Genesis Energy Limited

Kia ora koutou. Ngā mihi ki te mana whenua. Rau rangatira mā. Tēnā koutou. 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 Rāhui Pōkeka, 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 Coe 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 specialising 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 three breakout sessions, each focusing on a pillar of Gen 35, 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 Genesys, having previously been CFO at three 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 five 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 Te Ao Māori. 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 UK. 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 two fewer under Gen 35, with all being deeply experienced and mature executives. They're 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 Gen 35. 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 decarbonise our economy over time, and how we drive Genesis's 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 than 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. Gen 35 focuses on leveraging our three current strategic strengths. of strong customer revenues, grid scale firming capacity, and our solid credit rating. Enter 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 three 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 three. We intend to leverage our strong customer revenues, strong flexibility, and strong credit rating to invest around 1.1 billion in the Huntley portfolio and new renewable generation by 2030. I'd like to share two things we learnt putting Gen 35 together. Firstly, focusing on electrifying gas heating and hot water in homes is two times more impactful on CO2 reduction than rolling out distributed solar and batteries. Applying this to small and medium businesses sees electrification become 10 times 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 braggawatts into megawatts. With a half million customers, Genesis has a significantly strong demand-side position with large, diversified, long-term customer revenues. This de-risks our future upstream investment in new renewables because our investment programme 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 Plus 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 his 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 their 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 1200 megawatts of that right now, and subject to appropriate commercial support from the market, we will invest to increase this over coming years to 1400 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 fast to 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 a battery. We also have Unit 6 and consents to add more fast start gas peakers if market demand and fuels 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 air 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 Rankins using coal. The last five 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 decarbonisation 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 behaviour in the transition will either drive up or drive down system risk. However, no matter where we are in the system individually, if system risk crystallises, 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 five years to FY23, 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 reflect 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 Gen 35, 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 Coupé 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 drives 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 decarbonisation rather than fixating on the last five 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. Gen 35 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 reach 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 Coupe will expire around 2035. Simplicity, focusing on fewer but more impactful things, was the theme for developing Gen 35. 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's 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 set about activating a major strategy reset for Genesis, we have an engaged, aligned and energised 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 three time horizons. Our first horizon is short. It relates to FY24, 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 de-risked 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 to 50 million dollars per annum of OPEX and some CAPEX over the next few financial years. Horizon 2, between FY25 and FY28, will 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 EBITDAF first into the 500 millions and then further as we deploy our investment programme into the 600 millions. James will cover this in more detail later today. Horizon 3 between FY29 and FY35 will see us begin to put in place the future state of Genesis, Genesis 2.0. Between now and 2030, Coupé will generate around $290 million of free cash flows for Genesis. We know Coupé is the reason for the ESG discount being applied to Genesis, and that there has been commentary about future dividend resets as Coupé declines. Under Gen 35, Coupé will be tasked with displacing itself. By using the $290 million of free cash flows in our $1.1 billion investment programme, we will drive greater shareholder value growth than under a do-nothing scenario. What we are saying today is by dedicating Coupé'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. Coupé's cash flows represent around 3.6 cents per share in our current dividends. meaning from FY24, dividends will remain above peer averages, but be set at 14 cents per share. As a final note, Kūpei 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 Coupé, however we are now interested in its options for life beyond gas. Gen 35 is an exciting strategy reset, changing what we are as an investment. We are a transition within the 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 Rankin'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 Coe 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 three breakout sessions on our proposed new retail strategy, how we'll draw value from flexibility and the future of Huntly and our renewables growth.