Genesis Energy Limited

Tēnā koutou, tēnā koutou, tēnā koutou katoa. Kia ora and welcome to the H1 FY23 results presentation for Genesis Energy. Koa Tracey Hickman tōku ingoa. I am the interim chief executive and this morning our CFO James Spence and I will be discussing Genesis Energy results for the first half of financial year 2023. Firstly, though, I do want to recognise that this has been an extremely challenging month for many people across the North Island, impacted by the severe weather events of recent weeks and continuing even to today. Our hearts go out to all those affected, in some cases so tragically. I also want to say that I'm proud of our amazing people at Genesis who have continued to work hard to return our plant to service, whether impacted from the weather events itself or on planned outage, to get LPG into disrupted areas, to support customers in need in a variety of ways specific to them, in providing extra support to affected communities and for their volunteering efforts through and outside of their work capacity. So far, we have contributed a total of $200,000 to various release funds across some of our local communities who have been impacted. In addition, we have ramped up our longstanding Manaaki-Kenehi programme to provide extra credits payment flexibility and relief and wrap around services to those affected by these events. We have encouraged any of our customers across our Genesis and Frank brands to get in touch with us if they need support and many are. But this is not a one and done support. People will be affected for many months and years and we will continue to assess how we contribute over the long term in ways that can be most impactful. It is important to reinforce in these times the broader aspects of sustainability for our communities and our country, the importance of building more renewable generation and energy resilience, and the important role Genesis and our assets are playing and will continue to play in helping to decarbonise New Zealand. We continue to challenge ourselves as to how we can do more and where we can invest in new innovative solutions to support this journey. It's been a privilege to lead Genesis over the past six months as interim chief executive as we perform and transform our way to a low-carbon future. We showed strong growth in customer numbers after a long period of declines. We made progress on our plan to develop solar, concluded a successful trial of biomass at Huntly and launched an innovative new EV product to support our customers in decarbonising as well. And as you'll see today, we've been able to do this while continuing to deliver strong financial results. As you probably know, Malcolm Johns will be joining us as our permanent chief executive on the 6th of March. Malcolm has a strong track record as a chief executive and a leader in sustainability. Personally, I've spent a fair bit of time with Malcolm in recent weeks and I can tell you that I am genuinely excited about the purpose-driven and sustainability-focused leadership he will bring to Genesis to further accelerate our sustainability journey and drive ongoing and long-term success for our business. I'm looking forward to supporting Malcolm as he introduces himself to the business and I'm pleased to be able to pass over the reins when Genesis is performing so strongly. After mentioning a few highlights, James will cover our financial performance. I'll then come back on to discuss operational performance and a strategic outline before James will come back again to provide an update on Coupé and our FY23 guidance. Turning to our performance highlights, slide four covers our highlights over the period across financial, operational, and sustainability. Firstly, on the financial highlights, we delivered a very strong EBITDAF of 298 million. The result was supported by favourable market conditions off the back of high inflows into our hydro catchments over many months, and I'm pleased we were able to make the most of the opportunities and deliver such a strong result. NPAT was also up, driven by the improved EBITDAF as well as favourable revaluations of long-term contracts. For dividends, the board has declared an interim dividend of 8.8 cents per share. This is consistent with what we've done in the past, with the interim being half what we paid for the previous full year. We've also been able to fully impute this year. We were also successful in our retail business with growth in electricity, gas and LPG customers and some new momentum after relaunching our Genesis brand and introducing our new Frank brand to New Zealand. We were pleased to advance our first solar project alongside our partners FRV at Lauriston in Canterbury. The project is expected to provide 80 gigawatt hours per annum and with land rights, resource consents and transmission agreements in place, we're expecting it to be generating in late 2024. The cost of electricity generation declined significantly across our portfolio of thermal and renewable assets, almost half what it was a year ago. With our unique asset and fuel diversity combined with the benefit of strong hydro inflows, we were able to optimise our fuel portfolio to reduce fuel costs. Another benefit from the market conditions and our effective use of plant and fuel was a decline in our carbon emissions. Obviously, hydro conditions can be highly variable and broader market conditions can impact our emissions, but we're committed to being transparent and it was pleasing to see a 46% decline on the prior period. We also continue to support our customers through our increasingly popular and unique PowerShout offering. In addition to allowing our customers to save their free hours of power and use them when they are of most value to them, the programme also enables Genesis customers to gift electricity to families in need and then Genesis matches this donation. In this past period, over 300,000 hours of power were donated by our customers and ourselves and we will ensure they are directed to those customers most in need. And finally, we were pleased to launch a new partnership with Habitat for Humanity. We've partnered with Curtin Banks in Wellington and Christchurch for more than 10 years, and now we are proud to extend our support to Habitat for Humanity's efforts in its Auckland and Northland region to help warm up more homes, saving more people money and improving health outcomes. I'm now going to pass on to James to discuss our financial performance.

Thank you, Tracey, and good morning, everyone. After almost a year at Genesis, it's great to be presenting such a strong first half performance. I'm going to talk through the key drivers of our financial performance over the past six months. The hydro conditions were favorable, which we were able to capitalize on through flexible operation of our generation units and a strong trading performance. In addition to this, there's also continued momentum across the retail business, which is growing in customer numbers. So starting with some headline numbers, revenue is down over $200 million relative to the previous half due to the market not requiring backup thermal generation and the consequent reduction in spot wholesale prices which impacts our revenues. With the wet hydro conditions, we were able to increase renewable generation, turn down thermal generation and purchase electricity on the wholesale market at lower costs. These factors combined to deliver an exceptionally strong EBITDAF of $298 million. This slowed through to a strong NPAT performance, which has also benefited from an uplift in derivatives valuations due to the stronger outlook for wholesale electricity prices. Note the free cash flow of $214 million, reflecting the strong profitability, and our net debt position also reduced. And I'll go into this on a later slide together with the remaining items in this table. On slide seven, you'll see the drivers of the improved performance across energy types, coupé and operating expenditure. Electricity was the key driver of the improved performance with generation costs down across the portfolio as we were able to rely on renewables and minimize coal generation and associated costs of carbon. Gas profitability continued to improve as we delivered on our strategy to exit low priced legacy wholesale contracts and focus on higher value retail sales. LPG was flat as higher sales prices were offset by higher costs. This was due to purchases made at globally linked prices to provide additional LPG during the coupé outage and through winter. Other gross margin was down. This is primarily due to strong active carbon trading performance in the prior comparable period. We experienced inflation in our operating costs, which were up $12 million on the previous half, and I'll discuss that more on a later slide. Now we'll go into some more detail on the drivers of our gross margin, turning to slide eight. As we introduced at our FY22 presentation, we're presenting our results across the three fuel types and coupe. It's a simple way to understand the key drivers of the company's performance, removing the impact of transfer pricing. To see the retail and wholesale reporting, please refer to the segment note in the financial statements. So looking at the main drivers here, As noted earlier, electricity was the key driver of improved performance with gross margin up $107 million on the prior period. The hydro conditions were favorable with renewables generation up 614 gigawatt hours or 43% relative to H1FY22. We experienced strong inflows across all our catchments and we were able to utilize hydro generation and pull back on thermal, which was down by around 800 gigawatt hours or nearly half. The ability of Genesis to flex generation to market conditions was demonstrated in the period and could be illustrative of how Genesis will operate through the energy transition in a more highly renewable market. Electricity retail sales revenue was close to level with mass market retail slightly down in volume and average prices slightly up in the SME subsegment. the CNI average sales price improved up from $140 per megawatt hour to $156 as contracts repriced to the wholesale market. Sales onto the wholesale market from our generation assets were significantly down in price due to wholesale spot market conditions. Similarly, as you'd expect, the cost to procure for our retail positions benefited from lower costs in the spot market. The flexible generation was complemented by a strong trading performance. With volatile market conditions, trading is essential for optimizing the portfolio. Settlement on electricity financial contracts was up $38 million on H1 FY22, driven by hedging gains, lower swaption calls, and lower costs in providing liquidity to the ASX. This was partially offset by settlement of fixed price PPA contracts. Looking at our gas gross margin, we saw continued growth in value as we focused on sales through higher value retail channels and away from wholesale. Retail sales prices increased, while gas purchase unit prices reduced as expensive contracts rolled off. LPG gross margin follows a similar trend to gas, where we have focused the portfolio on higher value retail channels. LPG unit costs increased as some additional LPG had to be imported to cover the coupe outage and some customer requirements, while bulk delivery charges were also higher. Coupe was down on gross margin, driven largely by a planned outage in November, resulting in lower production. The higher oil price achieved partially offset the reduction, although oil sales volumes were down due to the declining oil yield and shipment timing. Now I'll move to slide nine to look at net profit after tax. The high EBITDAF has flowed through to NPAT, as you'd expect. Also, as we've seen in the past, NPAT has been volatile, driven by derivative valuations, which have added an aggregate of $19 million across the fair value movement and other gains lines. This is driven by the increase in valuation of financial instruments due to changes in long-term wholesale price assumptions. These increases mainly relate to the PPA contracts with Tuhara and Waipipi, which are strongly in the money. The higher wholesale prices meant that Unit 5 was previously valued up in FY22, and this has resulted in higher depreciation through H1 of FY23. Financing costs were up, and I'll discuss that more on a later slide. So now we'll move to operating expenses on slide 10. We've seen an increase in operating expenditure over the period due to inflation and investments in digital transformation. The job market remains competitive, particularly in the call center and LPG driver segments in which we operate. So employee benefits increased at a similar rate to inflation. We're also seeing inflation impact other areas such as software costs and insurance. We had some additional costs in the half relating to our digital transformation project with an additional $2.1 million incurred and marketing costs which have flowed through to benefits in both Frank and the Genesis brands. Overall, we're conscious of the OPEX increases and the need to manage cost increases carefully. We're seeing indications that the inflationary pressure in some areas is reducing. Over the past few years, there's been considerable upward pressure on Genesis OPEX and we're actively looking at how to manage costs, most likely through medium-term efficiency measures rather than quick fixes, conscious of the need to continue to invest in growth areas. So turning to CAPEX on slide 11, In H1FY23, capex was down moderately, and we've seen a switch from capex at coupe following completion of the inlet compression to increased capex at the power stations. In the period stage two of the 2i generator refurbishment was commenced. This is the second of three upgrades at the station, with each upgrade expected to provide an additional two megawatts of capacity. We also continued investment in Huntley across Unit 6 and the Rankins. This will continue to support flexible operation of the plants. Not included in the CAPEX number is our investments in associates. While our primary focus in this area is to reduce emissions, and we have several strategies focused on that, we hedge our remaining long-term exposure to the costs of the ETS by investing in forestry. The funding stage of dryland carbon has concluded with the capital now fully deployed. Our second long-term carbon offset, Forest Partners, is underway and $8.7 million was invested over H1 FY23. Now moving on to look at cash flow and balance sheet considerations on slide 12. Starting with the chart on movement in net debt on the bottom right of this slide, you can see that net debt reduced by $45 million over the six month period. The strong free cash flow was offset by increases in working capital, including inventory, primarily coal. We're not planning further coal imports in 2023. As previously discussed, in addition to capex of 30 million, further investment was made in forestry to meet our long-term obligations, bringing total investing capital to $41 million in the period. Net debt was also impacted by $29 million due to the capitalization of renegotiated lease obligations in the period. Now looking at our interest rate hedging position, you can see in the chart on the top right that we had 73% of current net debt hedged in H1 of FY23, providing good protection against further interest rate increases. As previously signaled, average cost of funding increased to 4.9%. In terms of the overall increase in the P&L interest charge from $30 million to $40 million in the period, this is driven by a few factors, including the increased coupon on the capital bonds and the increased interest on the non-hedged portion of debt, plus the interest charge on the lease liability and the Coupé rehab provision. At 2.2, the debt to EBITDAF credit metric has improved to our lowest level in the last five years due to the strong EBITDAF performance. This will assist Genesis in any future investment opportunities whilst maintaining the ratio within the target bands. So finally, turning to slide 13, where we look at dividends. This period end, the board has declared an interim dividend of 8.8 cents per share, consistent with our approach for the interim being half the previous year's total dividend. The dividend is 100% imputed. Our dividend policy remains at a range of 70 to 90% of annual free cash flow. We're mindful in setting the dividend of our investment program in future generation. So I'll now hand back to Tracy to discuss our operational performance and strategic outlook.

Thank you, James. Now I'm going to talk through some of the performance highlights and discuss the progress on some of our key strategic initiatives. I'll then hand back to James again to give us an update on Coupé and provide an update on guidance for the remainder of FY23. So firstly, looking at our customers. We relaunched our Genesis brand in the half, introducing Kiwis to George and her family. We've had a great response to this campaign with high levels of enjoyment, supporting our market-leading brand awareness. I'm very pleased to say that in the half, we increased the number of customers we have, including in residential electricity. After a period of flat or declining numbers, it's great to return to growth in a competitive market. Total customer numbers increased by more than 10,000 in the six months. Our net churn for the period declined to 12%, which is a great sign that customers value Genesis in what we offer and are choosing to stay with us. We continued to ensure that our pricing remained competitive with the market and that our products are appropriately priced. For the first time in two years we pushed through some but not all of the higher costs we are experiencing in our retail business to our Genesis residential electricity customers. We're mindful that many New Zealanders are facing rising costs as well and we've worked hard to strike the right balance in all of our pricing decisions. At Genesis we continue to work to ensure our most vulnerable customers have the support they need. Our Manaaki-Kenehi programme continues to develop and proactively engage with those in need. It's pleasing to see more of our customers supported to stay with us and the things we are doing to help them manage or reduce their debt. Despite the challenging economic conditions we continue to achieve low disconnection rates and we haven't seen a significant rise in customer debt. Moving on to electric vehicles. As a company, we are focused on supporting New Zealanders to make sustainable choices. We know that the transition to renewable transport is critical. With transportation making up 17% of the country's emissions compared to the electricity sector's 7%, it is clear that the electricity industry has an opportunity and responsibility to help this happen. As we've seen EV registrations grow in New Zealand, Genesis has been able to grow the number of customers on EV plans at an even faster rate. We launched a product called Everywhere in September 2022. This provides Genesis customers the ability to charge at New Zealand's largest charging network at the same rate as their home, all delivered on a single Genesis bill. This is the only EV roaming product in place across New Zealand and consumers are telling us they love it. We're offering this alongside our half price overnight rate for EV owners. As well as making EV ownership more affordable, we are also supporting our customers in making more sustainable choices. As you can see on the bottom left chart, by providing the right incentives, we've seen our customers shifting their load to overnight periods when carbon emissions are lower. While we continue to see the amount of energy consumed per electricity customer steadily decline, EV customers consume on average 24% more than the typical Genesis customer. Looking now at the netbacks across our sales channels. We continue to see good value across our SME and CNI channels. With a direct link to wholesale electricity prices, CNI grew strongly. There were also increases in gas netbacks for both SME and CNI. Residential netbacks declined as higher lines in operating costs were absorbed by the business. With retailing costs continuing to increase, we have moved to recover some of these with an electricity price increase across both brands in December 22 and January 23. Moving on to slide 18 to discuss the wholesale performance. Since July, we've seen considerable volatility in the wholesale market. As the chart on the top right shows, prices have fluctuated as the market was impacted by higher fuel prices through the winter, then exceptionally weak conditions later in the year. We frequently saw spot prices exceed $500 as well as fall to zero overnight through December. As we saw in the period, the high volumes of renewable energy could be indicative of the future as the market transitions to more highly renewable. Genesis's assets, fuel portfolio and our people are well placed to ensure our company can play a part in this change. Key to enabling this success is the work we've done and will continue to do to change how we operate our assets, build our fuel flexibility and work with our people to optimise trading decisions. As the bottom right chart shows in the period, Genesis's portfolio was able to respond to the conditions whatever they were. During the high priced winter period, our thermal assets were deployed. During times of low wholesale prices, the portfolio was able to significantly pull back thermal and purchase lower priced electricity from the market. And as you can see, we were able to respond to market conditions much more so than our competitors. Fuel portfolio flexibility is critical in achieving this. In the past six months, we have been able to manage fuel supply, including through a coupé outage, to ensure that Huntly operation is optimised. The plan of fuel flexibility were ably supported by informed and decisive trading. Understanding the drivers of the wholesale market and making trading decisions to support our assets was a critical component of the strong results in the half. Now to give an update on our market security option products. Genesis launched the market security option products in August 2022. This was part of our efforts to find a market solution to mitigate dry year risk by offering any wholesale market participant the opportunity to secure energy security through a transparent cost-based pricing mechanism that reflected the underlying costs of procuring energy in the global market. After strong initial interest from a number of parties, a small volume of cover was contracted, demonstrating the product worked well for some players, but the volume is significantly less than previously contracted under the swaption contracts. As a result, we continue to assess how we operate and invest in our thermal assets and what the right market setting might be to ensure Huntley is able to play an important role in the energy transition over the next decade or longer. Having hydro assets well maintained, available and reliable is critical to the portfolio flexibility. We are continuing major upgrades at our Waikamawana stations to replace turbines and generators, which will further add to portfolio capacity and improve water use efficiency. and key to this is evolving how Huntly operates. As you can see on the chart in the bottom right, with having greater fuel flexibility, Unit 5 is now used frequently to respond to market conditions, including being shut down or started up, or ramped down and ramped up. the unit made almost 90 starts in the period, as it was frequently turned off during overnight periods. This is a significant change from where we used to be, when the plant was generally run continuously throughout the year, often with the only shutdown and start-up being for its annual maintenance outage, and a nervousness to turn Unit 5 off for fear of it not restarting. But now we have a more dynamic fuel portfolio, the plant configuration to flex and the operational experience and confidence to successfully execute. This gives us greater portfolio optionality and flexibility than we have ever had before, driving more value from an increasingly volatile market. Now turning to sustainability. As a company, we're mindful of the impact we have on society and our stakeholders. Our company purpose to empower New Zealand's sustainable future is focused on three sustainability pillars. A low carbon future for all, a more equal society, and a sustainable business. Our people remain key to achieving these goals. We remain committed to gender equity and I'm pleased to report that we are leading in our sector with gender balance on our executive, one of the few NZX companies to do so. Our ongoing focus is not only supporting gender balance across all areas of leadership at Genesis, but genuinely and proactively supporting broader diversity and inclusion across our organisation and the wider sector, and leveraging the value of this in terms of the critical role we play for New Zealand. We continue to strive to make Genesis a safe place to work. Workplace injuries were up slightly, but it's important to take a more detailed look. Pleasingly, we are experiencing injuries with a lower level of severity. However, we also experienced some more minor injuries in the half. By far the majority of our minor injuries occur in our LPG business where slips and trips and muscular injuries can often occur. We're investing in equipment and an improved workplace culture to further reduce the risk of minor injuries in LPG. Now moving on to update on our strategic initiatives. Since we launched our joint venture partnership with FRV Australia a year ago, we have been busy working to develop 500 megawatts of solar as part of our FutureGen programme. While the competition for sites is strong, I'm pleased with the progress we are making. Earlier this month, we announced the first development near Lauriston in mid-Canterbury. The 50 megawatt development is expected to provide 80 gigawatt hours per annum of renewable electricity. It is an ideal site to meet all of the requirements for an excellent solar development. It's closely located to grid connection and the flatland is easily accessible for development. As you can see in the graph at the bottom right, the local energy demand is also well suited to solar. There is significant local demand for irrigation, so having local demand correlated to solar generation is another benefit of this location. And the site already has land rights, resource consent and connection agreements in place, meaning we can expect the site to be generating before the end of 2024. We are anticipating taking a 40% equity stake in the development as well as purchasing 100% of the generation under a power purchase agreement for the first 10 years. The location and grid connection means the economics of this project are favourable. Moving now to progress on FutureGen. Since we announced our FutureGen strategy two years ago, we focused on building a diverse portfolio of renewable generation to displace baseload thermal running and reach our science-based target by 2025. While there have been challenges across the market in generation development, we retain options and flexibility to source a diverse portfolio. On solar, we have assessed over 100 sites in the past year and are now focusing on three significant solar opportunities. These are all North Island sites with potential capacity of up to 400 megawatts. We also have a further 350 megawatts of potential sites that are being investigated and we're expecting to be able to confirm further sites before the end of the calendar year. Genesis also applied to extend consent for the Castle Hill wind farm. The new consent focuses on the most productive wind sites and gives Genesis the option to develop should we decide to. While this is a useful option for Genesis, no decision on development has been made. Moving on to biomass, in the last two weeks we are pleased to successfully complete a full viability trial of biomass generation at Huntly. The combustion trial is the culmination of a lot of research and planning, including discussions with others around the globe that have engaged in similar work. The trial demonstrated that advanced biomass is a viable fuel source for Huntly. We're confident that should a local supply source be developed, biomass could provide an effective alternative to coal. The biomass could be easily stored at Huntly, operated with a few plant modifications and allow us to generate with potentially a 90% reduction in emissions. Huntly is a key strategic site for New Zealand in the country's energy transition. It's located close to major electricity demand, has access to skilled workforce and has excellent rail, road and electricity connections. Now that we've proven we can burn biomass material in our rank and successfully, we'll start exploring the viability of a sustainable economic local supply chain of black pellets. We've launched a partnership with Fonterra as we seek an alternative fuel source to help carbonise our respective businesses and reduce New Zealand's carbon emissions. We'll bring in other industry partners to share knowledge and foster innovation. We aim to have an assessment completed by Q1 FY24. We are hopeful in the potential of biomass, but we reiterate we have made no final decisions about the role biomass could play for genesis. Finally, just to update you on the leadership team here at Genesis. We've had several new faces join our executive team in the past year, although with three internal promotions, the team has a good balance between Genesis knowledge and outside experience. Malcolm Johns will be joining us in just a few days. He's been getting his head around the sector and business for several months, so I expect he will hit the ground running. We've also announced recently that Claire Walker will be joining us in April as our Chief People Officer, moving from a similar role at Sky City Entertainment. I'll now pass back to James to give an update on Kupe and to discuss the update on our FY23 guidance.