Origin Energy Limited

Thank you for standing by and welcome to the Origin Energy full year results teleconference. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question you will need to press the star key followed by the number 1 on your telephone keypad. I would now like to hand the conference over to Mr Frank Calabria, CEO. Please go ahead.

Thank you very much and good morning everyone. Thank you for joining the Origin Energy 2020 full year results call. This is Frank Calabria here and I'm joined by my leadership team today which includes Laurie Tremaine, Greg Jarvis, Mark Schubert, Tony Lucas, John Briskin and Kate Jordan. So Laurie and I will take you through the presentation and at the conclusion of which there will be an opportunity for you to ask questions and we look forward to that. Our format is consistent to a previous presentation so I'll take you through the performance highlights for the year and I'm just trying to get slides to move on if I'm controlling them for you as well. Laurie will take you through the financial overview and then I'll provide an operational review and outlook. Just starting with performance highlights, I'll take you to slide Our summary of financial performance, our statutory profit for the full year was $83 million and that reflects a stable underlying profit of just over $1 billion and it also reflects in the statutory profit the previously announced year-end impairments and adjustments which were primarily driven by the revised oil and LNG price assumptions that we made over the medium to longer term. Our underlying return on capital employed is at 8.8%, slightly down from last year. I'm very pleased to say that our free cash flow increased by over $100 million to $1.6 billion and that's driven by the record production by Australia Pacific LNG and also our record cash distribution of just under $1.3 billion there so that's up $300 million from the prior year. Now adjusted net debt decreased by just under $800 million. You can see they're down $773 million to $4.6 billion. We've reported the number there excluding the lease liabilities but for transparency because the accounting standards have now included those lease liabilities if you include them at $5.2 billion. But I think the key story there is that debt is reduced by just under $800 million. And the board is determined to pay an unfranked final dividend of $0.10 million. per share which does equate to just underneath the 30% of our free cash flow and Laurie will take you through further that at the moment. When I reflect on the financial year just gone I really am very pleased about the strength of our operational and financial performance and we've included some highlights there just on page five. I did just mention the record production and cash distribution from APL&G. but also there's a 5% increase in the APL and G2P operated reserves before production. We're on track for our $100 million reduction to cost to serve in retail and we've now achieved $73 million of that at the end of this financial year. That's the target to achieve $100 million by the next one, financial year 21. From a customer experience perspective we've recorded our best ever. net promoter score which is one measure of customer satisfaction but across all of our customer satisfaction measures I think we've had a record year. Very pleased to see that we, for our people, that we've been able to lift our engagement to the top quartile at 75% score and also there's been a very strong improvement in our safety performance over the year following a more disappointing result to that measure last year. The increased cash flow has enabled us as you can see to underpin both debt reduction, the payment of dividends but also the investment in future growth and you know that one of those decisions over the recent months was the investment in Octopus. We remain committed, if I take you to slide six, delivering for all of our stakeholders, our customers, the communities, our people and shareholders. You can see there in terms of customer and transforming that experience, that increase in net promoter scores that I just mentioned. In terms of community, a couple of things. Pleased to see that we have reduced our Scope 1 and Scope 2 emissions by about 9% over the last financial year, largely due to the changing way in which we're operating in response to those market conditions. And also you can see in terms of support for local communities, the percentage of our total spend that now is through regional suppliers has increased from 12% to 14%. There on the right hand side are those two measures on both improved safety performance, our total recordable injury frequency rate you can see there is at 2.6, that's a 40% improvement year on year which I'm very pleased to see from the commitment of our people and also very pleased to see that through these what's been an extraordinary year I'm sure you'll all agree to see our staff engagement increasing to 75%. We are driven by our purpose of getting energy right for our customers, communities and planet and I think if you look at the last 12 months it's been extraordinary by any measure. There's been drought, bushfires, there's been extreme events. particularly storms that caused issues in Western Victoria as well as the COVID-19 pandemic. And firstly, what I would say is that we've been very much focused on supporting our customers through those events, through relief. There's been reduced prices that have occurred for our customers on 1 July. And very pleasingly, through all of these circumstances, the way we've been able to maintain reliable energy supply has been fantastic. We continue, as you will see in the slide following, that experience and the way we operate our business is responding to those changes as well. That's another feature, I think, that we've seen. For our communities, we spent $365 million in regional businesses. The Origin Energy Foundation, which is just 10 years old now, contributed a further $2.9 million over the last 12 months, and you can see donations to... bushfires, drought initiatives and volunteering, it really is a feature of what we stand for at Origin in terms of supporting communities both broadly and locally. I did mention our Scope 1 and 2 emissions reducing by 10%. We've set a Scope 1 emissions reduction target to reduce by 10% on average over the financial years 21 to 23. That's off the baseline that we set with the Science Based Target Initiative in 2017. and I think that equates to being a further 7% reduction off what we achieved in 2020 financial year. We have an aim to achieve net zero emissions by 2050 and you'll note that through the course of the year we published a scenario analysis to show our wholesale electricity supply portfolio, all of our generation and other contracts of what that scenario of 1.5 degrees would look like. So really pleased to see the ongoing progress in relation to decarbonisation. It really has been an unprecedented year in terms of commodity markets and I think slide 8 really does highlight what all of you will know. The key commodity markets we've highlighted there are the JCC because that links through to our LNG sales contracts, the domestic gas price where we're both a buyer and seller in that market and also the forward electricity prices and you can just see the extent of the change that's occurred over recent months. The one thing I'll just point out on a couple of these that many of these have not yet received the full impact because in the case of APL&G there's a lag between those prices flowing through to the sales contract so that's very much a feature of the FY21 year. In the case of the domestic gas prices certainly we've been able to adapt our portfolio and buy gas in that market and be able to manage that so that we did receive the short term benefit of those less gas prices by buying and taking those opportunities over recent months. In the case of electricity it really takes time for that to flow through to both underlying tariffs in the mass market. and also the re-contracting in the CNI book which is underway. The best way to think about that exposure though is that if you think we've got a fixed cost generation position of somewhere between 15 to 20 terawatt hours depending on how we run the portfolio otherwise the balance of our energy is being purchased in the market so you tend to get the lagged effect of the benefits of both buying and selling in that market. We'll take you through further that in a moment. And if I then talked about just really the response to COVID, and I'm sure all of you are hearing this from the various companies you're investing in, the key impacts to COVID, if you've seen really with that prior slide when we're looking at the commodity prices and probably in the case of the domestic electricity and the global and domestic gas prices, they sort of really are a reflection of the demand that we're seeing in our markets. and also the linkage in the case of gas to international markets that's having that flow-through impact. You can see there that the average electricity and gas demand is down about 5% to 10% overall which is really a reflection of the reduction in the CNI and FME customer market and it's offset by modest increases in the residential demand. That's obviously played out. We put it in our quarterly report. You would have seen how that pattern evolved over the last quarter. Obviously since the end of the year we've sort of almost got a two speed scenario going on in Victoria going back to what it looked like in April and the balance of the states continuing the trend you would have seen that finished that financial year or towards the end of June. We did announce a $40 million increase in our bad and doubtful debts provision. There was a postponement of the APLNG major shutdown until July 21 and we temporarily paused the Beedloo Exploration Program when planning to recommence this quarter next to get back going on that. Really overall I think we've been able to transition safely 4,000 people working from home and just as importantly we've been able to continue to operate our our sites, our LPG terminals and our gap fields under strict health and safety measures and I really am very pleased to see that we've been able to maintain a very reliable supply. Our response in these terms has firstly focused on the health and safety of our people, that's where it starts and then you can see there that it's very much focused about supporting our customers. We've paused the default listings, disconnections and late payment fees. We continue the hardship and payment extensions and as you know we moved early on that. It's at least aligned if not better than what was required under the AAR statement of expectations and recently announced that that statement of expectations would continue through to 31st of October and that continues to be the way we support our customers. We're very much focused as I say on the health and safety of our people and clearly as this continues both mental and physical wellbeing of our people is key and providing the flexibility and support is important. I think one of the features of both our energy markets and integrated gas business has been our ability to be able to adapt to those changing market conditions which I'll take you further through in the operational review. The two probably big examples of that are really the flexing down of the way we can run a RARing and also run a gas fleet of power stations, but also flexing the output of APLNG in response to that lower demand. We did announce a couple of months ago what we were targeting in terms of cost reductions. APLNG costs coming down between $300 and $500 million. Origin CapEx outside of APLNG will also be lower, and we've really made some inroads into that. As I've mentioned before the $100 million retail cost to serve is on track and that's before you consider the further activity underway to take further cost out that will be part of the octopus proposition of both customer experience and cost. Also what's happened is that over the last month or so we've extended our debt maturity profile and Laurie will take that through to you so we've got significant headroom and liquidity. We continue. We've made response. operationally we're resilient and we continue to respond to the circumstances and the market that we face. Just in terms of that economic recovery I think it's very important to see that that's going to be something that needs to be coordinated between business and government and that does provide policy opportunities. I think in terms of importance the key area that I think the electricity markets need to respond to is what We call the introduction of firming capacity in the market. The renewables have grown and whilst it may have slowed in recent months there's still a wave of renewables that are coming into the market being constructed and coming in and it really is the addition of what we call that flexible firming capacity which we see as a combination of batteries, hydro and fast start gas and investing in those requires an understanding of how we see those risks over time and that's where policies become important to the investment confidence there. Gas development, it's been well reported that one of the key things to bring gas prices down is to increase gas supply and therefore one of the areas and I've seen comments coming through from governments is that the focus there and we agree completely regarding removing restrictions, streamlining approvals and regulation, releasing acreage are all ways in which governments can work with industry to actually bring more supply on I think associated with that investment in firming generation is really I believe it's important when we see the changing electricity markets that the national electricity market and I think this post 2025 market review being led by the ESB is I think where we see that everything should be brought together in a coordinated way and it's a great opportunity I believe to produce better outcomes over time and that's got to be the key focus I think of both policy makers, industry and governments to work together to give confidence longer term. And clearly that leads into the next one about longer term integrated energy and carbon policy. That's what we see there. So the economic impacts of the pandemic are still being, obviously they're likely to be significant and ongoing and therefore customers will need support. You can see that retailers and for the early months networks supported, but it is going to be support that I believe the cost of which must be borne right across the supply chain I think it's one of the key things that we need to continue to do as an energy industry as a whole. Our strategy is to create value in this changing energy landscape. You've seen this slide before. You can see that's all about the transition from coal to renewables firm by what we call that fast start gas and storage. It's about being a low cost producer of that gas because of linkage between gas and those electricity markets but also to the gas demand here and in the Asia Pacific. There's been good progress in technologies. The Octopus Kraken platform, we've developed a VPP and we're also pursuing opportunities in new areas of energy such as we're actively pursuing in hydrogen e-mobility and small scale LNG. Clearly our strategy remains on continuing to advance that customer experience including the investment in the right technology solutions and culture that actually enables us to gain that trust over time. You can see that there's been good progress towards that across both of our businesses. We have step changed our customer experience and cost even over the last two years but I think Octopus has the opportunity to go again and that's exciting for us. We are progressing brownfield generation and storage opportunities but I just talked about both the settings and also the market signals that would need to be there. It's just about our ability to respond when they are appropriate. We now have 85 megawatts being orchestrated through our virtual power plant. That's greater than 11,000 customers. And we announced a partnership with OwnConnect, a US-based demand response business, and jointly we've launched the equivalent of that in the Australian market in the last week, what we call SPIKE. and we've got EV charging fleet management solutions underway including a trial that was recently announced in the ACT. You can see we've reduced our break even in integrated gas down to being US$29 a barrel. That's a distribution break even and includes I think somewhere in the vicinity of US$12 of project finance. So we are becoming every year a more competitive and lower cost upstream gas producer. and we continue to see opportunities to improve that. Clearly we're very focused on the Beedaloo opportunity which is an opportunity to take what we're doing in the APLNG as upstream operator and translate that and I'll talk a little bit about the way that program progresses and I've discussed with you that we're actively pursuing green hydrogen and small scale LNG. So on that note I'm going to pass over to Laurie and he'll take you through the financial performance.

Thanks Frank and good morning everyone. I'm going to start on slide 14 and our strong set of financial results. These have been made possible by good execution in a challenging environment. The highlight is the record distributions from APLNG contributing to a 7% increase in free cash flow to over $1.6 billion. This high free cash flow enabled us to reduce net debt by over $770 million to $4.6 billion or $5.2 billion with the impact of lease liabilities. Underlying profit was stable at just over $1 billion. However, statutory profit declined due to the APLNG impairment and Cameron owner's contract provision charges announced in July. Underlying ROCHI reduced slightly, reflecting stable profitability and returns from our upstream business, offset by lower returns in the energy markets business, reducing down to just over 10%. Moving on to slide 15, we've booked a $746 million impairment of our investment in AP LNG and have recognised an onerous contract provision of $455 million post tax associated with our 20 year Cameron LNG purchase contract. In both cases these charges largely reflect lower short and longer term commodity price assumptions. The impact of lower oil and JKM prices on the APLNG investment was partially offset by stronger field and operational outlook. Under the Cameron contract, Origin purchases LNG at a Henry Hub Link price plus a fixed tolling fee. We assume onward sale at JKM prices. The owner's contract provision is the result of an assumed contraction in the spread between Henry Hub and JKM prices. We currently estimate an after tax cost of around $25 million per annum. Under accounting standards this cash flow is then discounted at US Treasury bond rates. The average over the contract period was a low 0.81%. Moving to slide 16 and this is just a reminder that we've adopted the new lease standard and we've also changed our treatment of dewatering and work over cost at APLNG. This is consistent with our treatment at the half year. The impact of both changes on underlying profit in 2020 is minimal but you'll need to take note of the expenses moving around between EBITDA, depreciation and financing costs. We've provided additional disclosures in the OFR and financial statements to make these movements clearer. Underlying profit on slide 17, the stable year-on-year. a great result in a challenging environment. Lower earnings in our energy markets business was consistent with the midpoint of guidance. This was more than offset by lower integrated gas commodity hedging costs and lower corporate costs which were helped by the non-repeat of last year's remediation provision increase. Adoption of the new leasing standard explains most of the increase in DNA with offsetting lower lease charges across each of our business segments. Net interest costs are again lower due to lower debt and lower average interest rates. On slide 18 you can see energy markets earnings were down $115 million or 7% with all of the decrease coming from the electricity division partially offset by higher gas gross profit and lower cost served. Electricity gross profit decreased $203 million with lower margin and volumes. Margin was down $136 million. mainly due to the introduction of the VDO and DMO price re-regulation, and to a lesser extent, unplanned outages at Araring and Mortlake power stations. Lower sales volumes impacted earnings by $67 million, primarily driven by milder weather, lower usage from solar and efficiency gains, and COVID-19 impacts on demand. Gas gross profit was up $29 million with lower procurement costs partially offset by lower volumes due to the roll off of short term wholesale contracts in the prior year. Our cost out program is well underway with cost to serve down $40 million year on year and we remain on track for the $100 million cost reduction to cost to serve against the 2018 financial year baseline. Turning now to Integrated Gas on slide 19. Our integrated gas business EBITDA was down 44 million or 2% excluding the impact of the accounting changes. LNG revenue was down 100 million mainly due to mix with contract off-takers exercising their full downward volume flexibility from the second half. This resulted in a higher proportion of spot LNG volumes sold into a weaker market. Realised LNG contract prices were flat in Australian dollar terms. Domestic revenue was down $45 million with reduced volumes and average prices. Lower revenue was partially offset by operating cost savings including lower gas purchases. Also offsetting lower revenue was lower origin oil and LNG hedging and trading costs. Finally our recovery of origin overhead costs from APLNG is based on the level of direct operating and development spending. As we have reduced direct spending we are now under recovering against those overhead costs. This has increased these net overhead costs year on year. Turning to cash flow on slide 20. Operating cash flow was $951 million down $374 million. This was more than explained by a $465 million unfavourable movement in electricity futures exchange collateral which will unwind as positions are settled. and also a high tax paid on prior year earnings of $105 million. We delivered strong free cash flow, an increase of $105 million on the prior year excluding the Octopolis energy investment. This strong performance was driven by record distributions from APLNG of just under $1.3 billion and a significant further reduction in interest paid. The result represents a free cash flow yield of 16% and a cash conversion excluding the futures exchange collateral of 93%. Moving next to capital structure and dividends on slide 21. We continue to target debt to EBITDA in the two to three times range and I'm pleased to say we're currently at the low end of the range at 2.1 times. Staying within the range will be tougher this coming year as EBITDA reduces with lower commodities. Apart from the franking is in line with the prior year. We have previously foreshadowed a low franking account balance due to the timing of tax deductions from realised foreign exchange losses on debt maturities. We're also planning to accelerate debt reductions related to our Poseidon asset. The full year dividend represents 27% of free cash flow, slightly below our target range of 30% to 50%, but appropriate given the uncertain business conditions we currently face.