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Edited Transcript of 2.HK earnings conference call or presentation 24-Feb-20 7:00am GMT

Full Year 2019 CLP Holdings Ltd Earnings Presentation

Kowloon, Hong Kong Mar 24, 2020 (Thomson StreetEvents) -- Edited Transcript of CLP Holdings Ltd earnings conference call or presentation Monday, February 24, 2020 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Angus Guthrie

CLP Holdings Limited - Director of IR

* Geert Herman August Peeters

CLP Holdings Limited - CFO & Executive Director

* Richard Kendall Lancaster

CLP Holdings Limited - CEO & Executive Director

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Conference Call Participants

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* Dennis Ip

Daiwa Securities Co. Ltd., Research Division - Research Analyst

* Ming-Hon Li

HSBC, Research Division - Head of Utility and Alternative Energy and Analyst

* Pierre Lau

Citigroup Inc, Research Division - MD, Head of Regional Utilities Research Hong Kong, China & Korea and Deputy Head

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Presentation

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Angus Guthrie, CLP Holdings Limited - Director of IR [1]

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Ladies and gentlemen, welcome to this webcast of CLP's 2019 annual results briefing here in Hong Kong. We launched our 2019 annual results announcement with the Hong Kong exchange around mid-day and have subsequently posted on our website along with the presentation, which we will now present here.

The briefing will be delivered today by CLP Holdings' CEO, Mr. Rich Lancaster, on my right; and our CFO, Mr. Geert Peeters to Richard's right. My name is Angus Guthrie, and I'm Director of Investor Relations at CLP Holdings, and I'll be your host for this afternoon.

We will follow the usual protocol that we've adapted in past years with Richard and Geert running through the presentation materials at the commencement of the presentation, we will then have a question-and-answer session. Due to the health concerns here in Hong Kong this year, we do not have a live audience of analysts. However, we have organized for the analysts to have a live question session through teleconference lines. (Operator Instructions) At the end of the session, we will give priority to the analyst questions on the teleconference line. But we will endeavor to address all questions in due course.

With that framework established, I might hand over to Richard to commence the presentation.

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Richard Kendall Lancaster, CLP Holdings Limited - CEO & Executive Director [2]

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Well, good afternoon, ladies and gentlemen, and thank you very much for joining us on the webcast today. Our results in 2019 reflect the changes, the challenges and the opportunities in our business. Our operating earnings were down by 20%, which was mainly due to the lower permitted rate of return in Hong Kong together with lower earnings in Australia.

Our low carbon generation portfolio in Mainland China brought us stable and reliable results. While in India, we commenced the first full year of our partnership with CDPQ. In an important step, we launched an update to our Climate Vision 2050, updating our strategy and committing not to build any new coal-fired generation. We complemented this step with our ongoing investments in business improvement and innovation as we continue our drive towards becoming a utility of the future. While we saw a reduction in earnings this year, the fundamentals of our business remain strong. We have the capabilities, the strategic position and the financial capacity to deliver our investment plans under the scheme of control and to seize the opportunities being presented by the energy transition.

Financially, we reported operating earnings of $11.1 billion, a reduction of 20% when compared with 2018. Operating earnings per share were $4.40. We booked a one-off noncash impairment of goodwill at EnergyAustralia in June 2019, as a result of which, our total earnings were $4.7 billion, representing $1.84 per share.

2019 marks the first full year of the new Scheme of Control Agreement, which provides us with stable regulatory regime for 15 years. We've entered this period with a strong balance sheet and a strong capital structure. This strength and stability underpins our policy of paying reliable and consistent ordinary dividends, with steady increases when supported by our earnings and the ability to fund growth in our business.

Consistent with this policy and the lower earnings this year, the Board has chosen to maintain the fourth interim dividend at the same level as last year of $1.19 per share, bringing the total annual dividend up to $3.08, which is an increase of 2% over last year.

CLP is committed to achieving 0 harm in all of our activities and operations. We're still not satisfied with our safety performance and recognize that there's still a lot of work to do across our operations to improve this performance. In Hong Kong, we continue to maintain our extremely high levels of reliability, while we have increased customer accounts and electricity sales.

In Australia, the intense retail competition has led to a reduction of customer accounts, and our electricity sales were also impacted by lower usage per customer. We've continued to decarbonize our generation portfolio, adding solar projects in China, India and Australia, while lower electricity sent out reflected our sale of a 40% increase in CLP India to CDPQ and operational issues in Australia, partially offset by higher generation in China.

Now I'll now hand over to Geert to provide more details on our financial performance.

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Geert Herman August Peeters, CLP Holdings Limited - CFO & Executive Director [3]

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Thank you, Richard, and good afternoon, ladies and gentlemen. 2019 was always going to be a year of recalibration of our earnings. Through 2018, we flagged that earnings in Hong Kong, India and Australia would all be lower in 2019, and this has indeed come to pass. However, the decline in Australia has been more significant than anticipated, driven by the reregulation of retail electricity prices and reduced availability of major generation assets. This reregulation of retail prices also led to the significant impairment of goodwill in Australia as disclosed and discussed in our interim results.

Revenue in Australia was down 6%. So revenue on the group was down 6%, mainly due to lower sales in Australia and depreciation of the Australian dollar. We report operating earnings for the group of $11.1 billion, 20% lower than in 2018, with the reductions coming primarily from Australia and Hong Kong. The items affecting comparability mainly represent the 6.4% impairment of retail goodwill at EnergyAustralia booked at the interim. This was triggered by new regulations on electricity prices in Australia that came into effect in July 2019. After adjusting for items affecting comparability, total earnings were HKD 4.7 billion.

As you all know, we use adjusted current operating income or recurring EBITDA to discuss the underlying segment operation performance of the business. This year, the reduction in both operating earnings and ACOI was around 20% when compared with the previous year. Changes in fair value have been modest. Finance costs were moderately lower and the lower income tax resulted from the lower profit in Australia and Hong Kong. Noncontrolling interests now include the 40% share of the earnings of CLP India attributable to CDPQ as well as a 30% interest of China Southern grid in CAPCO. As a result, we have delivered a consolidated ACOI of HKD 17 billion.

While the headline at ACOI dropped by 19%, after adjusting for year-on-year foreign exchange movements, the reduction was actually 17%. The negative foreign exchange impact, aggregating to around HKD 400 million reflects the depreciation of the Australian dollar and renminbi relative to the Hong Kong dollar. As illustrated clearly in this chart, the reduced contributions to ACOI have mainly come from Hong Kong and Australia.

I will now proceed to address each of the business units separately in more detail. Starting with Hong Kong. The operational performance of our Hong Kong business was again dependable. Our reliability remains amongst the best in the world and local electricity sales were up 1.8%, mainly driven by warmer weather and supported by load growth from data centers and infrastructure projects. In 2019, we have continued to make good progress on projects with a clear strategy of decarbonization, digitalization and driving greater energy efficiency. This includes the new gas-fired generation units at Black Point, new gas supply sources and infrastructure, the landfill energy from waste project and significant uptake of our solar feed-in tariff.

From a financial perspective, ACOI, excluding foreign exchange differences, was down by almost $1.4 billion or 11%. This reflects the impact of the lower permitted rate of return under the new SoC which was only slightly offset by the increase in net fixed assets of 3.4% during this year. The reset in our earnings was fully anticipated, and we now have a new predictable earnings trajectory as we continue with the critical investments under the new development plan. Capital expenditure for 2019 was HKD 9.1 billion.

Looking forward, we will continue the decarbonization journey, and we are on track to contribute to the government's target of around 50% gas-fired generation in Hong Kong in 2020. We will continue to progress the major investments included in the development plan as well as the renewable energy, energy efficiency and conservation initiatives under the new scheme of control.

Moving now to China. Our diversified portfolio in China is delivering reliable earnings. Excluding renminbi depreciation, our ACOI has increased there by around HKD 320 million or 13%. Our nuclear projects delivered stable performance, contributing around 2/3 of earnings in China. Daya Bay performed reliably as usual, while the 6th and final unit of Yangjiang was commissioned in July 2019.

Our renewable footprint in China increased by 86 megawatts this year. Earnings from the diversified portfolio benefited from new projects and higher hydro resource from our IG plant. This was partially offset by slightly lower wind resources across the portfolio.

Payment of subsidies from the central government for renewable energy continue to be delayed. The aggregate amount due now is HKD 1.3 billion. Contribution from our thermal projects increased in part due to lower coal prices and in part due to lower seasonal competition from hydro electricity for our Fangchenggang plant in Guangxi. However, margins and profitability of the overall coal portfolio will continue to be variable and impacted by low tariffs.

As part of our innovation and diversification strategy, CLP, together with other partners, has been awarded a contract to deliver an incremental distribution network, or so-called IDN, at the High-tech Zone at Fangchenggang in Guangxi. We commenced to provide electricity supply services to our customers there in the High-tech Zone in January 2020.

Looking ahead, the evolution of market regulations and the introduction of market reforms is continuing to put increased pressure on margins for many of our projects. We will continue to pursue strategies to increase sales from existing projects, and we will look for new 0 emissions opportunities in a disciplined and selective manner as the electricity market reforms. We will also further explore development and diversification opportunities, such as IDNs, particularly in the Greater Bay Area.

To India now. In India, we continue to expand the portfolio and explore new business opportunities. Generation from our wind and solar portfolio was higher than last year, and earnings were slightly higher in aggregate. At Jhajjar, we achieved good operational performance and increased capacity payments for high availability. However, our thermal earnings were overall lower reflecting the end of the Paguthan PPA in December 2018.

The business faced increased challenges in collecting revenues for renewable energy from distribution companies, and total outstanding receivables have reached an amount of HKD 800 million. 2019 was the first full year of our partnership with CDPQ. Consistent with the objectives of this partnership, we acquired our first transmission asset in November, and we were also successful in bidding for a wind farm development project. Looking ahead in India, we will continue to focus on investments in renewable energy and transmission under our new partnership. We will proceed to complete our acquisition of 2 transmission projects during 2020, and we will commence construction of the Sidhpur wind project. We will also continue to optimize performance of our existing portfolio, including exploring new commercial avenues for the Paguthan plant.

Over to Southeast Asia. The operational performance in the region was again steady. Operations at the Lopburi Solar Plant continue to be reliable and benefited from higher solar resources. At Ho-Ping, our ACOI increased, driven by both lower coal costs and higher tariff. As part of our strategic decision stated in Climate Vision 2050, not to add any new coal-fired generation assets to our portfolio, we have decided to exit from our 2 legacy coal development projects in Vietnam. In the future, our efforts in the country will focus on exploring investment opportunities in renewable generation.

To Australia now. In Australia, competition in the retail market remains intense. The introduction of regulated caps for retail electricity prices in July represented the most significant change to energy retailing for many years. In response, we introduced simpler offers and prices to all customers who are stable or reduced. These market conditions have had a negative impact on both our margins and the number of customer accounts. The reregulation of retail electricity prices triggered an impairment of goodwill within the retail business of HKD 6.4 billion, which was reported in our midyear results. While wholesale market prices continue to track around historic highs, we experienced reduced output at our 2 largest plants, Yallourn and Mount Piper, due to maintenance and coal supply issues, respectively.

The reduced base load generation increased the utilization of our gas-fired power facilities, which then resulted in an increase in our generation costs. In addition, the higher wholesale prices had a negative impact to our cost to acquire energy. As a result, both the customer and energy segments delivered lower earnings in 2019. Going forward, we will continue to focus on service excellence and customer support, particularly in areas impacted by the recent bushfires. We will remain focused on improving compliance, reducing costs and making it easier for our customers to access new products and services.

Operationally, EnergyAustralia's focus will remain the optimization of its generation portfolio and asset reliability and securing adequate fuel supply for the Mount Piper power station for the short and long term. It will also explore the integration of flexible capacity options, including pumped hydro and gas-fired generation to help enhance the reliability and affordability of power as the country moves towards a low-carbon future.

Looking ahead in 2020, we will have the first full year impact of the price reregulation, and we expect intense competition in retail markets to continue. On generation, we expect the wholesale electricity market price to trend down as additional renewable energy capacity enters into the system. This will add to the intermittency of power supply, so we expect price variability and volatility to remain high. In summary, these unfavorable conditions will put further downward pressure on margins and earnings in the Australia business.

Some words about cash flow and balance sheet now. The free cash flow generated for the year has decreased by about $2 billion or about 8%, primarily reflecting lower underlying financial performance from Hong Kong and Australia. In the first half of the year, we also received the remaining balance of HKD 1.4 billion from a 40% divestment of CLP India to CDPQ. The group invested around $12 billion in 2019, of which $8.8 billion was in Hong Kong. $1.1 billion was for maintenance CapEx in Australia and $1.2 billion was for other CapEx, which included, amongst others, the completion payment for our investment in Yangjiang Nuclear. After funding these commitments and dividends, our net debt has increased by HKD 0.8 billion to HKD 44 billion. While our net debt to total capital ratio remains low at around 27%. With significant undrawn facilities and high credit ratings, our financial position remains strong.

This is also reflected in our ability to raise competitive financing. In October 2019, we issued a $500 million perpetual capital security at a $3.55 coupon to redeem the previous issuance. The coupon of the securities is 70 basis points tighter than the one that it replaced.

In summary, the business is well placed to fund our commitments to shareholders and bondholders, while retaining the ability to fund our investment plans under the scheme of control.

I now hand it back over to Richard for a talk about the strategy and the outlook.

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Richard Kendall Lancaster, CLP Holdings Limited - CEO & Executive Director [4]

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Thank you, Geert. At CLP, we play a key role in Hong Kong's energy transition. And in 2019, we progressed projects with a clear strategy of decarbonization, digitalization and driving greater energy efficiency. In order to support the government's fuel mix target of around 50% gas-fired generation in 2020, we've made good progress with the 550-megawatt combined cycle gas turbine unit at Black Point Power Station, which is currently under commissioning. While preparations for the development of a second CCGT unit have already started.

We've also achieved some important milestones in the development of the offshore LNG terminal. Construction contracts were awarded in January. We've contracted for gas supply and the required storage vessel has also been secured. In addition, there's also been steady progress on our smaller-scale initiatives. Our feed-in tariff scheme had received more than 6,900 applications by the end of 2019. Around 84% of those representing a total capacity of around 90 megawatts have already been approved. The West New Territories' landfill energy from waste project has now commenced generating power from waste gas and the installation of smart meters has progressed well with over 420,000 meters installed by the end of the year. Together, these efforts will make a strong contribution towards Hong Kong's energy transition and decarbonization pathway.

The projects I've mentioned are all aimed at improving the reliability and environmental performance of our electricity supply in Hong Kong. However, we recognize that it's also important to do this as cost effectively as possible and to minimize the financial impact on our customers. This is particularly true following the recent period of unrest in Hong Kong, where many small businesses are experiencing difficulties.

In 2020, the increase in gas-fired generation will produce significant environmental improvements, and we will see CLP's Power's carbon intensity drop by around 20% in 1 year. This will make CLP's carbon emissions performance one of the best in Asia. Yet, this comes with a significant increase in our fuel costs. We've, therefore, worked hard to reduce those costs where possible and limit the tariff increase in Hong Kong to just 2.5%, which is below inflation.

We've also launched a HKD 200 million relief program to help ease the burden on small businesses and the underprivileged. At CLP, we see innovation as the key to staying ahead of changing customer preferences as climate change, the energy transition and the speed of technological change become increasingly prominent. We're ensuring that innovation is integrated into the culture of the group, and the focus on business units using technology to improve performance and also turn promising initiatives into commercial opportunities.

The launch of Smart Energy Connect, Hong Kong's first online energy management solutions platform for businesses and organizations is one such example. We've deployed a variety of smart technologies, such as remotely operated robotics that undertake inspections in previously inaccessible areas and advanced patent recognition technology, which can detect abnormal conditions before equipment failure occurs. Investments in companies with cutting-edge technology and strategic capabilities also help our progress. For instance, our latest investment in R&B, a Chinese-based AI company, specializing in energy management solutions for buildings provides us with the technical capability to operate in this fast-growing market.

We also continue to participate in activities such as the Free Electrons' global energy start-up accelerator program, allowing us to partner with leading global utilities and start-up firms to fast-track the adoption of new technologies. As we move forward, innovation is simply something we do as part of the natural course of our business, remaining agile and efficient, inquisitive and effective to get the best out of our assets and make the most of our opportunities.

CLP was the first Asian-based power company to set carbon intensity reduction targets for its generation portfolio back in 2007, when our original Climate Vision 2050 was launched. Following the ratification of the Paris climate change agreement, we undertook a comprehensive review of our Climate Vision 2050, with the aim of aligning ourselves with that agreement. Our Climate Vision 2050 targets are now tracking towards the required science-based targets. We've pledged not to invest in any additional coal-fired generation assets and to phase out our existing coal-fired assets by 2050 at the latest. We've also pledged to revisit and strengthen our decarbonization targets at least every 5 years as technologies advance and costs reduce, tracking our progress against the goals of the Paris climate change agreement.

The updated Climate Vision 2050 is the foundation stone of our business strategy, giving us a decarbonization road map aligned with local policies in each of our markets and demonstrating our desire to contribute to the world's journey towards a sustainable energy future. Put simply, it's our vision for the future.

The recalibration of our earnings in 2019 reflects the ongoing energy transition impacting our industry. The long-term fundamentals of our business remain strong supported by the diversity of our portfolio, the capabilities of our people and our significant financial resources. We have a clear direction to navigate this dynamic landscape, and we'll continue to invest for the long term to bring value to all our stakeholders. In Hong Kong, while there are short-term challenges, we're confident they can be overcome. We'll continue to focus on providing clean energy infrastructure and enhancing customer experience. Through China and India, we'll continue to see good quality, long-term opportunities to expand our noncarbon emitting portfolio.

In Australia, we're cautious about the immediate outlook, yet remain confident in the long term. The market has a need for investments in fast response generation to reduce intermittency and volatility in the market. While we see opportunities right across our business, over the next few years, the investments required under the development plan in Hong Kong will take up the majority of the group's capital expenditure.

Together with our dividend policy and prudent approach to financing, this will limit our resources to invest in other areas over this period.

So in summary, we remain resolutely focused on delivering value from our investments, and we'll be selective and disciplined in our allocation of funds towards the continuing opportunities provided by the energy transition.

So thank you, ladies and gentlemen, and I'd now be happy to take your questions.

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Questions and Answers

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Angus Guthrie, CLP Holdings Limited - Director of IR [1]

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Thank you, Richard. As Richard indicated, we will now commence the Q&A session. (Operator Instructions) I believe the first question is from Pierre Lau from Citi.

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Pierre Lau, Citigroup Inc, Research Division - MD, Head of Regional Utilities Research Hong Kong, China & Korea and Deputy Head [2]

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This is Pierre Lau from Citi. There are 3 questions from my side. The first one is what is your company business strategy to deal with the declining energy prices in Australia ahead both in terms of wholesale and retail levels? Number two, what are your forecast utilization rate of Yallourn and Mount Piper power plant in 2020? I mean, how fast would their utilization rates recover each year? And number three, what are the expected investment scale and return rate of your 3 transmission line projects in India?

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Richard Kendall Lancaster, CLP Holdings Limited - CEO & Executive Director [3]

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Hear some of those -- those last 2 questions. First one I got through. But...

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Angus Guthrie, CLP Holdings Limited - Director of IR [4]

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I'm afraid, Pierre, could you please just repeat the second and third question?

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Pierre Lau, Citigroup Inc, Research Division - MD, Head of Regional Utilities Research Hong Kong, China & Korea and Deputy Head [5]

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You mean repeat which one, sorry?

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Angus Guthrie, CLP Holdings Limited - Director of IR [6]

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The second and third question, if that's possible.

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Pierre Lau, Citigroup Inc, Research Division - MD, Head of Regional Utilities Research Hong Kong, China & Korea and Deputy Head [7]

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Okay, the second question is, on your forecast utilization rate of Yallourn and Mount Piper power plant in 2020. I mean, how fast their utilization rate should recover this year? Number three, what are the expected investment size and return rate of your 3 power transmission assets in India?

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Richard Kendall Lancaster, CLP Holdings Limited - CEO & Executive Director [8]

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Thanks for repeating those questions, Pierre. The first time you mentioned them, they -- it didn't come through quite clearly. I'll address the first 2 questions on the business strategy with lower wholesale prices in EnergyAustralia and the performance of our wholesale generation portfolio, and I'll ask Geert to address the third question on the transmission assets. For our business in Australia, we are seeing wholesale prices trending lower, but we are still seeing quite volatile market conditions as more and more renewable energy is built to help energy -- or help Australia go through the energy transition then that is leading to a quite -- on occasions, quite tight supply and demand balance. So fundamentally, we would see that the business going forward would still have considerable volatility even though on average, wholesale prices will be trending down.

Our approach there remains to make our business as cost-efficient as we can. We are taking extra steps to reduce costs in our business to see it through. We're also making selective investments in wholesale generation assets that will make our portfolio more able to deal with volatility in the market. And some examples of these are the battery storage that we have contracted in Victoria. We are looking at pumped storage hydroelectric solutions and also expansion of our gas-fired assets. We have now added more gas capacity at our Hallett plant in South Australia, and we are working very hard to see an expansion at our Tallawarra plant in New South Wales. So all of this will help us not only reduce the risk that's inherent in volatile markets, but also to be able to better support and to have generation that's available as and when it's needed.

Your second question on the utilization rates at Yallourn and Mount Piper. We did see some struggles in the first half of the year at Yallourn, we did have to take steps to have longer outages because we had to make some changes to our switchgear to make them as safe as we would like. Those changes have been put into effect now, so the plant is running normally. And at Mount Piper, we were faced with a different challenge, which was around the supply of coal. And in particular, the quality of coal, which came from a particular area of the single mine that supplies Mount Piper. We have, again, completed a shift to a new area of the mine, so that has improved the coal quality. However, Mount Piper is still only supplied from a single source, and we are working to see how we can strengthen up the diversity of our coal supplies. And that means that whilst we still have that dependence on a single source, we will see potential for quality of coal or supply disruption. Longer term, we would aim to have multiple sources of supply, so that, that would reduce that risk.

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Geert Herman August Peeters, CLP Holdings Limited - CFO & Executive Director [9]

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On the return, Pierre, as you would expect, transmission projects in India do have an intrinsic return that is lower than generation assets. However, what is important to keep in mind as well is that they attract quite a high leverage. So the tolerance for the local -- from the local banking sector for leverage on transmission lines is quite high. And secondly, these projects come with 20- or 30-year contracts, so that helps the leverage as well. And it also helps the cash flows for the equity. So all in all, we bid, of course, at a return on equity, which meets our threshold and is reflective of this risk. This lower risk.

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Angus Guthrie, CLP Holdings Limited - Director of IR [10]

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If that has addressed the questions, could we move on to the next, which is Dennis Ip from Daiwa.

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Dennis Ip, Daiwa Securities Co. Ltd., Research Division - Research Analyst [11]

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So I have 3 questions. Number one question is, we have seen now the fourth dividend has been stable, and we have seen that over last several years we have, the dividend keep going up. So do we have any changes of the dividend in the near terms? That's question number one. And question number two is, recently we have seen there's a lot of the gas available in Australia because of the weak Asian's LNG market created by the coronavirus. So how it's going to affect our wholesale electricity price in the near terms? And also, I understand that we have a legal proceeding with the Iona Gas Plant, so any update on that? And finally, so can you discuss, talk more about the potential impact of the electricity consumption of the coronavirus happening in Hong Kong and also in China?

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Richard Kendall Lancaster, CLP Holdings Limited - CEO & Executive Director [12]

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Yes. Thank you, Dennis. Maybe I'll start with the impact of the coronavirus, and Geert, you may want to comment on the dividend policy and perhaps also the Iona Gas Plant litigation. I can talk about more widely the impact of the coronavirus. It is quite a recent development. And we -- first of all, at CLP, we take the health and safety and well-being of our staff and our customers very seriously. So that's been our #1 priority is to make sure that we are providing a safe and healthy workplace and minimizing any risk to our customers and to the community.

Secondly, we run an essential operation. So we've needed to make sure that our operations are well provided, well resourced. And so, so far, that's not had any concerns to us whatsoever. We're still running a very reliable operation, whether that's in Hong Kong or in China or in Australia or India as the case may be. It's a little bit too early to really assess any impact on electricity sales or electricity prices on -- from the coronavirus. We do see that there have been some changes in the short term, but whether they are consistent or whether they will extend, it's a little bit too early to tell from that. But it is something that we are monitoring very closely, and we'll make sure that we continue to keep us safe and reliable as we possibly can. On the dividend, Geert?

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Geert Herman August Peeters, CLP Holdings Limited - CFO & Executive Director [13]

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On the dividend, yes. As the Board defines and decides on the dividend by case by case, what the Board takes into account is, of course, our capital expenditure commitments. Our desire to keep the cost of capital low, i.e., to keep high credit ratings. The cash flows of the year and the outlook of the cash flows to come. And last but not least, of course, our dividend practice and dividend policy. Now as we have discussed during the year, you will have noticed that, indeed, because of the reduction of the rate of return, the cash flow generated this year was less than the cash flow generated in the past years. You will have heard that our cost of capital is still very competitive. Our credit structure is still strong. But then on the other side as well, that with respect to the outlook of the cash flows there are some uncertainties about where the business in Australia will exactly go in the coming months. And so as a matter of prudence, as the Board has done a couple of years ago as well when the rate of return was reset down, it appeared that all in all, the right dividend or the right dividend move to do this time was to have a flat decision on the dividend.

With respect to the Iona litigation, nothing new to mention. The proceedings are ongoing. We have the same disclosure in our financials than before. We think as before that the merits are limited to none of the claim, and we fight very hard against that claim.

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Angus Guthrie, CLP Holdings Limited - Director of IR [14]

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I think there was 1 more element to the question, which was actually the gas available in Australia, given the weak LNG market, that is being caused by the coronavirus. Dennis, without going into a lot of detail there. I think this is somewhat of a transitory situation there. We will have to see how that plays out more in the Australian market. But I would just point out that at the moment, the Australian market is -- gas market's in its low season, which is sort of summer through autumn. By the time you get into winter, there will be more gas demand in Australia, which may well then sort of reassert some higher upward price in Australia as well. So I think that really has to wait and see how it plays out over time.

I hope that addressed those questions. And the next question on the line is from Evan Li of HSBC.

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Ming-Hon Li, HSBC, Research Division - Head of Utility and Alternative Energy and Analyst [15]

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Can you hear me?

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Richard Kendall Lancaster, CLP Holdings Limited - CEO & Executive Director [16]

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Yes, we can hear you clearly, Evan. Thank you.

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Ming-Hon Li, HSBC, Research Division - Head of Utility and Alternative Energy and Analyst [17]

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I have a couple questions. They are, first of all, I just want to understand the permitted return in Hong Kong has been set to 8%. And we understand that there's some incentives over time if we do achieve some targets, we could get it from 8% to a maximum 8.243%. How are we looking in terms of the investment that we have on plan? I understand that Richard has mentioned here some innovation, some efficiency schemes in energy program that have been planned. How we should be expecting? Should they getting the maximum incentive return on that aspect? That would be my first question. Second question will be in the -- you mentioned about Mainland China, more investments in the Greater Bay Area with a specific mention on renewable energy. Given the subsidy situation in Mainland China is not getting any clearer. Obviously, a lot of subsidies have been delayed. Has the strategy on that aspect, particularly in wind and solar, for instance, changed? Or are we shifting our investment towards projects that could warrant grid parity with clearer investment returns, et cetera? And the third question that we have on mind is that you did mention that no more new investment in coal generation. On the other hand, would we consider, would the group consider disposal of any coal-fired generation assets within the portfolio? Yes, that will be all.

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Richard Kendall Lancaster, CLP Holdings Limited - CEO & Executive Director [18]

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Yes. Thank you, Evan, for those questions. I'll start with your first question on our Hong Kong business. We work very hard to earn the incentives in our scheme of control business, aside from clearly being in our interest to do so. They are incentives that help our customers and help promote better energy efficiency, so we believe these are the right things to do. And some of the incentives then are ploughed back into programs that help benefit our customers. So there is a win-win there for the shareholders and for our customers. So in 2019, we pretty much achieved all of those incentives.

In the Greater Bay Area and our investments in China, more generally, you're quite right that with the cost of renewables coming down to the point where subsidies are no longer needed, it has been an inflection point really in the development of renewable energy in China. That goes to India and other markets as well that we've reached a point where subsidies are no longer needed. So grid parity is the term that you used means that renewable energy can stand-alone relative to coal. What we've seen in China is as we've reached that inflection point, we don't have the same clarity around the policy that we've had in the past under a feed-in tariff scheme. So whilst we still see good opportunities to invest and whilst renewables are clearly needed as part of the nation's energy policy, we really need to see the clarity and the transparency around the way that renewables will be regulated going forward.

Now that has not stopped us from investing. We completed, and we had our first year of the Yangjiang Nuclear Project, which was quite a significant investment in 0 carbon energy in China. And as Geert mentioned during his presentation, we are also looking at independent distribution networks and other business opportunities in China, particularly in the Greater Bay Area.

Thirdly, your question on -- which was on -- remind me just on the...

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Angus Guthrie, CLP Holdings Limited - Director of IR [19]

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Our new investment in coal and...

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Richard Kendall Lancaster, CLP Holdings Limited - CEO & Executive Director [20]

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And consider disposal of -- sorry, yes. Yes, we are not going to be building any new coal-fired power. We do have a portfolio of coal plants in our business. Some of those are fast approaching their natural retirement. In the case of Hong Kong, we are currently building gas-fired generation so that, that can replace an entire coal-fired power station. So that will be closed before the -- well, as part of our current development plan. In other parts of our portfolio, coal-fired power is needed to support markets. And in Australia, for example, we do need coal as part of our portfolio to ensure that we can meet customer demand, and that will take some time to see through. We do consider divestment of coal. But we also consider that selling a coal-fired power station is not the same and doesn't have the same impact on carbon emissions as retiring it in a responsible way. So our approach is to see through and manage as far as possible, where we believe that we are the best people to responsibly close down a coal-fired power station, we would do so.

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Angus Guthrie, CLP Holdings Limited - Director of IR [21]

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I trust that addressed the question, Evan. And we do have a couple of questions on -- from the webcast itself. Janice, perhaps you could read those out for us? Or would you like me to do that? I'm sorry, I'll proceed. The first question, I believe, is from Tony Fei of BOCI, a research analyst. The question is the nuclear segment contributed HKD 128 million increase in ACOI in first half 2019. But minus HKD 1 million in the full year despite the commissioning of Yangjiang 6 in July. Could you elaborate on the negative factors encountered in the second half of 2019, which include service and statutory charges and VAT refund progress as noted on the slide? And whether they will be repeated in 2020?

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Geert Herman August Peeters, CLP Holdings Limited - CFO & Executive Director [22]

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So it is indeed a complex with 6 reactors. And it's not always easy to compare 1 year to another one. So in a certain year, you may have 3, 4, 1 reactor out year after year, these cycles change their loading cycles are the ones that are set by a certain pace of each of the different reactors. So last year, we may have had in 2018, a quite optimum, although we did not have full 6 reactors yet, we had a quite optimum unavailability of reactors. That's one of the variables to take into account. The other variable to take into account, which is quite complex as well, is indeed the repayment of VAT, which has a front-loaded profile. We warned for that last year that front-load was benefiting last year, but would not equally be strong in the years to come. And then finally, there is the element that you mentioned yourself, which is a new element, and that is that big generators, in particular, big nuclear sites have been asked to contribute more to the stability of the grid and so their charges, their service charges, their ancillary charges have been significantly increased.

And then last but not least, as another variable, there is the quantum of energy for which we will not receive the statutory or the regulatory nuclear tariff, but for which we will receive the price at which the market has cleared, the wholesale market in that specific region for us here. This is the Guangdong region. There is the question of what will be that price, and there is a question of how much of the energy of the output will be settled at that price. So all this together makes it quite difficult to speculate exactly where the outcome will be, and so pretty difficult to answer, will those elements play in 2020? Yes. How will they play exactly together and what will be the bottom line? Very difficult to say from now.

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Angus Guthrie, CLP Holdings Limited - Director of IR [23]

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There's a further question from the web. And again, I'll just read that out from Chung Weng Yun of Citadel Securities. There are 3 elements to this question. Could you please share the IPP tariff outlook for China? NDRC announced to cut 5% from tariffs last week. And so far state grid has said it will absorb the cut, but are we expecting it to eventually pass through to IPPs, if the economy deteriorates further? That's question number one. Number two was, could you share more detail on how to mitigate the downside risk on the Australian business? And number three was, are you planning to raise more debt this year to fund growth CapEx? Rich and Geert?

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Richard Kendall Lancaster, CLP Holdings Limited - CEO & Executive Director [24]

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I'll address the first 2 questions, and I think Geert can comment on the -- our funding of future CapEx. But start with the announcement from the NDRC, which we understand, would be absorbed by the grid companies, both state grid and China Southern grid, in terms of what that can -- what we can expect in future. Well, some of our plants in China are operating into the merchant market, so their pricing will be determined by supply and demand. And it is a little bit early to try and predict what may happen with that. And it's -- as far as we understand, these cuts have been there -- announced as a measure to help alleviate the impact on businesses. And as far as we understand, they're being absorbed by the state grid and China Southern grid.

For your second question, which is on mitigating as you put it, the downside risk on the Australian business, I think I could maybe talk more generally about how we are approaching the business in Australia. I talked earlier about our focus on making our business as cost-efficient as possible, and we are continuing to do that. Part of that comes through an approach of adopting digitalization as far as possible, which helps us reduce and potentially even eliminate back office costs. So that is still a relentless focus that we're pursuing in Australia.

In 2019, we saw some impact on our 2 large coal-fired power plants. We've stepped up our investment in Yallourn to address the safety concerns that we had at the end of 2018. That is now completed. We are investing and continuing to invest to make sure that, that plant runs as reliably as it can so that it is there to operate when it's needed in the system. For Mount Piper power station, which relies on a single source of coal, as I was describing earlier, we're taking steps to try and diversify our sources of coal and our supplies of coal so that we avoid any potential disruptions to its operations through inability to secure coal when we need it.

So those would be the main areas. We are also seeing more intense competition in retail market in Australia. And again, our focus there is to offer simple and attractive tariff packages to our customers, to retain customers as much as we can and offer the best quality service that we can to our customers.

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Geert Herman August Peeters, CLP Holdings Limited - CFO & Executive Director [25]

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On the funding, you may recall that we announced that under the new development plan, we have an aggregate of more than HKD 50 billion of investments coming ahead of us in the coming 5 years of that development plan. And yes, indeed, as you suspected, we will be further in the market to raise capital for those projects. We will, where we can use as much as we can our Climate Action Finance Framework. We will be there quite soon when it comes to issuing funding for the LNG terminal and then comes, of course, as well, the funding for the second combined cycle. This, in addition to the network investments that we make on a regular basis as well.

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Angus Guthrie, CLP Holdings Limited - Director of IR [26]

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I think we have time for one, maybe 2 more questions. The next question, if I could just put it straight through, any plans for ending -- entering into micro grid businesses in India?

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Richard Kendall Lancaster, CLP Holdings Limited - CEO & Executive Director [27]

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We have no concrete plans at this stage. Our focus is on the transmission investment, which is a new area of business for us and developing our renewable energy portfolio.

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Angus Guthrie, CLP Holdings Limited - Director of IR [28]

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And then I think as the last question we have time for, from [T. N.] of HSBC. At the interim result some HKD 240 million, HKD 300 million negative impact was guided for the impact of the VDO DMO for the second half. Now the company has reclassified the retail and wholesale segments within EA. Would you please expand on how the second half 2019 actually turned out in terms of customer accounts and churn rate change? And could you show and -- sorry, how should we look for 2020 in terms of the DMO VDO impact?

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Geert Herman August Peeters, CLP Holdings Limited - CFO & Executive Director [29]

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Maybe I'll take it, a mix of many detailed questions, which I will try to address directionally given we don't give normally precise guidance. And so what we had given at the interim result was also a directional guidance of HKD 240 million to HKD 300 million negative impact expected for half year. If you look at the results of this half year, and you analyze it in detail, then you will see that we have ended up on the higher side of that HKD 240 million to HKD 300 million, it was more HKD 350-ish million. When it comes to the impact in the future, we do not give precise guidance, but you will have heard in our presentation that we are bracing ourselves for a full year impact of those caps on prices and the consequences thereof. For us, that has been more simple tariffs, lower tariffs for most of our customers, if not all. And a severe competition battle still ongoing. So we do expect that a full year impact would be significant and follow the trend of the half year impact that we have seen so far.

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Angus Guthrie, CLP Holdings Limited - Director of IR [30]

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Okay. Ladies and gentlemen, I believe that's all the questions that we actually have on the web at the moment or on the lines. It also comes neatly to the end of an hour for the webcast itself. So I may well -- I'll call the webcast to a close now. For those people who might still have further questions, my team and I will be available through the balance of the afternoon to answer questions, and please feel free to contact us through the Investor Relations department with any further questions in the coming days as well. So thank you for your attendance, ladies and gentlemen. I'll call the webcast to a close.