Genesis Energy Limited (GNE) Earnings Call Transcript & Summary

All right. Thanks very much. We're going to start. Kicking it off now. So I'm Tim McSweeney, Investor Relations Manager. My job today is to introduce the guy that introduce the CEO. So it's pretty low-key. So I will pass you on to Te Awha Leevey, who's a maintenance planner here. And so if we just welcome Te Awha. Thanks.

[Foreign Language] Morning everyone and greetings. It's my honor and privilege to welcome you today to my second-home Huntly Power Station. As we sit beneath the shelter of the [indiscernible] healing waters of Aotearoa. My job here this morning is to open up our meeting with a Karakia. I just want to give a quick explanation why that's important to me. In my Karakia, I'm going to ask for guidance from all of our ancestors to align our minds, bodies, give us new experience and knowledge so we can achieve what we want this morning. Before I do, just a quick safety brief. Bathrooms are in the back [indiscernible] for those that need to know. We also have a deeper machine just at back [indiscernible]. Again, if we have any medical issues or emergencies, please let one of our Genesis staff know and they will take care of you. So on that note, I'd like to open up Hui today. [Foreign Language]. Thank you very much. I'll pass you on to Malcolm.

[Foreign Language] Good morning, everyone. I'm Malcolm Johns, Chief Executive of Genesis Energy. On behalf of the Board and our executive team and all the Genesis employees from around New Zealand, welcome to our 2023 Investor Day here at Rahui-Pokeka, Huntly. As we get underway, I'd ask you to note the disclaimer which is available on the NZX and our website with today's presentation. Allow me to run through the agenda for us today quickly. Firstly, I'll provide a high-level overview of Gen35, our 10-year strategy reset to drive strategic value into shareholder value. We'll then welcome Rob Koh from Morgan Stanley in Melbourne, who will give us an overview of what's been happening in the Australian energy equity market around ESG investing for the transition. Rob is an experienced sell-side analyst specializing in utilities infrastructure, energy and ESG. No doubt, we've all been following the battle for Origin's transition value in Australia. And that is exactly the reason Rob will have to join us today via video link. For those present, following Rob's presentation, we will run 3 breakout sessions, each focusing on a pillar of Gen35, electrification, wholesale flexibility and renewables growth. Following lunch, we'll take a tour of Huntly Power Station. We will then regroup back here and rejoin those online for a presentation on our reset strategy for technology and transformation and saving the best until last, our CFO, James Spence, will walk us through our improved financial outlook and investor value proposition. If we can stay on schedule, we'll have time for a panel Q&A at the end before we enjoy refreshments and head back to Auckland. If there are any additional discussion points that you feel haven't been covered at today's Hui, or you would like a follow-up meeting with us, please reach out to our GM Investor Relations, Tim McSweeney or another appropriate Genesis contact. To begin, let me introduce our executive team, Tracey Hickman, Chief Wholesale Officer. Tracey has been with Genesis for many years, and has extensive experience in the sector and executive leadership across the company. James Spence, Chief Financial Officer; most of you will also know James, who has been with us since March 2022. James brings global experience to Genesis, having previously been CFO at 3 integrated energy companies in America and Australia. He also has experience in the software sector. Matthew Osborne, Chief Corporate Affairs Officer. Matt has been with us for over 5 years, responsible for our legal and corporate affairs areas. He has worked offshore for utility companies in the Middle East and Ireland. Claire Walker, Chief People Officer. Claire has more than 20 years' experience in listed companies, leading human resources management with a strong background in sustainability. Claire is deeply experienced in high-performing cultures, org structure simplification, diversity and inclusion, and championing [indiscernible]. Stephen England-Hall, Chief Retail Officer; Stephen is responsible for our mass market customer business unit and our stable of energy brands. He has previously held Chief Executive roles in New Zealand and the U.K. Ed Hyde, Chief Transformation and Technology Officer. Ed comes to us from Chorus and Spark. He has deep experience, including technology platforms, data and AI into businesses to drive productivity growth. He also oversees our large and strategic customer sales function. The team is excited to be sharing our strategy reset with you all today, and engaging on how we will drive our strategic value into future shareholder value. The team is too fewer under Gen35 with all being deeply experienced and mature executives. There are a nice blend of old and new with those from the sector and those new to the sector, but all have been chosen for their unique skill sets needed to activate the different pillars of Gen35. They have formed a great chemistry as a team. They're looking forward to talking to you all today. We also have a number of our senior leaders here today, including Craig Brown, who leads our renewables development team. He will host one of the breakout sessions on our renewables development plan. The context for Gen35 comes from the Zero Carbon 2050 Act, New Zealand's commitment to decarbonize our economy over time, and how we drive Genesis' strategic value into new shareholder value by delivering a plan to both grow our business and reduce our ESG investment discount. The country must grow the proportion of energy drawn from renewable sources from 20% today to over 60% to reach net-zero 2050. This will drive future demand growth and opportunity. In fact, we are blessed with many more times the new renewable opportunities that New Zealand needs to reach net-zero 2050. There is a world full of export businesses and foreign exchange earning activity out there in the globe chasing reliable, scalable, renewable electricity supply. And at 90% to 95% renewability, New Zealand has a 10- to 20-year head start on many of our international competitors. As a country and a sector we should have an ambition beyond just net-zero 2050. An ambition to make renewable energy a key future economic development platform for New Zealand, especially regional New Zealand. Gen35 focuses on leveraging our 3 current strategic strengths of strong customer revenues, grid-scale firming capacity and our solid credit rating into a growth plan to deliver shareholder value through new renewables and developing the Huntly portfolio. In the process, we will transition Genesis to 95% renewable generation by 2035 and eliminate the ESG investment discount currently being applied. Genesis offers investors value from a double transition, the company's transition and the country's transition. The size of the electrification challenge in New Zealand is more known than the timing of it. This timing will not be driven by how fast we can build new renewables on the supply side, but by how fast we can electrify homes and businesses on the demand side. Over the next 25 years, more Kiwi homes and businesses will use electricity for heat and transport. The great Kiwi electrification challenge is our sector's challenge. Get it right, and we will have affordable, secure renewable electricity and meet our 2050 targets. Get it right and be ambitious and we can go beyond 2050 to create a new economic development platform for the prosperity of future generations. New renewables creates a sector and an economy more dependent on rain, wind and sun. Electrification is about electricity where it is needed, when it is needed and in the volume it is needed every day of every week of every month of every year without fail. So the challenges we must meet -- or the challenges we must take on as a country, a sector and a company over the next 25 years are all part of the same, faster electrification of homes and businesses through accelerating demand growth and relentlessly ensuring a secure grid. There are 3 value pools for our industry over the next 25 years, electrification to stimulate the transition, renewables to enable the transition and flexibility to secure the transition. Genesis has strategic strengths and opportunity in all 3. We intend to leverage our strong customer revenues, strong flexibility and strong credit rating to invest around $1.1 billion in the Huntly portfolio, a new renewable generation by 2030. I'd like to share 2 things we learned putting Gen35 together. Firstly, focusing on electrifying gas heating and hot water in homes is 2x more impactful on CO2 reduction than rolling out distributed solar and batteries. Applying this to small and medium businesses sees electrification become 10x more impactful than distributed solar. Secondly, the market appears to allocate future value in the New Zealand transition to the supply side, your generation pipeline. In a small market like New Zealand, the evidence we viewed appears to indicate that when it comes to future value creation, it is easier to build new generation to meet your demand position than it is to build new demand to meet your generation position. In the New Zealand context, your demand position is critical to your ability to turn your pipeline from bragawatts into megawatts. With 0.5 million customers, Genesis has a significantly strong demand-side position with large, diversified, long-term customer revenues. This derisks our future upstream investment in new renewables because our investment program is building new generation for our existing demand side position. Our strong customer position is further supported by our strong flexibility position and our BBB+ credit rating. These strategic strengths allow Genesis to pursue pure PPAs or a JV with a PPA or on balance sheet development, all as options for new renewable delivery models. In this breakout session, Craig Brown will outline this in more detail and explain further why this is going to matter to future shareholder value creation. Craig will be joined by Carlo Frigerio, CEO of our JV partner, FRV Australia. Historically, firming required by the grid has skewed towards dry years for hydro. New renewables will come from solar and wind. And there firming will skew towards minutes, hours and weeks. This will make prices more dynamic with both micro and macro scarcity periods across hours, weeks and years. The sector estimates it will need around 3,100 megawatts of additional supply and demand side firming this decade alone, with another 2,500 megawatts required in the 2030s. Firming will become a greater portion of the final price customers pay and in a high renewables grid over coming decades. Genesis can supply at least 1,200 megawatts of that right now and subject to appropriate commercial support from the market, we will invest to increase this over coming years to 1,400 megawatts, offering new asset-backed firming products for solar, wind and hydro operators across hours, weeks and years. The recent calls for future gas peaking can be met by Unit 5, the country's largest gas generation unit. While configured for baseline duties today, we are investing in options to make it faster start and with a battery that provides valuable near-term fast-firming options. When its baseload duties are complete, Unit 5 can be reconfigured into the country's largest fast-start gas peaker able to cycle between 13 and 250 megawatts and operate in conjunction with the battery. We also have Unit 6 and consents to add more fast-start gas peakers if market demand and fuel supported such investment. Batteries again provide attractive arbitrage options to further lift the peaking capacity impact of Unit 6. As we have already indicated, Huntly is the ideal site for grid-scale modular batteries. The site today can accommodate up to 400 megawatts offering 800-megawatt hours with minimal site works or need for new grid connections. As coal reserves reduce, further space will open up, should it be required. Genesis is committed to investing in new fuels and assets to firm a highly renewable solar, wind and hydro grid over the next 25 years. Tracey will speak more to this in her session. While we're talking about flexibility, we note the new government's intention to stop work on Lake Onslow. That solution to the dry year risk was estimated to have cost taxpayers at least $15 billion and taken until at least 2040 to complete. Dry year risk is a system challenge given the critical role hydro plays in our grid, but it is difficult to see Lake Onslow and its estimated cost as the optimal solution in the New Zealand context. Huntly is a portfolio of assets, fuels and unique human skill sets that already exists. It's consented for existing and new assets that can already play the key role identified as the portfolio option by the New Zealand battery project. It's time to move beyond thinking of Huntly as a site simply running Rankine using coal. The last 5 years of production from Huntly has overwhelmingly come from New Zealand-supplied natural Gas, supporting a grid that has remained largely at a world-class 90% renewable. Pragmatically, it is more impactful on net-zero 2050 to focus our decarbonization efforts on electrification of the economy than the last 5% to 10% of the electricity system. There is no market segment for cold showers by candlelight. And equally, there isn't a political constituency that will accept that either. The Lake Onslow discussion is interesting, primarily for the reminder, it offers us all. the sector, regulators and investors alike. For each of us, our behavior in the transition will either drive up or drive down system risk. However, no matter where we are in the system individually, if system crystallizes, it will do so equally for all of us collectively. We are part of a market-based electricity system, and when the market fails to solve its own challenges, politicians will be encouraged to step in and solve it themselves using the biggest balance sheet in town. Dry year risk is a system risk driven by long-length weather cycles. It is a difficult system risk to manage because it requires assets, fuels and human skills to stand by reliably for years. then step in with 24/7 intensity and unfaltering security for months at a time. In the 5 years to FY '23, the majority of coal used at Huntly was used to cover system risk, hydro storage, major gas field outage and peak demand. The country enjoys a 90% renewable grid, but there are consequential system risks from increasing intermittent generation, ongoing dry years and major natural disasters or unplanned plant or gas field outages. The market security options or MSOs, offered to the market earlier this year reflects that Genesis will no longer fund coal reserves on behalf of other operators or the system. It is for the system to fund coal to cover system risks. If it so desires, the clear signal from market participants was MSOs to cover dry year risk were desirable. However, MSOs backed by a reserve of coal was undesirable, and a number of operators declined to take them up on that basis. As a result of this, the very clear market signals, Genesis has moved to release its facilities, leases and supplier contracts that will support future coal reserve purchases. The current coal reserve will back the system for the next couple of years. And Genesis will trade that reserve strongly into the market over this period. Under Gen35, our focus will be to drive biomass as a solution to displace coal and to offer future MSOs backed by biomass. Biomass has potential to use waste products from forestry and dairy, while also driving new regional jobs and being part of a fuel mix to cover dry year risk. We expect good market support for this and have established a dedicated internal team to drive this project over the line within the next 12 months. As I've already mentioned, the market has applied an ESG discount to Genesis, and this lowers value for our shareholders. Market feedback indicates this is due to the investment in the Kupe joint venture and the potential misunderstanding of what has driven recent coal generation at Huntly. As I undertook my first meetings with investors in New Zealand and Australia, I was struck by the very different philosophies toward ESG investment policy on each side of the Tasman who should carry the ESG discount. Those investing in new solar and wind that drive the demand for thermal firming services or the providers of those thermal firming services that are essential to securing that very investment in new solar and wind. Pragmatically, we are a 90% renewable grid. We are on our way to being 95%. The increased system risk of more solar and wind alongside hydro and the disaster risk rests with the market's ability to commercially solve firming across hours, weeks and years. The real impact investment on net-zero 2050 is investment in economy-wide decarbonization rather than fixating on the last 5% to 10% of the electricity system. Exclusion-based ESG investment policies carry some risk of hindering rather than helping a secure energy transition in the New Zealand context. It is important that as we pursue growth, Genesis sweeps its own front yard at the same time. Gen35 will do this by delivering Genesis to net-zero by 2040 under the science-based targets initiative. These graphs demonstrate the modeling we have done to show how we can get there. Our Scope 1 generation intensity will decrease as we eliminate coal from our own needs, reduce fossil gas over time and reached 95% renewable generation by 2035. Our Scope 3 emissions from our gas and LPG sales will decrease as we electrify our customers and Stephen will speak more to this in his session. Reserves from Kupe will expire around 2035. Simplicity, focusing on fewer but more impactful things was the theme for developing Gen35. Relentless focus on this is why it has taken us some months to deliver our strategy reset. But we can now bring all of this together on a single page. This page speaks to how we will drive Genesis' strategic value into financial value for our shareholders. Our staff have co-created this strategy from top to bottom. We included them to ensure every one of our staff had fingerprints on this page that they could see how what they do contributes to our company transition. And the role Genesis will play in the transition of our customers and our country. Recent internal surveys show 85% of our team believe we have a positive culture. They are ambitious for Genesis. And during our recent staff roadshows, we had record staff turnout as they were eager to see the results of their co-creation of Gen35. Our people believe in delivering a balanced scorecard for people, for profit and planet, focused on playing our role to deliver a sustainable and thriving Aotearoa New Zealand. I'm proud that as we sit about activating a major strategy reset for Genesis, we have an engaged, aligned and energized team. I'm grateful to our Board for allowing us the time to build that internal coalition during this process. We will execute Gen35 over 3 time horizons. Our first horizon is short. It relates to FY '24, where we'll focus on front-loading our strategy and structural resets. We have signaled this may involve a reduction of around 200 roles. And our focus right now is on supporting our staff through this change process. Ed will speak to how we're resetting our approach to technology to again focus on fewer but more impactful projects with derisked delivery plans. Structure always follows strategy. And by taking the time to understand our current state, then working through what we need to activate our reset strategy, we will remove around $40 million to $50 million per annum of OpEx and some CapEx over the next few financial years. Horizon 2, between FY '25 and FY '28, we'll see benefits from our new retail model, grid-scale batteries at Huntly and new solar generation developments. Our ambition is for this to lift our EBITDA first into the $500 million and then further as we deploy our investment program into the $600 million. James will cover this in more detail later today. Horizon 3 between FY '29 and FY '35 will see us begin to put in place the future state of Genesis, Genesis 2.0. Between now and 2030, Kupe will generate around $290 million of free cash flows for Genesis. We know Kupe is the reason for the ESG discount being applied to Genesis and that there has been commentary about future dividend resets as Kupe declines. Under Gen35, Kupe will be tasked with displacing itself. By using the $290 million of free cash flows in our $1.1 billion investment program, we will drive greater shareholder value growth than under a do-nothing scenario. What we are saying today is by dedicating Kupe's free cash flows towards Genesis reaching 95% renewable generation by 2035. We will not only deliver new cash flows to fund future dividends, we will also remove the basis for the current ESG discount. Kupe's cash flows represent around $0.036 share in our current dividends, meaning from FY '24 dividends will remain above peer averages, but be set at $0.14 per share. As a final note, Kupe is also located right in the heart of one of the best offshore wind opportunities in New Zealand. It is existing infrastructure that has potential options to be repurposed once its life as a gas facility is over. James will cover our current valuation of Kupe. However, we are now interested in its options for life beyond gas. Gen35 is an exciting strategy reset changing what we are as an investment. We are a transition within that transition, offering multiplied transition value growth to investors. We're moving from a model with a low growth outlook, high dividend and ESG discount to a balanced growth, solid yield and diminishing ESG discount stock. We're transitioning Huntly from being Rankine's burning coal to a portfolio of grid-scale firming and peaking services across hours, weeks, years and disruptions. We're growing from 60% renewable generation with a pure PPA-focused displacement strategy to being 95% renewable driven by a portfolio of new generation options. We're changing our in-house technology-centered retail strategy to a low-cost light touch retail strategy that prioritizes customer electrification through deep partnerships. The executive and senior leadership team here today is pumped to be able to unpack this for you as your day unfolds. Thank you all very much for your time and your interest. I'd now like to introduce Rob Koh from Morgan Stanley. Rob will give us an overview of what's happening in the Australian markets. After Rob, Tim will provide details on the 3 breakout sessions on our proposed new retail strategy, how we'll draw value from flexibility and the future of Huntly and our renewables growth. But first, it's time to hear from Rob who's coming to us from Melbourne. So welcome, Rob.

All right. I'll make a start. [Foreign Language]. Hello, everybody. My name is Rob, my ancestors came from Southern China and I'm now living in Melbourne, the lands of Wurundjeri, Woiwurrung, and I pay my respects to their elders past and present and to any First Nations people joining today. Let me also thank Mr. Johns, Mr. Spence and Mr. Sweeney for inviting me today. I'm actually really, really sorry I couldn't be there in person, but I just kind of ran out of time due to a combination of high workload and my own intermittent capacity. So I've got 10 slides for you and I don't know if we're doing questions here. But I'm certainly available to any of the buy-side investors present today to catch up whenever you want. And if you're in the media, I do ask that you reach out separately if you need a quote or background because I'll have additional approval processes for those requests. I should also say upfront that I don't cover Genesis Energy nor any of the New Zealand utilities. I've often really, really wanted to. And then when I get on an Auckland Airport investor call, I'm a bit intimidated by the quality of the sell-side questions from the New Zealand brokers. So I was -- get a bit scared off. But anyway, the long and the short of it is, please don't take anything I'm saying today as an investment recommendation on any of those stocks. So let me share these slides and reduce the size of my head. Okay. Hopefully, you can all see that. And the slide deck already. So I've actually got a bunch of promotional slides here. This is the slide deck for the institutional investor survey, which my firm really loves, so you can see your way to voting for us in that, that would be great. But let's go to this slide here, which is my first content slide. And this is a simple comp sheet of consensus EV-to-EBITDA multiples for the years 2011 to 2025. Green means a high multiple, red means a low multiple. We've also manually taken out some outliers so that the color scheme is a little bit more normalized. So if you start at the bottom of the table from 2018 onwards, you see a group of U.S. utilities that have seen a re-rating. And these are -- all these compute are integrated utilities. And the U.S. utilities are re-rating because many of them were starting on renewable development journeys. So they're starting to see earnings growth being factored in. And also the economics of the U.S. renewables built out in a lot of places, it's really pretty good, new wind and solar being more economic than marginal coal. And then with the rate base utility business model, many of them able to actually increase their returns while keeping the tariff steady, which is a utility Utopia. Lately, we've seen some of the froth come out of that U.S. story. With the rents rising, supply chain constraints and also the Siemens 5.X megawatt model recall around the world. If we move to the middle of the table, we have some similar stories, albeit at lower multiples because now we are in Western Europe and the energy transition in Europe has been much more of a push than a pull. And you also have a bit of survivorship bias in these multiples because you're no longer seeing names like Energy and EDF, these names taken off the grid, so to speak. So then you have the events of 2022 extreme volatility in fuel costs, which hit Europe probably more than most markets, although pretty much every market impacted and you also have some very, very extreme customer repricing outcomes there, which hurts utility sentiment. Moving up a few more rows. You have these mysteriously higher multiples that are the envy of the world. and I'll skip over those. But then we have the 2 utilities that the closest to in my coverage, which is AG and Origin. And Origin, as you no doubt know, is under a takeover with a scheme vote on the fourth of December. Trading at about 5x EV to EBITDA, which is below its long-term average. And then we have AGL, which is also derated over time, which you can attribute to a lot of different things. But in simple terms, AGL has a long-generation position approaching the end of its life. And the company spent the last few years trying to demerge before changing course and starting on the journey of becoming a renewables developer. So give it time. All right. So if we accept -- so that's a global integrated utilities in -- kind of in a thumbnail sketch trying to be as brief as I can. So if we -- except that earnings estimates and revisions drive the stock prices for these kinds of utilities, then in Australia, the biggest single driver of earnings is the electricity price or the pool price. And the single biggest driver of that is the gas price. So this chart is the New South Wales implied heat rate. So it's just monthly average New South Wales spot prices divided by monthly average short-term trading market gas prices in New South Wales. And over the time frame of this chart, which is about 12 or 13 years, it's roughly 11%, which happens to be the rated heat rate for a plant named Uranquinty, which is owned by Origin Energy. And it's had a few noise issues. It's had some water discharge issues over the years. Origins had to fund a local sporting center, but it does set the price in the New South Wales region, about 15% to 25% of the time. And the coal plants that come before it in the merit order often shadowed the Uranquinty, which is to say that they bid just below Uranquinty short-run marginal cost so that they can earn the spark spread. And so using a very simple pool price model, you can try to predict electricity pool prices, which are the single best driver of earnings for the coal plants, which is the single biggest driver of company earnings and then you can put a multiple on those earnings from the previous slide. And that's exactly what a lot of the buyer sale in Australia do and actually not much more and that methodology would probably have generated a pretty reliable alpha on Australian utilities since late 1998, maybe until 2020 and even through periods of consolidation, privatization. We had a carbon prices for a couple of years, and now we're in the closure era where large amounts of thermal capacity leaving the market, pretty amazing. And going to the next slide. And now we're going to turn to corporate activity, which has been a theme for my stocks since 2020. I've lost about $70 billion of market cap to take profits over that period. Now instead of relative valuation, we look at breakup value. This slide is hopefully too small to read, and it's a little bit dated. I've got a link to the original research there from June. But the blue section is AGL, and we took AGL share price at that time and the implied values for the retail customers. We took out some big wholesale items like the coal plants and the legacy gas contract and the Tilt Renewables investment. And one other minor point, actually, the multiples that I showed you a couple of slides ago, based on just statutory values for AGL and for Origin. There are a few non-statutory items that we use to adjust for the enterprise value, things like rehabilitation and some leasing or offtake agreements in there. And that's why the multiple here is a little bit different. But anyway, the point is we took AGL's share price and converted into a per megawatt and a per customer type number and calibrated those to trade sales. And then we took those numbers and we applied them to Origin and we come up with something like $11 per share for Origin at that time. So integrated utility with upstream gas reserves and the extra complexity across the value chain that makes evaluation a lot less transparent and a lot more complicated, I'm saying that pointedly. All right. Now let's go beyond the parts that we have and look at some other research that I did in 2022 when AGL was under takeover by Brookfield consortium and Grok Ventures. And that bit had a number of conditions, 2 of which were firstly pledged to close the coal plants as much as a decade earlier than planned. And then secondly, pledged to invest a large amount in renewables, something like 10 gigawatts at that time. And I think they've bid about AUD 7.50 a share and then they increase that to AUD 8.25. Board of AGL rejected that bid and instead try to do a demerger and then there was a management transition and then there were some planned outages. So it's been a very complicated story for Brook -- for AGL. I took a stab at how the bidding group could try to generate value from the bid structure and the bid conditions, and I came up with this highly simplified version here. So first point, the coal closure meant an opportunity cost in dollar terms that using, I think, a very conservative [indiscernible] full price then that is an opportunity cost of about $3 a share. That's $3 a share actually also works out to be about AUD 7, a tonne of CO2 abatement. It's not a monetizable abatement, not to pay you for it necessarily, but that abatement task is also consistent with AGL's TCFD statement for what a 1.5-degree scenario could look like for AGL. So that's a cost. And now when you close the plant, there is also in Australia, at least an increase in the pool prices for all the surviving plant. And so if you took AGL's new plants and its surviving plants, particularly the southern hydro plant, then in the aftermath of the early closures, all else equal, you might get a benefit. Now I'd put about $1 per share value on that. High prices don't last forever, could new supply will come in. And also there's a risk that policymakers will intervene to moderate any price increases in the interest of consumers. Then we took the value of the bidding group's credit rating and perhaps a slightly lower beta for an AGL as an unlisted entity with its own stand-alone credit rating in beta. And I modeled that in a very, very sophisticated way. I just cover the discount rate in our DCF valuation by one percentage point came up with a value of $2 per share. And then finally, for the 10 gigawatts that the consortium wanted to develop, we modeled 2 scenarios, one where the plants were done on a merchant basis and one with AGL's customer book as the offtaker for a 10-year period of time and standard merchantile-type assumptions. Actually, in the counterfactual, we used a second-tier retailer or a corporate offtake, not a full merchant plant. So that NPV worked out to be 100 basis points reduction in cost of capital. and that got us a $2 share value. So the AGL takeover, at that time, we estimated with cost of capital differentials with the $7 per tonne CO2 abatement cost was how one could justify a 30% premium to the share price of AGL at that time versus a traditional group of buyer side goes using heat rates from 2005. And that's where the arbitrage came in. Now you can use similar principles to look at Origin and coincidentally, the dollar per share type numbers kind of work out to be kind of similar despite the different share counts. But in any event, AGL went down a different cost of capital differentiation route with the demerger vote but didn't actually managed to do that so far as to tell the market that if they didn't do the demerger, they wouldn't be able to refinance their debt. And thankfully, they were with the climate transition action plan able to refinance their debt and even upsize their debt later on. Okay. Hopefully, I haven't lost you yet. But now I'm starting to worry if I might lose you. This slide is an even more exotic valuation technique that we've tried. This is my stab at trying to value flexible capacity. So you've all hopefully heard of something called the frog curve. This is what we call the blue whale curve. And if you use your imagination, you can hopefully see the blue whale in the chart. So this is along the X-axis is calendar 2022. And the Y-axis is megawatt demand in South Australia, the state with the highest renewable penetration in Australia. So basically, I took a traditional load duration curve. So each demand point in the year ranked from highest to lowest. And I first took off the variable renewable energy. So the wind and solar production to get the yellow line. And that's a dispatchable demand duration curve. Some people call that a residual demand curve. And that's the demand for peakers, battery and hydro, if you can indeed build hydro in Australia. And I left the demand levels for each of those residual demand levels in blue and came up with this distinctive whale pattern. So the area under the curve is the demand for flexible capacity. And the area between the curves is potentially the fuel for the batteries. So the wider well opens its mouth, the more valuable the batteries are because the fuel they we'll have. And this is, I guess, a poor man's way of trying to -- I'm the poor man in this equation, trying to estimate the value of volatility and then NPVing it back into a cap price to value peaking capacity or flexible capacity. And this is a subject of controversy amongst practitioners. And most stock markets tend to undervalue flexible capacity because you can't see the earnings easily, and you can't estimate the value easily. But in a humble opinion, directionally, at least the blue whale is getting bigger. All right. Let's turn to ESG, which is one of my other practices. And this is a standard introductory slide on ESG, which I put up because as Mr. Johns mentioned, ESG means a lot of different things to different investors. If you have us focus on the top part of the slide, we have a spectrum of investing approaches, starting with negative screening or exclusions to positive screening or investing in pure plays or best-in-class stocks. To the more thematic investing, which often means investing in the supply chain in Australia, new energy minerals and things like that. Actually, globally, you see a lot of people investing in enabling technologies as well. And then a very small number of cases on the right, you have impact investment or nonfinancial investment where the investors are looking for, in addition to financial returns or perhaps, they're financially neutral. They're looking for some kind of extra benefit. That's in Australia in the hundreds of millions of assets under management, nowhere near the mainstream. Underlying all of that is the black square, which is ESG integration, and that's just mainstream funds that have integrated ESG metrics into the standard process. And that is the vast majority of funds in Australia and New Zealand according to survey data from the Responsible Investment Association. Al right. Okay. So that's just a little bit of definition of ESG, which I found sometimes a bit useful and to set the scene a little bit. Now within the Morgan Stanley Global Sustainability team, we have 7 key themes that we've been looking at this year. I won't go through all of these. Just focus on the top 2, energy transition is, of course, the perennial theme, given the amount of capital being mobilized and the amount of activity everywhere in the world. But what we did this year was overlay the multipolar world to see how the dynamics would change. What we mean by multipolar world are things like the reshoring to the U.S. stimulated by the inflation Reduction Act and the global trade tensions caused by lots of different things going on. And so that's led to a lot of different changes in supply chains and a lot of changes and pivots in the energy transition. Now the second point here overlaps a little bit. We've also been looking at a stock basket of, I guess, what we call rate of change thesis stocks or improves and as opposed to just investing in best in class. So our thesis is that best-in-class is already in the price because everybody's worked out who's best-in-class a long time ago. And the rise in ESG labeled funds under management happened a long time ago, and they're still growing faster than mainstream funds. But it's pretty obvious who are best in class. And our quant team actually looked at price-to-book valuations versus carbon intensity, so that's just revenue carbon intensity. And actually found that price signal and so a discount for higher carbon intensity that actually started to be meaningful back in 2006 and is still meaningful to this day, and it's a fully back-tested quant model. So we know that most of the world's emissions come from incumbent companies and so if we can find the magic companies that are profitably transitioning faster than their peers, then hopefully, we could generate alpha from that. Now that's a pretty tough ask, but it is possible, and that's the rate of change investing thesis that we've -- as a team at Morgan Stanley been looking at. All right. So how can you judge the rate of change? So this is one way that we started doing it in Australia. And so we looked at the word counts or the word frequency counts in company transcripts and just using Bloomberg transcript analyzer. And we look at the amount of bandwidth that companies devote to ESG topics. Now this is susceptible to misinterpretation and dog whistle effects. It could be a company saying, ESG is a bunch of rubbish, we don't care about ESG. ESG people are foolish and that will still be counted towards the frequency count here. But on average, companies don't do that. And for industry groupings, we can pick leaders and laggards and we can also calculate rates of change. In the mining industry in Australia, for example, the bandwidth 2 ESG matters has increased year-on-year. whereas in the general market is actually decreased. And that's despite the resource industry having a higher environmental footprint versus most other industries. Now another thing that we do is look at the money and go straight to the answers. And we've looked at ESG assets under management. That's the chart on the left, and we also look at sustainable debt issuance. That's the chart on the right. So definitions for ESG funds are actually a little bit fraught. And the RIAA has a definition for an ESG leaders. And there's also some formal labels for global funds that are following the EU tax on the SFDR so-called Article 8 or even a more aggressive Article 9 type funds. Sustainable debt is also evolving very rapidly. And there's some AP LMA documentation, which has become reasonably standard for that, and there's also a carbon bonds initiative globally. And so issuance for sustainable debt so far this year is actually -- this is just Australia, actually, I apologize. And it's about level with last year. And notably, within their AGL, did a refinancing, which included a green purpose CapEx tranche. So lenders to AGL, we're happy to take the corporate risk of AGL. And on the proviso that the CapEx tranche would be drawn only to fund renewable projects and also AGL had published a climate transition action plan, which had closure scenarios. So not just closure scenarios, but also reinvestment scenarios. Another stock in my coverage is Santos Energy and Santos Energy at its recent Investor Day talked a lot about having access to capital as a function of having a credible measurable climate transition action plan. So that's the money at work. So I just want to note that these definitions of what's ESG assets under management and what sustainable debt are a little bit fraught. Because they focused very much on best-in-class, and they are used a lot for exclusions. Exclusion-based investing is still very, very popular around the world. The U.K. Financial Conduct Authority, the FCA, has an improvers label. So that's kind of aligned with the Morgan Stanley rate of change type approach. And actually, the FCA also recently introduced a mixed goal label. That seems to be about as close as we get. I'm on a technical expert working group. I'm not sure how I'm an expert, but anyway, a technical expert working group for the Australian taxonomy, which is being developed by -- as the Australian Sustainable Finance Institute in collaboration with the Australian government. And so far, that looks like it's being based very much on the EU taxonomy. So I'm all for harmonization so that, that reduces the transaction cost for investors. But every time I kind of bring up questions about incumbents with incredible transition plans or fossil fuel players that are striving to become improvers that -- it doesn't seem to get a lot of traction so far. But anyway, all change is constant and everything changes. So anyway, I'm probably coming to the end of my allocated time, I'd like to just to leave you with this last slide, which is some analysis frameworks for the energy transition. All of these frameworks are actually things that I used in my stock coverage when I started out as a stock analyst. It's not actually any new frameworks here. It's just that we've checked carbon in there. So on the relative measures, you can look at what's in the price using whatever valuation metric you like. And as I said, a quant team has found carbon to be a meaningful signal of alpha over a long period of time. We've also looked at gender diversity. We've also looked at AGM strikes in Australia, AGM strikes or which is a governance signal is actually generating a lot of alpha in stocks. You can also just rate stocks. This is in the top right here. Using a simple 2 by 2 matrix. And so the top right there are the companies with high emissions and a fast rate of change or a low degree of difficulty of removing those emissions and those should be, in our view, fast rate of change type stocks, whereas the ones in the bottom left corner, lower emissions and a high degree of difficulty in abating those emissions as well. Those guys, you might be able to just except that they will use offsets for the near future, kind of thing. Then we move to the middle row, we can look at some absolute scenarios, and we can try and model free cash flows along, say, a blue line in there, which is a nationally determined contribution. Or a business as usual case or a Paris-aligned case and the company should hopefully start to disclose what a Paris-aligned case looks like in their TCFD disclosures. In Australia, we're introducing mandatory carbon disclosures over the next 3 or 4 years. And we do this for our infrastructure stocks where we use long-term DCF as a primary valuation tool. We can also look at different climate adaptation scenarios. That's the middle right scenario. And those are -- these are just made-up numbers, but those are 2 banks and the portion of the mortgage books that are literally underwater under different climate change-type scenario. So kind of looks like the blue bank there. And again, these are not real numbers, but the blue bank there looks to have a much higher sensitivity to an extreme climate change-type scenario, whereas the pink one there seems to have picked different areas to lend to. Now getting that information is pretty difficult in Australia, the banks have gone through one iteration of that, but the data isn't yet available. And there was a lot of debate and discussion about what is an appropriate data set to use, but that would be the Holy Grail for analyzing climate adaptation. And then finally, on the bottom here, we've got some techniques borrowed from the power sector or the mining sector, where you look at the cost curve, you're adding a notional carbon cost and we have trading markets in New Zealand and Australia now, so you've got a scenario bounds that you can put in and where you see a company inflecting, so that's the red arrow on the left. From being somewhere good in the merit order or the cost curve to somewhere higher because of the carbon intensity well -- or the other way around. Then you have a potential alpha opportunity where you've got inflection within a cost curve. And then the final one there is the marginal abatement cost curve also looking at an economy or a single company and looking at the range of activities the company could do an NPV that and ranking them from lowest to highest often, companies actually have negative NPV or positive value cost items. So let me just say that again, so they've got negative cost NPV items to do so they can actually make money by decarbonizing often that's things like energy efficiency, process improvement, things like that. And that's one first step in looking or at ranking stocks. So hopefully, that makes some sense to you. As I said, the power sector is an incredibly difficult sector to value. So to the buy side out there, I salute you. And it's a wonderful sector to look at the largest consumer of capital in the world, historically, and it's only increasing. The oil and gas market is still the largest commodity market in the world. This may be behind in the foreign exchange markets and investment in the energy transition is surely going to require the best of the best from the companies and the investors all the way along. So I hope you found this Interesting. And I'll leave it here. Thank you very much.

Thank you very much, Rob. Thanks very much. So we will just wrap up for the morning session now. So we've got about 15, 20 minutes for coffee. You'll see on the back of your name tag, there will be a color. So you'll be -- we've got 3 different colors, red, yellow and orange. So at 11:25, we'll have sort of 3 breakout sessions. And here, you'll have Craig Brown talking about solar. In the room to the back, you'll have Tracey Hickman talking on the Huntly portfolio. And on the back left from my side, you'll have Stephen England-Hall talking about the retail business. So I think we have the red group in here, yellow with Tracey in the back there and orange in the far with Stephen. So obviously, take some time and be back at 11:25 for coffees. I encourage you to go have a look at the biofuels display in the corner there. And then we will actually got some of the solar panels ironically in the shadiest corner of the building, but I think that's not where we're going to be putting them long term. So thanks very much.