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 one on your telephone keypad. I would now like to hand the conference over to Mr. Frank Calabria, Managing Director and Chief Executive Officer. Please go ahead.

okay thank you very much and good morning everyone and welcome to origins 2021 full year results uh thank you all for joining us um and probably acknowledging that many of you like us are in lockdown and uh just to let you know that uh lori and i are presenting remotely and we also have the rest of our executive team in attendance as you would normally expect um i'll give a short introduction uh then lori will go through the financial review then i'll come back and give an operational update strategy and outlook and then we'll go to questions and answers before I start I'd just like to acknowledge the traditional owners and all of the lands that we are meeting today and all the lands that everyone is participating on this call today and just pay my respects their elders past present and future and with that I'll move straight through to slide four and you can see there a snapshot of our financial results the statutory loss was foreshadowed the market on the 30th of July when we announced 2.2 billion in non-cash charges which were really associated with impairments to the generation assets to some goodwill and energy markets and also the recording of a deferred tax liability to APLG. Our underlying profit is lower for the year which is predominantly due to the lower commodity prices both in integrated gas and energy markets and we've worked hard to offset some of those lower commodity prices through lower operating costs in APL&G, some retail cost savings, lower interest expense, and we've also had some oil hedging gains. Operating cash flow is up slightly to $964 million. That's despite the decline in EBITDA. And our adjusted net debt has continued to reduce. It's down a further just over $500 million to $4.6 billion. And we have, as a board, determined that a seven and a half cent final dividend taking total dividends for the financial year to 20 cents per share so now turning to slide five I just thought I'd give a some highlights obviously operating conditions were challenging this year we obviously had low prices low demand particularly in the early parts of the year with the impact of the pandemic across all of our key commodities and those being electricity gas and oil We continue to generate strong cash flows. Some operational highlights worth calling out. Firstly, for integrated gas, there continues to be what I believe outstanding performance by APLNG. Our reserves replacement on a 2P basis for 94%. We have demonstrated our ability to ramp production up and down during the year to based on demand. Early part of the year it was obviously subdued and then we ramped back up into the stronger demand period and overall was able to achieve production levels similar to the prior year. We've achieved record low unit costs and the distribution break even is also a record low and we finished the year with a cash distribution to origin from APLG of $709 million. In energy markets, we achieved our cost savings target that we set off of FY 2018 baseline of $100 million. We achieved $110 million, so that's very pleasing. And we extend our lead at the lowest cost to serve retailer in the market. We secured gas and supply and transportation deals through the APOMG APA deal into the southern markets from 2023. We increased our customer accounts by $30,000. We now have 250,000 customer accounts migrated onto the Kraken as we establish our new retail business. And I have to say that the growth and material uplift in the value of Octopus Energy has been incredibly impressive, and I'll touch on that later. It's a business now that extends across renewable energy services and technology, and all of those are growing dramatically. So just then coming to the next slide, which really then focuses on our stakeholders and in a challenging year for many of our stakeholders, we continue to support and deliver them. Firstly, for our customers, clearly a lot of customers have been impacted by the pandemic and I'm proud of the way we supported and assisted them, particularly businesses and small to medium sized enterprises. In particular, sectors have been impacted most. And we've been pleased to be able to actually provide that support. And for many, many of our customers, they've had lower energy prices this year. And we've been able to assist them and assist those ones that are in need. On a policy basis, we continue to advocate for energy policy that supports the investment required for particularly the sort of dispatchable reliable energy. And that needs to be supported with the ongoing growth at dramatic levels of solar and wind in our generation mix, as really the energy supply just continues to transition at pace. So it's all about making sure that transition happens smoothly for customers. And that's one of the key areas of policy that I'm sure no doubt people have been reading about recently. I continue to focus on regional communities. We operate in many of them. And also we do quite a lot of good work through our foundation. And you can see there that we've contributed once again in many ways through our people funding and other measures. It does some great work. From a people perspective, our recordable injury rate score of 2.7 was steady. We maintained our top quarter engagement score at 74%. And I think like many others, there's been a real focus on mental health and wellbeing to support people over these last 12 months, including areas like pandemic leave. And we've continued to act on climate change when we think about our planet. So we introduced a short-term emissions reduction target last year and linked that to our executive remuneration. And I'm pleased to report an 8% reduction in our Scope 1 and Scope 2 emissions this year, and that's down 11% since 2017. Just expanding a little bit further on climate change and we are working to a one and a half degree emissions reduction pathway. We continue to progress that work and we're still, we really are in the process of updating emission reduction targets in what is a dynamically changing environment. We've recently announced a non-binding advisory resolution and we'll put that to shareholders at next year's AGM relating to climate reporting. So we clearly continue to make progress not only just in relation to commitments and targets but also our actions and we've taken a number of those actions that you can see there in both the near and medium term so on that note and concluding slide seven I think I'll pass over to Laurie now to go through the financial review and then I'll come back and talk operational strategy outlook and guidance so over to you Laurie thanks Frank and good morning everyone

I'll start with the underlying profit bridge on slide nine. As Frank mentioned, our financial results were significantly impacted by weaker commodity prices across electricity, gas and oil. These negative impacts were partially mitigated by Origin's oil hedging gains, as well as lower operating costs in both businesses. Higher net corporate costs are largely due to investment in systems, including our ERP replacement project, which went live on the 1st of July. Depreciation and amortisation expense was higher due to the accelerated amortisation of our retail IT systems as we implement the Kraken platform and higher amortisation of restoration assets and generation. Interest expense reduced 74 million with lower debt outstanding and lower average interest rates. Moving to slide 10, the statutory loss for the year reflects two material non-cash charges. Firstly, an impairment in energy markets driven by a lower outlook for wholesale electricity prices due to new supply coming online, particularly renewables, as well as a contraction in near-term gas earnings as a result of higher procurement costs and recent subdued market conditions. This impacted the valuation of our generation fleet, particularly our RRing. The outlook for long-term renewable power purchase agreements and the lower gas earnings have also impacted Goodwill's valuation. Secondly, the recognition of deferred tax liability associated with our investment in APLNG. An improved outlook for operating and financial performance means we now expect the APLNG preference shares to be fully redeemed by financial year 2023 and distributions thereafter will be in the form of ordinary dividends. These dividends will initially be unfranked until APLNG is fully utilised to carry forward tax losses, which is not expected until later in the decade. Origin is expected to pay taxes on these unfranked dividends from FY 2024. So just to be clear, the $669 million book reflects the required timing for accounting purposes, but this is no relationship to the underlying project economics, which continue to improve, or tax payments, which we expect will start in financial year 2024. Next, an update on our LGC trading strategy on slide 11. At half year, I presented our plan to defer the surrender of more than 2 million LGCs, electing to incur a shortfall charge of $65 per certificate that is refundable, provided we surrender the certificates within three years. This plan arises as we expect the LGC market to be oversupplied, with the backwardation of the forward curve presenting an opportunity to lower our supply costs. We have now purchased most of the certificates in relation to the 2020 calendar year shortfall at a substantial discount to current market prices, locking in a benefit of around $50 million. We will continue this approach for calendar year 2021, deferring the surrender of an estimated 3.1 million certificates. The 2020 and first half 2021 calendar year shortfalls result in a refundable shortfall charge of $262 million, which is included in the statutory result. Of this amount, $64 million is expensed in underlying profit, reflecting the estimated future cost based on purchases to date and current forward market prices. Currently, the shortfall charge is not tax deductible, but the refund is assessable. The legislation to correct this asymmetry was recently introduced to Federal Parliament. Moving to cash flow on slide 12. Operating cash flow was stable year on year despite the reduction in earnings and payment of the LGC shortfall charge, partially reflecting the unwired of electricity futures collateral positions and a tax refund in the year. Free cash flow was also strong at $1.14 billion, driven by a high cash conversion, $709 million cash distributions from APL&G, lower capital expenditure and lower interest in tax payments. This enabled debt reduction of just over $500 million while also allowing for investment in growth and continuing dividends to shareholders. Free cash flow yield was 15% well ahead of the ASX 200 average. Focusing in now on AP LNG cash flows on slide 13. Due to the lag in pricing of offtake contracts, this result includes the low point in recent oil price cycle from April to June 2020. Despite this, the APLNG distributed $709 million cash to Origin at a realized oil price of US $43 a barrel. Origin also realized oil hedging gains net of premiums paid of $92 million. With the contract pricing lag, approximately half of the FY22 oil exposures have already been priced at US $68 a barrel. At this level, for the full year, we estimate distributions in excess of $1 billion, again, net of origins oil hedging. APLNG continues to be levered around US $500 million per annum before distributions to shareholders. Dealing in the project has reduced to 26%. Next to capital management on slide 14. Our approach to capital management is broadly unchanged. We continue to balance the priorities of reducing debt with delivering returns to shareholders and funding targeted growth initiatives. While headwinds in energy markets are expected to be largely offset by higher earnings and cash flow from APING, debt reduction and risk management remain key priorities. given the higher proportion of earnings will be oil length. We ended the year with net debt of $4.6 billion, with debt to EBITDA at the top of our targeted range at 2.9 times. We continue to target debt to EBITDA at two to three times through the cycle and target a net debt level over the median term of less than $4 billion. We also continue to target a free cash flow payout ratio to shareholders of 30% to 50%, The final dividend of 7.5 cents per share takes the full year dividends to 20 cents per share. 31% of free cash flow and a dividend yield of 4.5%. Dividends will continue to be unfranked in the near term. Moving to costs on slide 15. We've established a track record of driving operating costs lower. Our successes in APOMG and our retail business have been well reported. The chart on the left shows functional costs are trending lower as well. This trend isn't apparent from annual results as it is reflected through lower overheads in our businesses. We expect a reduction in these costs of around 19% over the period shown in the chart to 2022. Discipline management of capital expenditure resulted in materially lower spend in 2021, particularly in generation. Some of this saving comes from re-phasing of shutdowns with a major O'Reilly unit overhaul just getting underway. The licensing and implementation of the Kraken platform was a significant component of our spend in the year and progressing through to financial year 2022. We're also forecasting higher exploration and appraisal spend in the coming year, primarily at Breedaloo. Our objective is to rebalance our capital allocation towards growth initiatives. Now to oil hedging on slide 16. Our oil hedging program is designed to protect our balance sheet through the business cycle, whilst also retaining a level of upside exposure to the oil price. For the coming year, we have roughly half the remaining oil exposure hedged via a combination of swaps, puts, and producer collars, as well as some purchase calls to increase upside participation. Hedge positions have been established for 2023 and are shown on the second chart. will continue to monitor financial risk and potentially add to this position through the year. I'll now provide a more detailed analysis of operational drivers in each of the businesses before passing back to Frank, and I'll start with energy markets on slide 17. Either Dar was down $468 million, or 32%, with a decrease coming from both electricity and gas businesses, partially offset by retail cost savings. Electricity gross profit decreased $288 million, primarily driven by a $10 per megawatt hour drop in wholesale electricity prices and a $15 drop in renewable certificate prices, both flying into retail and business tariffs. Margins were further impacted by higher network and metering costs not factored into the regulated retail tariff and ongoing costs associated with customer support and competition. Gas gross profit reduced 297 million with lower CNI and retail tariffs reflecting the competitive environment, while our procurement costs increased as a result of price reviews and higher JKM link supply costs due to strong demand and international supply constraints in the second half. Margins were also impacted by the roll-off of long-term supply and transportation capacity sales contracts. Cost to serve reduced from our retail cost out program as well as the impact of a 2020 $38 million bad and doubtful debt provision increase associated with COVID-19 not repeating in 2021. COVID's played a role in these results with weaker demand, particularly across our C&I and SME customers, partially offset by higher residential demand with many working from home. And lastly, turning to integrated gas on slide 18. Our upstream business continues to deliver stable production at lower cost while demonstrating the flexibility to respond to market demand. Underlying EBITDA was down $606 million, mostly due to lower oil prices flying into LNG contract pricing. The realized oil price was US $43 per barrel compared to US $68 for 2020. This was partially offset by lower operating costs. Lower earnings from OPLNG were partially offset by origin oil hedging gains and lower LNG hedging and trading losses, as well as lower upstream overhead costs. With that, I'll hand you back to Frank to discuss operational performance.