both increased, reflecting current market conditions and more on both of these items on subsequent slides. The higher profitability also flowed through to cash flow. In FY '22, free cash flow was impacted by a coal inventory buildup, not repeated in FY '23 with minimal coal purchases in the year. Capital expenditure remained relatively level, with investment in our hydro assets, the main focus of the year. We also commenced development of the Kupe KS-9 well. Net debt reduced by $68 million, with consequent improvement in credit metrics, which we'll look at further on. So now to discuss the EBITDAF performance on Slide 7. The electricity gross margin was up on lower generation costs and increased retail prices, and you can see that's the main driver of our overall improved profitability. Gas profitability improved, with continued price momentum and focus on higher-value retail channels. LPG margin is reduced, as the retail price increases have been offset by higher direct cost increases. Other gross margin was down, primarily due to a strong carbon trading performance in FY '22. And Kupe gross margin was also down $9 million, primarily due to lower gas volumes. Operating costs were $32 million, higher than the previous year, and I'll cover that on a later slide. So now I'll turn to Slide 8, where we look at the gross margin drivers in more detail. The electricity gross margin was up $141 million. The flexibility of our portfolio enabled us to reduce higher-cost thermal generation substantially and replaced with a mixture of increased renewable generation and lower cost market purchases. Average portfolio generation costs reduced by 36% to $35 per megawatt hour. We also continued to see revenue growth in electricity retailing. Of note, C&I average unit revenue increased 19% to $169 per megawatt hour, as contracts renewed at higher prices. The equivalent increase in mass market was 3%, with the increase coming partway through the year. Electricity derivative settlements contributed an improvement of $55 million on FY '22. This was driven by the movements in the position of long-term hedges, the swaptions, PPAs and short-term trading. Moving on to gas, where Genesis continued to focus on value over volume. Retail volumes remained level, while lower-priced wholesale gas sales were not renewed. Pricing momentum continued in retail gas sales, with realized unit price up on average 16% versus the PCP. The business was able to use shorter or more flexible wholesale gas contracts to enable better use of thermal plant. This procurement and lower demand overall enabled a reduction in gas costs of $0.80 per GJ. On to LPG; LPG margin was down around $8 million versus the PCP. Retail pricing continued to increase, up 13%, while sales volumes were down slightly. Purchase costs were up, driven by an amendment to internal pricing of LPG purchased from Kupe, and higher bulk delivery charges. We also saw an increase in the operating cost environment in LPG, largely driven by delivery costs. Looking at Kupe, where gross margin was down 9% to $91 million, mainly driven by reduction in gas volumes, and there are 3 main causes of this reduction. Firstly, a scheduled November maintenance outage. Secondly, the declining production yield, and thirdly, we utilized the flexibility of the contract to turn down volumes to optimize running of Unit 5 at Huntly in low-priced periods. You can see these last 2 items clearly on the chart on the Kupe slide later on in this pack. The transfer price on LPG increased from $450 per tonne to $705 per tonne, reflecting market conditions and a catch-up on previous year. Moving to Slide 9, where you can see NPAT was $196 million, down $26 million versus PCP. A key driver is that in FY '22, we had a significant uplift in derivative contract valuations, due to the reduction in the liability on the swaption contract, and the increase in wholesale price outlook in FY '22. This year, we're also recording a revaluation uplift on the Rankines of $46 million, which is $37 million greater than previous year. The recent Unit 5 outage, means that we're forecasting more output from the Rankines than previously expected. This is recorded in the income statement, as we're partially reversing previous impairments. Net finance costs were higher as higher interest rates impacted the cost of servicing debt and I'll talk about that more on the cash flow slide. So now moving on to operating expenditure on Slide 10. As discussed previously, we had increases in operating expenditure over the year with a total increase of 11% to $330 million, as inflation continued to impact staff costs and other items such as insurance. Technology costs increased, as we work through the billing system discovery process and increased costs on IT infrastructure and software. Staffing levels were higher, as we fill gaps in LPG delivery and front office call center roles. Higher costs were also seen in maintenance materials and contractors for our wholesale assets. OpEx is a key area of focus for us, with competing pressures, the need to modernize our IT estate, while driving long-term productivity improvements, at the same time managing growth in retail and renewables. Moving to capital expenditure; we've made some changes to how we present our capital expenditure, as well as outlining our expectations for FY '24, which will be an above-average capital spend year. Firstly, outlining CapEx in FY '23, we continued with major investments to upgrade turbines and generators at our Waikaremoana scheme. Total expenditure at our hydro schemes was $29 million, and these long-term investments will improve efficiencies of the plant by up to 10% and provide longevity for the hydro schemes. As previously disclosed, we also commenced the development of a new well at Kupe, to ensure continued supply for Huntly and our customers and to support the energy transition. Capital expenditure of $10 million was incurred in FY '23, with $65 million forecast through completion of KS-9 in FY '24. Looking at FY '24, stay-in business CapEx is expected to be higher at $80 million as major projects are taken on, including the final stage of the Tuai generator upgrades and commencing maintenance work at Rangipo. FY '24 growth CapEx is expected to be in total around $87 million, which includes the $65 million for KS-9 and additional amounts for technology spend. We're also signaling further investment in associates, which include continuing forestry investment and investing in our solar JV. When we come to Investor Day in November, we'll talk further about our strategic investments in renewable generation and other capital investment opportunities. Turning to cash flow and balance sheet; the strong performance in EBITDAF and operating cash flow has supported the strengthening of our balance sheet as we look forward to future investment. Firstly, in the bottom left chart, our net debt to EBITDAF ratio reduced to 2.2%, due to the strong profitability and a reduction in net debt of $68 million. This provides additional room for future investment, although we're mindful that FY '23 profitability has been particularly strong, which influences the metric. Looking at some of the key cash flow movements in the bottom right chart; net working capital increased by $47 million. The key movements related mostly to the delivery of forward carbon purchases, which were holding due to the lower surrender requirements following the lower emissions in the year. We've also seen an increase in receivables on higher pricing, relatively high June consumption and a modest increase in overdue accounts, mostly settled in July. Inventory remained level, as the coal stockpile remained high, with record low coal burn in the period. The final item on that chart relates to renegotiation of a long-term lease for one of our generation sites will be incurred over the multi-year term of the lease. After several years of decline, as you can see in the top right chart, funding costs increased due to higher interest rates on the unhedged portion of our debt, and the repricing of the capital bonds in June 2022. So moving now to dividends on Slide 13. The Board has declared a final dividend of $0.088 per share. This brings total declared dividends for FY '23 to $0.176, which is level with the FY '22 payout. We've taken this decision on the basis that FY '23 results have benefited from above normal hydrology, and we're mindful of the need to preserve balance sheet flexibility for future investment requirements. We'll talk further about capital planning at our Investor Day in November. So with that, I'll hand you back to Malcolm to discuss operational performance and strategic outlook.

Thank you, James. Now turning to our operational performance, starting with our customers and the work we're doing to support Kiwis getting into EVs. We are proud of our brand and the products we provide and both demonstrated strong growth in FY '23. Customer growth was encouraging across both our Genesis and Frank Energy brands, increasing over 12,000 customers in the year. While residential electricity consumption per person continues to fall, EVs are a strong growth opportunity, with the average EV customer consuming 40% more kilowatt hours per year, than other customers do. Pleasingly, the number of customers on an EV plan doubled to over 4,000 during the year. During the year, we ran a successful trial using our EV Sync product, which allowed customers to charge their vehicles using the optimal price carbon mix of their choosing. Looking at our wholesale market performance, record high rainfall across New Zealand saw Genesis receive 50% or 1.6 terawatt hours higher inflows than average. As James indicated earlier, the higher inflows were obviously a tailwind for our performance. Critical to this success, was our ability to be able to be flexible in our plant dispatch and fuel contracting, which minimized use of our most expensive generation options. Looking at the top right chart, you can see that Genesis was able to focus generation in the higher price periods and do so more than other gentailers in the market. Genesis was able to pull back thermal generation through the lower priced summer period, then returned the generation to market when the prices were higher. Our carbon emissions profile continued a downward trend. FY '23 demonstrated that environmental conditions to remain a key driver of carbon emissions in the New Zealand electricity sector. Of course, it is pleasing to see this year's decline, but we want to be clear about what was in our control and what was outside it. To understand this, it's helpful to compare FY '23 to FY '21. People may remember that in FY '21, the market was impacted by a prolonged dry period and unpredictable gas supply. At Genesis, we played our part in supporting New Zealand's energy security, but that meant emissions that year were significantly higher. We flagged then, that the emissions were beyond our control, and we're being equally transparent again now, about the fact that the emissions decline in FY '23 was due to a combined impact of Genesis' actions and the weather we experienced. Almost 2/3 of this can be attributed to hydrology, both from our lakes and those of other generators. Slightly lower customer demand also impacted emissions. What we were more focused on, are the things we can control. Our Waipipi PPA supported some carbon reduction, but a more significant driver was our ability to source gas to support flexible thermal plant generation. 95% of the gigawatt hours produced at Huntly this year came from gas. This contributed an approximately 500,000 tonne decline in emissions over the period, and it shows the valuable aspect gas can play as a transitional fuel. If we assumed more normal hydro inflows, we'd expect total emissions to be around 3 megatonnes in FY '23. This is shown on the chart in the bottom right corner. It's been a busy few weeks following the Huntly Unit 5 outage. While the outage has been unexpected, we were not unprepared. Firstly, to talk through what has happened. The damage was due to a fault on the generation circuit breaker. It's a critical component designed to precise specification and expected by us and the manufacturer to last the lifetime of the plant. It was a significant, but rare event that occurred with no warning. In fact, the manufacturer has not seen such a component failure internationally before. The machine itself is undamaged, as is the transformer. The key aspect of repair of the existing structure, is manufacturing the porcelain components. Manufacturing slots and the requirement for some parts to sit and cure for around 3 months before shipping, are the key drivers of the current timelines. We remain committed to working to show -- we remain committed to working to the shortage -- to shorten the outage if we can. We're mindful of our role in supporting New Zealand's energy security and have ensured that our Rankine units are available for backup generation. As you can see on the right-hand table, we have 3 Rankine units available, and we are using the gas normally used in Unit 5 in the Rankines. We have already indicated the impact on our FY '24 financial performance at between $20 million and $30 million after insurance. We also have substantial energy storage, both with our coal stockpile and in our hydro lakes. These total over 2 terawatt hours. Another achievement for the year was the completion of a significant resource consent application for our Tekapo power scheme. Tekapo is a critical asset for Genesis, producing approximately 1,000 gigawatt hours per annum. The application seeks to replace the existing consent, for a further 35 years, and retains the existing operating rules. It is expected that the consent application will take between 12 and 18 months to complete. We have entered into a formal relationship with Ngai Tahu, Runaka and DOC, to work together to positively impact the natural environment and the communities in the area of the new consent. Business to us is about balancing and succeeding across people and planet and profit. We are mindful of the communities we operate in and understand that we are often a critical economic driver in many small towns across New Zealand. A key achievement in community support was the opening of our regional customer hub at our Tokaanu site. Genesis has long been a major employer in Turangi and Taupo, and we know that local community well. We are thrilled with the results of our ability to bring real full-time jobs to regional New Zealand and the community in Turangi. We also continue to support the communities we operate in, through our Nga Ara Creating Pathways program, which has now offered 32 apprenticeships, internships and work experience opportunities to rangatahi Maori in the Huntly region. We continued our support of the Theo conservation for the Tongariro power scheme, where we are seeing pleasing results. We have also supported our customer energy well-being through our Manaaki Kenehi program, supplying over 300,000 free hours of power to those in need. And our Curtain Bank partnership is creating warmer homes through upcycled curtains and window coverings. During the year, we continued to invest in our Women in Leadership program as well as maintain our focus on gender diversity and equity. We continued our focus on building our safety culture and the focus on hazard identification and management has seen our injury severity rate decline materially. 85% of our team are positive about the culture at Genesis, and our turnover has begun trending downward. The culture at Genesis remains one of our strengths, and this provides the perfect opportunity to talk briefly to our future outlook. As mentioned earlier, we are reviewing and updating our long-term strategy, and we will speak in more detail when we release this in late November. However, allow me to make a few early comments based on the information we are able to share today. The Zero Carbon Act 2050 was almost unanimously passed into law by all major parties. And in achieving that, Net Zero 2050 is no longer a point of national debate, it is an agreed destination for the country. There appears equal agreement, that the best way to achieve that outcome is to electrify as much of our lives and our economy as we can over the next quarter century. This brings 3 things to mind; that asset transition must lead the energy transition. New Zealand faces the largest asset transition challenge in our history, at both a household and a business level. New Zealand must proactively move away from assets that operate only on fossil fuels, and towards assets that operate on electricity. The asset transition timeline is the critical driver for the energy transition timeline. The sector and the government are now in a close long-term partnership to deliver Net Zero 2050. We should expect that over the next 25 years, different governments will apply different weightings to the balance, the emissions trading scheme and the emission reductions plan provides, as they seek to trigger those asset transitions. Regardless of which government is in power, long term, all governments will seek asset transition to secure New Zealand's energy transition. Both of these challenges make the sector an incredibly exciting place to be right now. The next quarter century is about when, how and where we bring the right mix of new renewable generation into play, alongside what our long-term go-to-market strategy will be for that generation. Genesis has some very strong foundation stones to build off, as we look to drive enhanced future total shareholder returns. It has a large customer base at almost 0.5 million customers. It has a premium brand, customer loyalty is high and it has a highly skilled workforce with a great culture. It cares deeply about how it approaches the combination of delivering for people, planet and profit at the same time. As starting points for an updated long-term strategy, we remain committed to the current future gen targets of developing 2,650 gigawatt hours of renewable energy by 2030, and to decarbonizing our generation. As a transition step to achieving this target, we will also remain open to contracting some of this volume via PPAs from third-party generation. Looking forward over the next 10 to 25 years, we see 3 primary areas of value for Genesis, electrify more of our customers' lives, building more renewable generation, and in the area of flexibility, both demand and supply side. These 3 areas will be supported by ongoing work on future fuels at Huntly, technology-driven productivity growth to control operating costs, and business model and process simplification. I expect our updated long-term strategy to focus on fewer, but more impactful deliverables, that will enable Genesis to positively contribute to the energy transition of our customers and New Zealand, while also enhancing the long-term total shareholder returns. We won't be going into detail on this today. However, we will have more to say when we release the updated strategy in late November. One of the things that FY '23 has demonstrated is that flexibility and security is becoming increasingly important in a more intermittent grid, and flexibility and security are sweet spots for Genesis. The chart on the right shows the intraday volatility we have seen, and it is strongly correlated to the level of thermal generation in the market. We estimate that New Zealand will require up to 1,000 megawatts of flexibility over the coming decade, and we see our customers and Huntly playing an ongoing role in delivering this. Huntly is located at the heart of New Zealand's fastest growing regions and economies. It is consented for electricity. It has vacant consents for further peaking capacity. It has a grid connection of 1,200 megawatts, with options to increase this further. It has diverse existing assets, that can operate on diverse current and future fuels. During the year, we successfully completed a biomass trial and have confirmed that 1.5 million tonnes of biomass will produce around 3 terawatt hours through the Rankines. This provides an interesting economic dry year cover opportunity under the New Zealand battery portfolio option, and we will remain engaged with government, as dry year cover options are evaluated under that project. We have completed engineering reviews for large grid scale batteries on the Huntly site, and are reviewing the flexibility interplay between these and our existing generation assets. We have also explored with manufacturers future fuel options for Unit 5, confirming that under its current configuration, it can operate on a natural gas hydrogen blend, and with minor modifications, could operate fully on hydrogen. The future of gas, gas flexibility, gas storage and an economic supply of hydrogen at the required volumes, are key to what options we might have with this unit over the next 10 to 20 years. As we announced earlier this week, we continue to progress our development pipeline towards our current target of 500 megawatts of solar. Our partnership with FRV is in great shape, with FRV providing outstanding international experience in managing these projects, and having strong global supply chain connections. Genesis brings to the market a trusted brand, large and loyal customer base and a solid credit rating to build a PPA off. The 50-megawatt site at Lauriston is nearing final investment decision, and we are looking to finance -- to project finance this development. Finally, as James indicated earlier, as part of our strategy review, we are also looking deeply at how we can simplify our existing operating models. While we will incur some initial costs to invest in new technology, we will be linking any new investment to business simplification and productivity growth. The culture at Genesis is very strong. The team are rightly proud of the role the company plays in flexibility, and securing the grid, and they are equally very ambitious for it to positively contribute to New Zealand's energy transition. This provides an excellent foundation to build a simplified and impactful long-term strategy from. Lastly, I'm very pleased to have been able to attract Claire Walker, Stephen England-Hall and Edward Hyde as new and experienced executives into the Genesis executive team. Claire is a deeply experienced people and culture executive, who understands how structures best serve strategy, and how to build high-performing cultures. Stephen is a go-to-market strategy specialist, and understands value-creating brand strategies, deep customer loyalty, proactive channel management and high-value, low-cost customer service models. Ed has deep experience in introducing technology platforms, data and AI into businesses, to drive deep productivity growth. All will play key roles in our updated go-to-market productivity and technology plans. And now I'll hand back to James to discuss Kupe and the outlook for FY '24.

Thank you, Malcolm. So production at Kupe was lower due to a planned outage in November, reduced gas demand and declining peak capacity. Genesis and our joint venture partners have committed to invest in the development, within the existing permit area, to access undeveloped fuel reserves in the development well known as KS-9. Initial drilling remains on target for second quarter of FY '24, and a suitable rig has been secured for this process and is expected on site in September. First gas is targeted for quarter 3 of FY '24, and the remaining project CapEx is forecast to be $65 million, with $10 million already incurred in FY '23. Turning now to guidance; FY '24 EBITDAF is expected to be around $430 million. As previously announced, Huntly Unit 5 is scheduled to return to service in May 2024. Genesis is actively pursuing options to return the unit to service earlier, and has material damage and business interruption insurance cover in place. The financial impact of this event based on current market conditions, plant and fuel availability and mitigating factors is estimated to be in the range, $20 million to $30 million net of insurance proceeds. This is included in the EBITDAF guidance. Operating expenditure is expected to be around $375 million, including additional technology spend of around $25 million and increased spend on strategic growth initiatives. Capital expenditure in FY '24 is expected to be around $165 million. FY '24 expenditure includes the investment in Kupe KS-9 well of $65 million. Other key capital expenditure projects include completion of the Tuai generator upgrades and commencing the Rangipo turbine and generator overhauls. Stay-in business capital expenditure is expected to return to around $60 million per year from FY '25 to FY '27. So with that, we will now hand over to the call operator for questions on the phone.

[Operator Instructions] All right, and it comes from the line of Grant Swanepoel with Jarden.

[indiscernible]

Grant, it's James here. I'll take that one. No, we're not providing guidance on that. Our focus is obviously to look at productivity improvements. We see significant opportunities through improving our legacy IT estate, and we think there are significant opportunities to leverage data and the emerging AI opportunities to improve productivity, but we're not guiding on a normalized level of OpEx.

[indiscernible]

We're working through the IT spend in the medium term. That is the additional spend that we forecast for FY '24. Will be in FY '24 late-stage discovery on the billing system work, but there are other legacy systems that we will be working through discovery, and we'll use that to inform where our technology spend will be in FY '25. So we cannot -- we're not providing guidance today on where that FY '25 spend will go to. Grant, we've lost you. Did you have further questions?

[Technical Difficulty]

Yes, we can hear you, Grant.

[indiscernible]

Grant, James again here. I'll take that one. Look, obviously, we look at the dividend each reporting period, and the Board makes a call considering a number of factors. We have previously guided to a policy of between 70% to 90% of free cash flow, conditional on considering the future needs of the business. And clearly, there are a range of considerations that go into determining the final dividend that is declared. In this case, we have taken into account the significant one-off benefits that we've seen during FY '23. We've also considered other factors such as current yield and particularly the potential capital requirements of the business going forward. So we don't have anything further to say today, in terms of dividend policy going forward. But we will talk at the Investor Day more broadly about capital management and funding plans.

[indiscernible]

So the answer to the first question, Grant, is yes. Sorry -- 1 January, '25 is the correct start date of that. Yes, it is in our forecast. In terms of maintenance of Unit 5, our focus on that is to be flexible on how our maintenance program will play out over the next 12 months, with a primary focus on how do we shorten the outage of Unit 5. So we have all of our resources dedicated to those 2 things, and all of our suppliers that we can work with internationally, looking for options to shorten Unit 5. In terms of government, I haven't caught up with those comments from Minister Woods. Our relationship with government remains positive. My view of government is that we're in a 25-year journey with government, and they will -- each government will have its own different peculiarities on how it sees the transition playing out. But our updated strategy will look to the long term and we'll have more to say about that in November. In terms of retail, do you want to take...

Yes, I am happy to take retail pricing. And obviously, we look at our competitive positioning in the market constantly. I definitely don't have any comments to make in terms of future retail pricing decisions at this point, which will take as and when it's appropriate. You'll see that our C&I average rate has increased between FY '22 and FY '23, reflecting the forward market -- forward wholesale price conditions, as you'd expect.

And question comes from the line of Andrew Harvey with Forsyth Barr.

[indiscernible]

Right. Okay. So the question was on the Unit 5 outage, and are we having any discussions with Contact? We don't make public comment on our trading policies, obviously. The Unit 5 outage is -- our focus on the Unit 5 outage is, how do we shorten it. And that's where our focus and our resources are at, at the moment and will remain there for the near term.

[indiscernible] I just wanted to understand if that commission regardless, of whether it's running on coal or gas, or is it just the coal [indiscernible]?

No, it's agnostic to fuel.

And last question just on -- you've called out $20 million to $30 million net impact in this of insurance proceeds. [ We now ] sort of do some initial analysis, it does look like those insurance proceeds are going to relatively significant in the several tens of millions of dollars. Is that a reasonable assumption to be running about?

James here. The question was the scale of the insurance proceeds and whether they will be quite significant. Andrew, we do have insurance and cover. We haven't disclosed the scale of the insurance proceeds, and that's a discussion that takes place between ourselves and the insurers, and I don't think it's appropriate for us to share those, but it is fair to assume that there is an excess that we would be exposed to and then there will be an amount above that, that the insurers will bear. Obviously, our focus right now is to mitigate the situation and to look to how we can return the unit to service as quickly as possible. So nothing further to say on insurance proceeds at this point.

Okay. And then just changing tax likely and sort of an interesting commentary, I guess, around some of the flexibilities you're looking at and doing the work on the battery. I thought it was interesting that you didn't talk about gas peaking plant at all as a possible solution going forward. Is that something that's off the table now or is that still there?

Look, so the question is around gas peaking plant at Huntly. As I mentioned in my commentary, Huntly has consented for further gas peakers. Today, we won't be going into any more detail on Huntly, but we'll have more to say around current and future fuels and assets on that site at our Investor Day in November.

And last question for me is just around your carbon hedging and I think on Slide 33, you obviously sort of set out that you're well hedged for the next 6 or 7 years or so. Just wanted to get a sense of how much of that is coming from forestry. Obviously, you're spending quite a bit going forward. And then just be interested in some comments on that in the context of the current ETS review. And just it looks like forestry credits may be [indiscernible] slightly different than going forward and just some comments around that?

Maybe I'll take the first part of that question. You take the second part. So the question that was asked was around the carbon hedging on Slide 33. I think it is -- and what's the split between hedges and forestry, and then a follow-up on the ETS. So in terms of our hedging, look, it's a mixture, Andrew, between forward hedges and forestry. We haven't broken out the ratio and frankly, I wouldn't know that off the top of my head, that there is a mixture -- a material amount of both. But in the longer term, the hedges are related to forestry primarily ETS.

So on the ETS, the 2 primary tools that sit in the Net Zero 2050 toolkit for government at the moment are the ETS and the emission reduction plan. We expect different governments to put different weightings on each of those over the next 25 years. Our call would be that the more stability and long-term view we can have on how governments intend to use those 2 tools, the better it will be for everybody in New Zealand, frankly. The key here is triggering asset transition, not triggering investment uncertainty.

Next question comes from the line of Stephen Hudson with Macquarie Securities.

Just a few from me. Just on your stay-in business CapEx of $60 million for 2025 to 2027, does that exclude the forestry associated CapEx that you're now splitting out? And if so, is the sort of a $20 million number, a reasonable number to use medium term? Secondly, just back to Unit 5 and the gross costs, excluding insurance, have you had any indication from the insurance company that it will respond to a claim, and how will you account for that receivable in 2024? Thirdly, is your DRP discount still operating for the final dividend? And then fourthly, can you give us a [ feel ] for your cost of debt for next year, given the step up this year?

Okay. Stephen, thank you. It's James here. I think most of those are directed to me, so let me try and take them one by one, and I'll repeat the questions as I go through, so that everyone can hear the answer. So the first question was related to the stay-in business CapEx indication provided in the guidance for the 2025 to 2027. And the answer to that was yes, that $60 million is the stay-in business CapEx. It excludes the forestry and the forestry assumption is the best assumption for analysts to use at the moment, for future investment in forestry. The next question was related to the growth costs. Sorry, Stephen, you said it, and I haven't written down the full question. I've just written down growth cost. Maybe you could repeat that question, please.

That's okay. Yes. Sorry, there was a lot there. Thanks, James. It was just the insurance receivable, have you had any indication from the insurance companies that they will respond? And then separately, how will you account for that receivable?

Okay. Sure. I can do that. I thought there was a question in between on the growth cost, sorry, I wrote down, maybe I got that wrong.

Sorry, I said growth as excluding interest.

Sorry I missed that. Sorry, got it Stephen. Okay. So in terms of the insurance, I mean, look, we're in discussions with the insurers. Obviously, this is a significant item for them. We haven't -- we're not going to give a running commentary on where we are in terms of the insurance, but I can assure you it's a constructive and helpful conversation that we're moving forward. So in terms of the numbers, I'm not going to say anything other than what's within the guidance. But clearly, that's an important conversation that we're working closely with our insurers, and obviously aiming to mitigate the length of time of that outage. In terms of the accounting, well, Stephen, the simple answer is we'll follow the accounting rules and what that means is that you recognize the asset if it's virtually certain. So I can't say much beyond, we will follow the accounting rules for accounting for the receivable. So more -- as we have more when we get to more clarity on where that's landing. In terms of the DRP, we are continuing to offer the 2.5% discount on the DRP. Cost of debt was your final question. The cost of debt, yes, you can see that there's an increase there in FY '23. And I think bear in mind that the green bond priced at the beginning of July and the coupon on that was 6.5%. That was up from, I believe, 4.66%, that's a matter of record, but I think it was 4.6%. So clearly, there's some further pressure on our numbers. But obviously, you can see how we're hedging -- we've given an indication of how we're hedging interest costs there on the slide.

That's great. I'll just sneak another quick one in. Will the credit rating agencies exclude the cost of Unit 5 outage when they're calculating your leverage ratio?

Honestly, we'll need to work with the rating agencies on that mate. I don't want to speak for S&P. My experience with S&P is that they tend to be pretty pragmatic at looking at what to normalize, but I simply can't speak for them here. So we'll see where we get to with that. Yes, I can't really comment further on that.

One moment for our next question. And it comes from the line of Nevill Gluyas with Jarden.

A number from me. And I guess a lot of the questions I want to ask, sounds like we may have to wait till November to hear answers to. But to ask another way, maybe a bit closer to where things are at now, can you give us some idea of where you think your retail portfolio is going to get to? Obviously, some growth in customer numbers, what do you -- what's your intention for mix and for total size of the retail portfolio at the moment?

I'll take that one. That is one that we'll speak to in November.

Okay. Fair enough. Sort of a detailed question then. Can you give us some indication at the moment of the kind of level of demand response of VPPs, et cetera, that you've got within the portfolio today?

Look, you can see that we've published some information in relation to EVs. It is early stage, and we're investigating this further. But we -- this is an area for us that we think has -- can be a significant opportunity. We're looking at it as an option. We'll talk more about it in November.

Great. Okay. And the last one along that retail track, the residential netback now for last year pretty much lines up with that for SMEs and a little bit above C&I. No reason for us to expect that netback to track to sort of a higher level, versus those other 2 categories of -- they are sort of -- there or thereabouts from your perspective?

I'll answer that one. The question related to netbacks. I mean, look, we look at -- there are different dynamics driving the pricing in residential and in C&I. C&I is obviously largely driven by a forward market view. The way in this industry, C&I contracts price is based on largely the 3-year forward market. Retail is more complex, and there are a number of different factors to consider, such as obviously, where we sit competitively is a key driver, as we look at that and obviously, where the costs that we incur specific to residential are, and there's the factors that we consider as we look at residential pricing. So look, I don't equate the 2 directly. Those are the considerations that, obviously, we have to look at, as we consider how we price those different go-to-market options.

Okay. And moving lastly into the thermal space. I mean, just can you give us some idea of what the Rankine share of FY '23 CapEx was? And what the Huntly's share of FY '23 OpEx was?

Look, in terms of CapEx, you can see on the slide, on the stay-in business, you can see we've -- I think we've broken out thermal, haven't we, Nevill? So I think that kind of gives you the answer, doesn't it.

I was wondering if you had a Rankine split on that one, [indiscernible].

All right. Got it. Sorry. Yes, look, it is primarily Rankines, okay, there was significant work done on Unit 4 actually in FY '23. It wouldn't be all of it, but it would be probably around 2/3 to 3/4 of the total stay-in business CapEx on the thermal side, Yes, that will be about right. And the OpEx split, I don't have -- no, sorry, we don't provide that.

Okay. In terms of -- just one question, it's a very specific question about the Unit 5 fault, and it seems unusual that you guys got unlucky to get hit by the [indiscernible] on this one. Is there any suggestion that it might be connected to the way you're operating Unit 5? Operating possibly more flexibly than the rest of the fleets around the world? Is that a line of questioning [ anyone's following ]?

So I'll take that one. The question is the way that we're operating Unit 5 related to the outage or the fault that occurred? We will undertake our own root cause analysis. We'll get independent investigation on that. The component supplier will undertake their own root cause analysis as well. There is no evidence or indication at this point in time, that would link the fault to that. But until we've completed that detailed root cause analysis, can't give you a conclusive answer on that.

Great. And just one last one from me, if I could recall what it was. Sorry, it has slipped my mind. I'm sure it was a good one, but I don't recall. Sorry, it has come to me. Again, this is a question I [indiscernible] November, but it would be useful to know beforehand. Are you also potentially considering gas storage expansion options amongst your strategy suite?

So the question is, are we considering gas storage amongst our suite. What we're looking at is how we bring flexibility into fuels and assets, current and future and we'll have more to say about that in November.

I'm just going to correct -- just provide a bit more information on the answer I gave previously, which was related to forestry. So our forestry -- I misspoke, our forestry investment runs through FY '25 at around $20 million and so we expect it to curtail after that. Sorry, any more further questions?

Thank you, sir. No, I don't see any further questions in the queue. And thank you all who participated. I will pass it back to Malcolm Johns for final comments.

Thank you all for listening. It's certainly an exciting time to be part of the energy sector, and I'm looking forward to talking to everybody further in November. We're looking to our competitive advantages, such as Huntly and our strong customer base to deliver electrification, flexibility and renewables development through to our Net Zero future. We will do this with a more efficient and productive business, while rewarding our shareholders with long-term growth. I look forward to seeing some of you on the roadshow, as well as when we launch our new strategy later this year. [Foreign Language] everybody.