Origin Energy Limited

Good morning everyone. It's Frank Calabria here and welcome to our Origin Energy 2020 half year results. I'm joined by all of my leadership team and I'm sure there'll be questions for a number of them. Laurie Tremaine, our CFO, Mark Schubert, our Executive General Manager of Integrated Gas, Greg Jarvis, our EGM of Energy Supply and Operations, John Briskin, who heads retail, and also Tony Lucas, who heads up our future energy and business development, amongst other colleagues. So thank you for joining us. It is a familiar format. We will be... I'll take you through some of the performance highlights, then Laurie will come back with a financial review. I'll then discuss some of the operational review highlights and outlook, and then we'll turn to questions. So firstly now, just turning to the... performance highlights. If you move to slide four, you should see on the screen there, you'll see that our underlying profit is down 11% for this half compared to the first half of the prior year. We've had good performance in APLNG driving growth, but that's been more than offset by the decline in energy markets and the three key drivers are outlined there being the regulated retail price, for electricity. We had some generation outages that were unplanned in the half, and we'll talk further about those and the recovery of them in the second half, and also some lower electricity volumes. That translates to an underlying ROCE of 8.3%. Very good to see a strong cash flow that's grown by 22% to $680 million, really on the back of the higher distribution from APLNG. And then you can see that we've continued our trend of reducing debt down to $5.1 billion. Laurie will talk through the lease accounting impact on that debt, but the key message is on a like-for-like basis, down $340 million. On the back of that strong cash flow, I'm pleased to say that the board is determined to declare a $0.15 a share fully franked dividend, and that compares to $0.10 per share for the first half last year, and it represents 39% of the free cash flow that we took investors through over the last 12 months as part of our distribution policy. Just now turning to the strong operational performance in the first half of 2020, and I'd start by giving you a message that's been a very good half and a continuing trend I hope you'll see over the last 18 months of good performance in integrated gas. And the simple message there is that a combination of good performance of the wells, the subsurface, in addition to very good performance on the surface facilities and bringing that all together has resulted in record production and it's also therefore allowed us to re-scope the program, it all performing better for less and that's allowing us to reduce costs to deliver the same production. You'll see there that in the last six months we've been able to increase that production at 358 petajoules and you can see that's really comparing to circa 340 petajoules over the last four periods. So a great performance there and that's translating into being a lower cost operator and making us very resilient under all market conditions. When it comes to energy markets, I did mention that we did have two unplanned generation outages and that's the first time we've had those of that nature in the last six months. I'm very pleased to see how those assets return to service. In particular, to bring Mortlake back from the event it did within six months and have it available through January has proven to be very important. And I'm very pleased with how the team performed in that respect. We continue to take a disciplined approach to managing customer lifetime value, but we'll talk a little bit further about that in terms of the competitive markets for retail. The lower wholesale gas prices are benefiting the wholesale business and our cost of gas into that market We continue to reduce cost to serve, and the retail team have reduced that by a further $28 million and a half. And importantly, at the same time, we really are advancing the transformation of our customer experience. So overall, a strong operational performance, notwithstanding we had a couple of those outages in generation. It really is important that we deliver for you, our shareholders, but at the same time, we remain committed to delivering for all stakeholders. And here are just some of the measures that we do to track our progress. What you can see is that we really look across customers, the community environment and our people. Touching on the key highlights, that is the highest ever strategic net promoter score that we've had at Origin, representing a continuing trend over the last several years. So very good to see that progress. It's worth noting that our interactions that net promoter score you'll see has dipped. Through the course of the period, we had a significant offshoring as part of that reduction in cost to serve and managing through that change. And we're very determined to see that continue back on its upward trend over the coming periods. In terms of care and battery impact, there's many ways you could assess that. The two that we've shown here are the continuation of renewables coming online, but the key event this year will be the construction of Stockyard Hill. And secondly, that we continue to support regional suppliers to our business. And you can see we increased our percentage of total spend. When we reported last to you in respect of safety of our people, we were disappointed by the performance of June. There's been a very concerted effort across the business. And you can see there on a rolling 12-month measure that we've made some improvements. We clearly have more work to do to continue to reduce that. And you can see there we measure the women in senior roles. It's a measure that takes quite a bit of coordination and effort to continue to move. I'm pleased to see the positive direction over the last six months as part of increasing our diversity of our workforce at senior levels. Just extending that further then to our purpose of getting energy right for our customers, communities and planet, it's probably worth highlighting just how much does happen across those aspects of our business in the last six months. The most significant event has been the bushfires and you can see that Origin, I'm very proud of the role that Origin's played in respect to those bushfires. Firstly, the $4 million bushfire relief package that really has gone to assisting customers right across the regions in which we operate and serve. And then if you looked underneath the communities column, you'll see that in addition to that, there's been over $870,000 donated to drought and bushfire relief and recovery by the organisation and our people. And we continue to respond and clearly there's still customers facing hardship challenges and we're continuing to provide that support. Turning back to customers, clearly I raised the customer experience. In addition to that, we've obviously had the regulated price for Victoria introduced on the 1st of January as its next review point. and we extended beyond the regulatory requirements to what we believe was an implementation of the right thing for our customer base. The other thing is that APLNG has signed further domestic contracts with manufacturers including Orica and Aurora and it's good to see further gas agreements being signed and it's also good to see for those manufacturers that those prices are coming down. I talked about our regional spend for customers. Just a note that at Origins Foundation, you know, really worth saying in terms of the community has now donated over $25 million to causes in education and disadvantaged people over that last 10 years, a tremendous achievement. When it comes to the planet, we did release a one and a half degree scenario for our wholesale electricity portfolio that showed that it was resilient under that scenario. We continue to support the national goal of net zero emissions in the electricity sector by 2050 and earlier. And as I said earlier, we're actually on track to have 25% of our generation capacity by renewables by the end of this calendar year. I'm sure you'll all then, if we turn to the next page, been noticing that the energy markets continue to be very dynamic and rapidly change, and it is evidenced by really these trends in gas, electricity prices and also intraday volatility. The electricity forward prices, you can see over the last several years have moved up and down and over recent times have moved down. As the influx of renewables, some despite bushfires and other activities, a milder summer for weather in some regions, but nevertheless it's demonstrating that introduction of new supply into the market. At the same time, what it's doing, and because a lot of that supply is renewables, you can see at that middle chart that that shape is starting to continue to accentuate as it hollowed out in the middle of the day and it creates those peaks, meaning that the way we efficiently supply our customers continues to evolve and that's where you want that flexibility of portfolio. Lastly, it's both globally and locally you can see that gas prices have declined and that chart there really shows the domestic and JKM spot prices and the relationship between the two. Those trends are ones we've spoken about previously, but you can see them playing out, and really what Origin is setting itself up to do is to execute our strategy to deliver in that changing market, and you can see that we have, and on our Invest Today was another time for us to present that, but we really are executing a clear strategy that sets across accelerating towards clean energy, the low-cost operator developing growing gas resources. Gas will be critical to the increased adoption of renewables, but also... to the markets near Australia, embracing that decentralised and digital future and also clearly it's very important that we continue to ascend and become an increasingly customer-centric retailer. We continue to build the track record that sits alongside that and that's therefore setting us up to do a number of things across our business. cost to serve reduction of $100 million is on track and you can see the progress and we are now in the planning phase for the next wave of that transformation. We talk about building a digital IoT capability and those words may not mean a lot to everyone on the call, but I just really should describe the fact that what we've done is we now are orchestrating distributed assets. for our customers using our platform. And firstly, for our large business customers, we have tens of megawatts that we are running demand response successfully through our artificial intelligence platform. And they've already been contracted and there were three demand response events over the course of January. And so we're building trust and demonstrating that and in the underway in terms of growing greater volumes of those assets on our platform. The key benefit for our customers is both a reduction in cost and also a reduction in carbon emissions. At the same time, we've extended that capability to our residential and mass market customers, and we have now built that retail capability such that we're in live customer testing where we've now sold and onboarded to our customers air conditioner control programs, and we've run about five demand response events over summer. The reason I raise that is that it's just demonstration of the fact that as retailing the market and a distributed world changes, so are the capabilities that we're building around it. We've continued to grow revenue streams in our centralised energy service business, and you can see the customer growth. We'll talk a bit about broadband. Brownfield generation opportunities continue to be progressed, and those that are being progressed are responding to that changing market. We continue to exercise some caution around making those decisions given that we're currently in a period where governments are playing a role in terms of underwriting those and you would expect us to just make sure we've got a clear line of sight to the future benefits associated with those investments for both our customers and the economics. In integrated gas, our focus is really about exploring multiple plays in APLNG, continuing to reduce its costs, and we're very much now focused on the program associated with Beetaloo and they're the key opportunities and further afield we've done quite a bit of work in terms of pursuing the hydrogen and ONG transport opportunities. So we continue to execute our strategy for this changing energy market and positioning ourselves for the future. So just turning back to then the operational performance that's driving the returns in this financial year. We therefore, and we will cover this further in guidance, but really our view now for APLNG for the full financial year is that production will be improved and it's at the upper end of the range we previously guided to, or 690 to 710 petajoules. The distribution break-even at APLNG has now reduced to $29 to $32 US, a barrel equivalent, And when we give you that distribution break even, I think it's worth pointing out that that does include principal repayment of project finance of the US $8. So the operating break even is therefore now into the low 20s. And that will translate that performance now into a higher cash distribution to origin that's now up in the range of $1.1 to $1.3 billion Australian dollars for this financial year. We do expect improved generation performance in the second half of 2020 with a non-repeat of the unplanned outages. And we continue to target the 150 million company-wide cost out by next financial year. That includes the 100 million energy markets cost to serve that you can see we've already realized $43 million. That has allowed us to translate into a 15 cents a share, fully frank dividend, and as you would expect, continue to manage our capital. in a disciplined way. I'll now pass you over to Laurie who will take you through the financial review.

Thanks Frank and good morning everyone. Thanks for joining us on the call. Like Frank, I'm pleased to be able to present this morning a strong set of financial and operational results and like Frank, I'd call out cash generation as particularly being the highlight Free cash flow increased, as Frank said, 22% on the back of strong performance at APLNG, as well as proceeds from the Ironbark sale. Excluding the impact of the leasing standard change, net debt reduced by over $300 million in the half to $5.1 billion. But across the full 2019 calendar year, net debt is reduced by over $1 billion, again, excluding leases. Both statutory and underlying profit declined half on half. Underlying profit was lower than statutory profit, almost entirely due to backing out of favourable non-cash fair value adjustments. Underlying EBITDA was down, driven by lower earnings from energy markets, consistent with both our expectations and guidance. But I'll speak to that in more detail later. As foreshadowed at our investor day, we've adopted two accounting changes in this result. Firstly, consistent with the requirements of the new leasing standard, all leases are now recognised on balance sheet and the lease expense previously accounted for in EBITDA is now booked to DNA and financing costs. Right of use assets of just under $500 million have been recognised along with a lease liability of $540 million. As a consequence, underlying EBITDA increased by $42 million in the half. offset by a $50 million increase in depreciation and financing costs. Secondly, APLNG dewatering and workover costs have previously been capitalised. Having achieved steady state operations, dewatering and workover costs are now considered ongoing and operational in nature and will be expensed as incurred. This resulted in a $56 million reduction in our share of APLNG EBITDA offset by a $63 million decrease in our share of APLNG depreciation charges. Overall the adoption of these two accounting changes had minimal impact on underlying profit. Speaking of underlying profit, we presented a bridge on slide 14. Our profit was impacted by lower earnings in our energy markets business. particularly the electricity division, partially offsetting this with higher earnings at APLNG driven by higher production and sales and lower origin commodity hedging and trading costs as well as lower origin tax expense. Adoption of the leasing standard explains most of the increase in V&A with offsetting elimination of leasing charges across each of our business segments. Corporate costs increased by $14 million. including a one-off self-insurance cost of $7 million relating to the electrical fault at the Mort Lake Power Station. Now digging into energy markets in a bit more detail in slide 15. Earnings were down $129 million or 15% with almost all of the decrease coming from the electricity division partially offset by lower costs to serve. Electricity gross profit decreased $170 million and a half with the impacts of the business split between three factors. Firstly retail price regulation, specifically the introduction of the VDO and DMO. One-off unplanned outages at Araring and Mortlake power stations. In the case of the Mortlake we expect insurance recoveries this financial year. And then finally lower sales volumes. The impact from lower volumes was $46 million. split relatively evenly between expiry of certain large but lower margin business contracts, lower usage with solar take-up and increasing energy efficiency and changes in retail customer numbers and mix. This mixed element includes a growing proportion of lower volume but higher margin embedded network customers. Gas gross profit was lower due to some short-term wholesale contracts rolling off partially offset by lower gas procurement costs and favourable repricing of business contracts late in the comparative period. Our Cost Out program is well underway with cost to serve down $28 million and we remain on track for a $100 million reduction by the end of financial year 2021. Integrated gas on slide 16.

I'm going the wrong way, sorry about that everyone. Definitely operator error.