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Edited Transcript of 2.HK earnings conference call or presentation 6-Aug-19 7:45am GMT

Half Year 2019 CLP Holdings Ltd Earnings Presentation

Kowloon, Hong Kong Aug 12, 2019 (Thomson StreetEvents) -- Edited Transcript of CLP Holdings Ltd earnings conference call or presentation Tuesday, August 6, 2019 at 7:45:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Angus Guthrie

CLP Holdings Limited - Director of IR

* Janice Cho

* Richard Kendall Lancaster

CLP Holdings Limited - CEO & Executive Director

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Conference Call Participants

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* Belle Chang

Morgan Stanley, Research Division - Strategist

* Elaine Wu

JP Morgan Chase & Co, Research Division - Lead Analyst

* Mark Wiseman

Goldman Sachs Group Inc., Research Division - Senior 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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Welcome, ladies and gentlemen, to this -- the CLP 2019 Interim Results Webcast and Analyst Briefing. We have a life audience here in Hong Kong. My name is Angus Guthrie. I'm the Director of Investor Relations for CLP Holdings; and I'm joined on the stage here by Richard Lancaster, our CEO; and Benjamin Lau, our acting CFO. The event is being webcast as well as hosting a live audience here. So we will have, first of all, the presentation, which will be provided by Richard, which will then be followed by a Q&A session. We will address questions from the floor here first but if you are on the webcast, there is a little dialogue box on the bottom right-hand side of your screen, which you can submit a question to at any time and we will then try and address those questions in due course at the end of the webcast.

I think that is probably everything in place. So Richard, if you would like to start the presentation, please?

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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 for coming along today. There's no doubt that the first half has been a challenging one for CLP and one in which we have transitioned the business through a number of changes that will in the long term, deliver greater stability and future growth. Underlying this, the fundamentals of the business are strong, with the capabilities and the financial capacity to deliver our investment plans and maintain our dividend practice.

It's worth remembering that this time last year, we reported an exceptional performance, with operating earnings up by 33%. At the time, we mentioned that the strong first half of 2018 and the fundamentals of the business positioned us well for more demanding conditions that we saw coming in the second half. We specifically flagged the change in the rate of return in Hong Kong, the increasing challenges in the Australian market and pressure on coal profitability in China. These events largely came to pass and their influence continues. In Hong Kong, the reset of the Scheme of Control rate of return has flowed through to our earnings, and we'll now progressively see the benefit of the $53 billion of investments to be made through to 2023 under the new development plan.

In Australia, the challenges that we foresaw for our generation assets have been more protracted than expected. And governments have now sought to reregulate the retail prices. However, wholesale prices remain high, providing opportunities to invest in new flexible, fast-response generation.

In India, we've entered into a partnership with CDPQ to grow the business, with a focus on renewable energy and transmission assets. And in China, we continue to navigate the issue that we foresaw in our coal portfolio and the business is supported by reliable earnings from our nuclear assets.

Importantly, these challenges and transitions have not changed the underlying nature of the business. Our fundamentals are strong and our pathways remain clear.

Financially, given the short-term impacts we've already mentioned, we reported operating earnings of HKD 5.5 billion. This is a reduction of 31% when compared with the exceptionally high earnings delivered this time last year. Earnings per share were $2.17. In this half, we've also booked a one-off impairment of goodwill at EnergyAustralia, and as a result, our total earnings reported a loss of HKD 0.9 billion. The reduction in operating earnings from Hong Kong has been foreshadowed for several years. Approaching this period, we managed the business prudently to ensure we had the financial capabilities to navigate this period successfully.

Our strong balance sheet and our capital structure will allow us to increase dividends and cover our future capital investments despite somewhat lower earnings, and I'll discuss this in more detail towards the end of the presentation. And the Board has recommended a second interim dividend of HKD 0.63, bringing the total interim dividends to $1.26, an increase of 3% on the same period last year. Turning to our operational performance. We've been able to demonstrate resilient performance under a challenging operating environment. CLP is committed to achieving zero harm to all employees, contractors and members of the public in all of our activities and operations. However, our safety performance has not improved, with a tragic fatality within our operations during the period. We are not satisfied with our safety performance, and we recognize that there's still a lot of work to be done across our operations. We continue to maintain first-class reliability in Hong Kong where we're responsible for the entire electricity supply chain, and excluding the impact of Typhoon Mangkhut in September 2018, our reliability has improved, and we continue to make enhancements to our assets and systems to make them ever more robust in the face of such extreme weather events.

We continue to see an increase in customer accounts in Hong Kong and our local demand has continued to increase. However, one long-term sales contract to Mainland China has come to an end, resulting to a decline in total sales and energy sent out. In Australia, intense retail competition has seen a reduction of customer accounts and our electricity sales are lower as a result of constraints at our 2 major generating plants. Our electricity center out across the group is somewhat lower due to the combined effect of the reductions in Hong Kong and Australia, together with our sale of a 40% increase in CLP India to CDPQ last year. These reductions were partly offset by higher generation from China mainly due to the commissioning of Unit 5 of the Yangjiang nuclear power plant. And during the period, we've continued our progress towards cleaner generation, with an increase in our non-carbon emitting generation but a decline in total capacity due to the 40% dilution in India.

And turning in more detail to our financial performance. Revenue was down by 60% -- oh, sorry, 6% mainly due to the depreciation of the Australian dollar and modestly lower revenue from Hong Kong, where one long-term sales contract to Mainland China has come to an end. As already discussed, we've reported operating earnings of HKD 5.5 billion, with the reduction shown on the slide coming primarily from Australia and Hong Kong. Regarding the items affecting comparability, on the 20th of June, we announced that due to the mandated implementation of 2 new electricity pricing mechanisms in Australia, we would report a HKD 6 billion to HKD 7 billion impairment of retail goodwill at EnergyAustralia.

Following further analysis, an impairment of HKD 6.381 billion has now been confirmed and is included in these results. The impairment itself is a one-off noncash item and doesn't of itself have an immediate impact on the operations or cash flow of the business.

However, it's estimated that these mandated changes will result in a decrease in second half earnings before tax from the retail segment of EnergyAustralia of the order of HKD 240 million to HKD 300 million, with the reduction likely to sustain into the future.

After adjusting for items affecting comparability, we reported a loss of $0.9 billion in total earnings. And reconciling these earnings to our adjusted current operating income, or EBITDAF, which we use to discuss the underlying segment operating performance in more detail, the key change in this reconciliation is the reversal in the sign of the fair value adjustments. In our Australia business, we progressively hedge our generating position using a range of financial instruments in order to reduce our energy price risk for the business. These derivatives are hedges of economic exposures. However, according to the accounting rules, a timing difference will often result, which creates volatility in the profit and loss statement associated with mark-to-market movements. This is particularly the case if there are large movements in forward contract prices.

In the half year to June, the mark-to-market in the profit and loss statement is negative, resulting from an increase in forward contract prices. However, this is a noncash item and will provide earnings benefits over time when these derivatives are settled together with the electricity generated.

Other points to note are that the lower income tax reflects the lowest -- lower profit in Australia and Hong Kong, while the noncontrolling interests now includes the 40% share of the earnings of CLP India attributed to CDPQ. As a result, we've delivered a consolidated ACOI of nearly HKD 9 billion, which is our preferred measure of the operating performance of the business.

And as just mentioned, headline ACOI dropped by 22%. After adjusting for year-on-year foreign exchange movements, the reduction was 20%. The negative foreign exchange impact aggregating to HKD 327 million reflects depreciation of the Australian dollar and renminbi relative to the Hong Kong dollar. The reduced contributions to ACOI have mainly come from Hong Kong and Australia, and I'll now go through each of the business units in more detail.

The operational performance of our Hong Kong business was again very dependable and our reliability remains amongst the best in the world. Local sales have increased and good progress continues to be made on our major development projects. From a financial perspective, ACOI, excluding foreign exchange difference, was down by almost $1.2 billion or 18%. This reflects the lower permitted rate of return under the new Scheme of Control Agreement, which was only slightly offset by the increase in net fixed assets during the period.

The CapEx for this half was around $3.9 billion. Looking forward, we see the first full year impact of the reduced rate of return in 2019. The impact will be moderated by the growth of our asset base, driven by the infrastructure investments required in the 5-year development plan. We will progress on the major investments included in the development plan, and we'll continue to pursue renewable energy, energy efficiency and conservation initiatives under the new Scheme of Control Agreement.

In Mainland China, we achieved higher earnings across the portfolio. Excluding renminbi depreciation, our ACOI has increased by around HKD 240 million or 20%. The major increase came from our nuclear business, which was driven by the commissioning of Unit 5 of the Yangjiang nuclear power plant in July 2018. And I'm also very pleased to advise that the sixth and final unit of Yangjiang successfully completed commissioning in late July, with the entire project completed now within budget.

Daya Bay continued to perform consistently and reliable nuclear energy now accounts for over 60% of our earnings in China. Our earnings from renewables benefited from new projects and higher hydro resources, partially offset by less wind resources. The footprint increased by 86 megawatts this half and in total, by 103 megawatts since July 2018, with new contributions coming from both wind and solar projects.

Higher earnings from the coal portfolio were mainly from Fangchenggang due to lower coal costs and a 14% increase in sent-out. However, margins and profitability of the coal portfolio continue to be impacted by low tariffs.

Looking forward for our China business, we'll see further increases in non-carbon generation following the completion of Yangjiang Unit 6 in July. We'll continue to look for new renewable opportunities in a disciplined and selective manner, and we'll continue our efforts to enhance the commercial and financial performance of our coal assets in the face of high coal prices and intense competition for dispatch.

In India, we achieved good operational performance of our renewable energy assets and high availability of the Jhajjar coal plant in the first half of the year. However, ACOI, excluding Indian rupee depreciation, was down by HKD 85 million or 14%, reflecting the end of the Paguthan PPA in December 2018.

Looking ahead, we'll continue to focus on investments in renewable energy and transmission with our new partner, CDPQ. In fact, in July, we entered into agreements for the acquisition of 3 power transmission lines totaling 815 kilometers in length, demonstrating the value of this new partnership. This is our first entry into the power transmission sector in India, and we hope there'll be many more opportunities to diversify and grow our business there. We'll also continually seek to optimize performance of our existing portfolio, including exploring new commercial avenues for Paguthan. The operational performance and the earnings contribution in Southeast Asia and Taiwan was again steady. Operations at the Lopburi Solar Plant continued to be smooth, with modestly higher solar resources. Our ACOI was more than double, with higher earnings from Ho-Ping, which mainly reflects the lagging adjustments of the tariff based on the prior year's higher coal cost.

Going forward, we'll continue to focus on enhancing the operation of our assets in Taiwan and Thailand and continue our efforts to support the Vietnamese government to explore options to meet the country's future energy needs.

The 6 months to June 2019 were challenging for EnergyAustralia. In Australia, we structured our business with a natural hedge by being both a major power generator and also a retailer of electricity with 2.5 million customer accounts. As a result, we usually find a balance with one part of the business doing well, while the other side may be under pressure. However, in the first half of 2019, this wasn't the case. Firstly, in our customer segment, the trust in energy retail -- retailers is at a low ebb and governments have introduced new default price mechanisms to address concerns that the electricity retail market is simply too complicated. We're also addressing these issues.

Over the last year, we've chosen to hold average energy prices flat for our energy customers even in the face of increasing supply costs. We've also introduced simpler, fairer energy plans to make it easier for our customers, and we've rationalized our customer acquisition channels and excluding those external challenges -- external channels who don't follow our principles. And we've successfully reduced costs where we can, despite having to prepare for the introduction of the VDO and DMO. This hasn't been easy, and consequently, customer accounts and margins have reduced, while usage has also been lower, influenced by seasonal trends.

Secondly, in our wholesale energy business, we're addressing constraints at both of our major generating plants. At our Mount Piper power station, there's been a significant decline in the quality and quantity of coal deliveries. To manage this, we have a coal conservation strategy, under which, we generally run only 1 of the 2 units at Mount Piper at any time, yet, preserve sufficient coal to run both units at peak times to support customers' needs. In addition, following a fatal incident at our Yallourn plant in late 2018, we've operated under some safety-related constraints whilst we resolve issues. This means that we've experienced longer-than-usual maintenance periods and some of which have been at critical times. Concurrently, as a result of these circumstances, we've generated lesser electricity than at this time of last year, and we're in the somewhat unusual position of our wholesale and retail operations, both delivering lower earnings than anticipated.

Going forward, we'll continue to support and advocate for our customers as the market evolves under the new default price mechanisms. We'll continue to deliver our internal cost-saving programs, while at the same time, focusing on delivering innovation and energy efficiency products such that our partnership -- or such as our partnership with the Echo Group. On the wholesale side, we expect to see continued volatility and elevated prices in the market. In this environment, we'll focus on ensuring the availability of our existing assets and we'll continue to evaluate new projects that can deliver flexible, fast-response generation capability.

Operations at Yallourn are expected to return to normal during the second half of 2019 as we complete operational and safety improvements. At Mount Piper, EnergyAustralia is working closely with the New South Wales government and the mine operator to find alternative sources of coal.

Now turning to our cash flow and dividends. We have significant financial strength with the flexibility to maintain our dividend practice and address future growth opportunities. Our cash flow is seasonal, with low cash flows in the first half coupled with a higher dividend payment due to us paying a larger final dividend in March each year. The free cash flow generated for the period has decreased by HKD 2.7 billion or about 28%, which is primarily reflecting the lower underlying earnings from Hong Kong and Australia.

During this half, we've also received the remaining balance of $1.4 billion from our 40% divestments of CLP India to CDPQ. We've reduced discretionary CapEx while maintaining our commitments to the dividend and the Scheme of Control CapEx. So on a cash basis, we invested HKD 5.8 billion in the first half, of which, HKD 4.3 billion was in Hong Kong. HKD 0.5 billion was for maintenance CapEx, predominantly, in Australia and nearly HKD 0.6 billion in China, including the completion payment for the acquisition of the Yangjiang nuclear plant and construction of renewables project.

After funding these commitments, our net debt has increased by HKD 4.2 billion or 10%, while our net debt-to-total capital ratio remains low at around 28%. With significant undrawn debt facilities and high credit ratings, our financial structure remains strong. And this is reflected in our ability to raise competitive financing.

In July 2019, we issued a new energy bond of 2.8% coupon to fund the construction of the West New Territories landfill gas generation project. This is an inaugural green financing for our Scheme of Control business under the CLP Climate Action Finance Framework.

And as a last point on this slide, our financial strength and prudent cash flow management is reflected in our long history of dividend payments. As illustrated in the last chart, we have maintained a steady or growing dividend stream in the last 30 years, and we continue to manage the business to this objective.

At CLP, we've continued to de-carbonize our asset portfolio in the first half of 2019. In Hong Kong, we made significant progress on the development of gas infrastructure that will allow the gradual retirement of coal-fired units at Castle Peak A by 2025. We are continuing the construction of new CCGT or Combined Cycle Gas Turbines, which is due to go into operation by early 2020. And we've also embarked on the development of a second Combined Cycle Gas Turbine unit. With the offshore LNG terminal, we commenced front-end engineering design and we entered into agreements for the supply of LNG and chartering of the floating shipboard regasification unit or FSRU vessel. We've also received favorable responses to our recent green and smart initiatives. The feed in tariff scheme, which enables customers to generate their own renewable energy, had received over 3,900 applications up to the end of June. Our renewable energy certificates have also received positive feedback. And by June 2019, we installed and connected nearly 200,000 smart meters for our customers, and our target is to provide smart meters for all our 2.6 million customers by 2025.

We've also implemented a project to optimize the distribution network operation systems to ensure effective integration of smart meters and the realization of operating efficiencies. And these efforts will be significant factors in driving Hong Kong's transition to a smarter, greener and low-carbon future.

The current development plan initiatives we've just discussed build on a strong record of emission reductions in Hong Kong. It's been our long-standing commitment to address climate change by changing our fuel mix to reduce carbon emissions while maintaining a highly reliable electricity supply.

In this regard, we have a strong record in Hong Kong, nearly doubling customers served and electricity sales since 1990, while holding emissions steady and almost halving our emissions intensity.

In mid-June, the Council for Sustainable Development launched a public engagement on Hong Kong's long-term decarbonization strategy. This will enable the city to make key decisions to address climate change and improve the environment for our future. We'll participate in this engagement and there are many areas where utilities such as CLP can contribute.

We'll also continue to decarbonize our asset portfolio in all the regions in which we operate. In China, we'll continue our energy transition towards lower carbon generation. Our portfolio is underpinned by significant investments in the 0-emission, highly reliable nuclear facilities, and we'll continue to grow our renewable energy developments. We'll also focus on the greater Bay Area, where we'll work closely with partners to pursue energy-related opportunities in this important emerging market.

In India, our new partnership with CDPQ has brought long-term strategic backing and additional resources to support our continuing growth into the future. In July, CLP India entered into agreements for the acquisition of 3 power transmission lines, expanding our geographical reach and broadening our portfolio into a new segment of the electricity value chain. We've also acquired full ownership of the Gale and Veltoor solar projects during this half. And in Australia, as part of our commitment to support Australia's transition to a cleaner and more modern energy system, we'll continue to explore innovative solutions and evaluate new projects that can deliver flexible, fast-response generating capacity.

And innovation is a key enabler of the energy transition, so we are continuing to invest in our innovation culture and digitalization capabilities while strengthening partnerships with like-minded companies around the world. With these, we aim to speed up the development of smarter, more customer-centric products and services and implement new technologies to enhance our operations.

Examples of these initiatives include the Smart Energy Connect platform we launched earlier this year in Hong Kong. This is essentially an online app store that provides new tools for customers to manage their energy usage, enabling businesses and organizations to become more efficient and sustainable.

In June, CLP hosted the Free Electrons, global energy startup accelerator program, in Hong Kong. Free Electrons provides a platform for utility companies to partner with startup and -- startups and fast track the development of new energy technologies and solutions.

So with many opportunities ahead, we'll be cautious and selective in making our investment decisions. For instance, our partnership with AutoGrid will build the foundation for CLP Group projects across APAC to leverage artificial intelligence in achieving real-time optimization. We're also developing many new products and applications simply designed to make life better for our customers. As a fully integrated utility of the future, with expertise across the entire value chain, we are well positioned to make the best use of technologies in growing a sustainable and smart lower-carbon business.

So looking forward, I'm pleased to reiterate that the fundamentals of our business are strong, and we have the financial resources and clear pathways to continue to grow. We are transforming into a utility of the future, progressively reducing carbon from our portfolio and putting customers and communities at the heart of everything that we do. We've updated our Climate Vision 2050, and I'm pleased to say that later this year, we'll share our plans to meet the stronger targets in our renewed Climate Vision 2050. And as we enter this dynamic and challenging time, we are, as always, focused on delivering reliable, affordable and environmentally sustainable energy to the communities that we serve and delivering growing returns to our shareholders.

So thank you very much, ladies and gentlemen. And I'll now be very happy to take your questions.

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Angus Guthrie, CLP Holdings Limited - Director of IR [3]

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Thank you very much, Richard, for delivering the presentation and we can now commence the Q&A session. Could I just remind those on the web that there is a dialogue box on the bottom right-hand side of your screen and you can submit a question at any time through that dialogue box? But we'll start though with questions from the floor. So I think Elaine, [eventually toward] Pierre. Elaine, a microphone, please.

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Questions and Answers

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Elaine Wu, JP Morgan Chase & Co, Research Division - Lead Analyst [1]

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Thanks, Angus. Thanks, Richard, for the presentation. I have 2 questions on Australia. So seems like the Yallourn outage was quite -- is likely a one-off event. But for the Mount -- the coal supply issue at Mount Piper, do you expect that to be resolved already? Or is that -- is there going to be some issues there in the second half as well? For the retail business, I was wondering, 2019 is going to be the year where the DMO is going to be implemented. So after the changes this year, do you expect the situation for the retail business to improve next year?

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

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Well, thank you for those questions, Elaine. Just to elaborate a little bit more about Yallourn and Mount Piper first. With Yallourn, we did have a fatal accident at the end of 2018. We have understood the cause of that accident. We have taken steps to improve the equipment and make modifications to our equipment at Yallourn. Those are being progressively implemented. Whilst that is going on, we've taken a prudent measure to operate the plant in a different way that will eliminate any risk for the operators. So yes, once those fixes are implemented, we'll be back to the normal way that we operate. For Mount Piper, coal supply for the plant comes from one source and that is a mine which is nearby. But as they move progressively from one part of the mine to another as they start to exhaust one area, the coal quality can become unsteady. And so therefore, we've taken prudent steps to make sure that we are available to operate when we need to. So we've been conserving the coal supply. Longer term, we are working with the New South Wales government to improve the supply situation. We would like to see other mines develop so we have multiple sources coming into the plant. As part of getting environmental permitting, we are developing a water treatment plan that will enable, jointly with the coal mines, the ability to process any water that needs to be discharged back into the river system. So there's a lot of work in progress to fix that problem as well.

With the retail business, the default market offers have been implemented as of the 1st of July. We've taken this opportunity to offer more simple and more competitive energy plans for our customers. We believe that this will be welcomed by our customers. But it's early days yet because it's only been implemented on the 1st of July. So we will continue to monitor how our retail offerings are competitive in the market. In terms of looking longer term, the fact that we have considered the value of our retail business and taken a write-down of that business means that our view for the future will be lower than what we've seen in the past. And as I mentioned in the presentation, that would amount to around $240 million to $300 million per year...

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Angus Guthrie, CLP Holdings Limited - Director of IR [3]

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Per half.

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

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Per half. Sorry, per half. Thank you. Yes, $240 million to $300 million per half going forward.

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Angus Guthrie, CLP Holdings Limited - Director of IR [5]

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Next question from Pierre, please.

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Pierre Lau, Citigroup Inc, Research Division - MD, Head of Regional Utilities Research Hong Kong, China & Korea and Deputy Head [6]

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My first question is, for the second half this year, so you mentioned that your Australian power retail business would have some setback, about the $240 million to $300 million reductions in terms of earnings, while at the same time, you would have more output from your Yallourn power project. Do you expect a positive incremental contribution from Yallourn would be able to offset that $240 million to $300 million reduction because of the power retail business? The second question is, so you have got 3 power transmission projects in India. Historically, your company rarely invests in overseas power transmission projects. So what has triggered you for such investment in India? And do you expect to have more power transmission projects in overseas?

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Richard Kendall Lancaster, CLP Holdings Limited - CEO & Executive Director [7]

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Okay. Thanks for those questions, Pierre. As you know, we cannot give guidance and we don't normally give guidance for the second half. But looking at our EnergyAustralia business, as I pointed out in my presentation, when I was sitting here 12 months ago, I was presenting a 33% exceptional increase in our earnings, and much of that came from EnergyAustralia. What we're seeing today is roughly in line with what we saw in 2017. Now we can't give any guidance. We have communicated our view of the retail business. I've communicated that with Yallourn, we would -- we should see that getting back to more normal operation with these changes to the plant. But our business in Australia, it is a highly competitive market. Very much depends on when we have a plant available. If the plant is available to operate when prices are high, which is exactly what we wanted to be, then we do see the benefit of that. If there are problems at our plant at the wrong time, then we can see that impacting our earnings. So I think in -- perhaps, in simple terms, if you look at 2017, it is more indicative of what a normal level would be.

Your second question on India and on the transmission investments in India. CLP actually is a very experienced operator of transmission assets, both in Hong Kong and also in Southern China, where we operate assets to bring, for example, the Daya Bay, electricity into Hong Kong. We do see this as an area that we have a strong capability in. But opportunities to invest in Mainland China and India in the transmission sector have not really been coming our way or been opened up for private investment. We have acquired now a portfolio of transmission lines, which gives us now a platform from which we can grow. There are -- there is a need for more transmission investment in India. It's needed to support growing demand for electricity but also to support the switch towards more renewable energy. So where you build wind farms and solar farms, you need to build transmission lines to bring that power to load centers. And the governments in India are recognizing the need for private investment to support that. So we do see this as an area that has good growth potential for us. It's well within our capabilities, and we do see this as a way that we can diversify our business and start to link our transmission business with our existing renewable projects. So with those 3 transmission lines, 2 of them are actually connected to some of our existing projects.

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Angus Guthrie, CLP Holdings Limited - Director of IR [8]

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Belle, if...

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Belle Chang, Morgan Stanley, Research Division - Strategist [9]

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Thanks for the presentation. This is Belle from Morgan Stanley. I have 2 questions. First is about CLP India. We know that -- it's just a follow-up question. We know that you acquired 3 power transmission projects. Given the high cost of capital in India, could you share any color on the project IRR of these projects? Also, do you expect these 3 power transmission projects to generate some positive impact from the second half of this year? In August, we noticed that CLP India also had a potential transaction for a solar asset. So could you share more color on this as well? And the second question is about your Vietnam project. We noticed that you have recovery of the development expenses. Just want to understand that is the recovery of the development expenses due to the CLP East exiting the project and so you are recovering your previous investment from your partner.

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Richard Kendall Lancaster, CLP Holdings Limited - CEO & Executive Director [10]

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Thanks, Belle. We -- whilst we have acquired 3 transmission lines, we are also in discussions on a fourth transmission line at the moment. So we're not in the position to talk about the IRR for those investments. In terms of the timing for earnings, one of those transmission lines is nearing completion and the other 2 are under construction. So there will be in -- towards the end of this year, we'll start to see some of the earnings flowing through but relatively modest in 2019. The solar investments, we had already invested in 49% of those 2 solar farms and we have now acquired the full 100% interest in those. Those were solar farms which were developed. We did acquire those as part of our growth strategy in India to not just look at greenfield development but also for good acquisition opportunities. So those were part of our strategy of growth by acquisition. In Vietnam, we -- whilst we talk about recovering our development expenses, we have seen a change in shareholding for the Vung Ang project. So 10% of that project was sold to a new partner, and that's really why we saw those recoveries of costs.

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Angus Guthrie, CLP Holdings Limited - Director of IR [11]

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Mark? And then we'll take a question from the web after that.

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Mark Wiseman, Goldman Sachs Group Inc., Research Division - Senior Analyst [12]

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It's Mark Wiseman from Goldman Sachs. Just 2 questions. Firstly, on the Australia portfolio. Clearly, returns declining with the reregulation of prices and the -- just the state of the market. It seems like you are perhaps planning to invest a little more heavily in the future. There are some comments in the report about the pumps, hydro project and perhaps, some more gas peakers as well, which would follow the grid scale batteries that you've invested in and some other gas plants. I just wonder if you could provide some color around what type of investment we're talking about there. And secondly, just a question on the Hong Kong business. If you could just comment on the first half versus second half impact. Obviously, you've experienced a lower rate of return but are there any other impacts that we should think about as we're forecasting the second half?

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Richard Kendall Lancaster, CLP Holdings Limited - CEO & Executive Director [13]

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Okay. Thanks, Mark. Firstly, for Australia. We have seen a period where wholesale prices have risen. Prices rise because of an imbalance between supply and demand. So supply and demand is now quite tight in some of the states in the national electricity market. When prices are high, if there is any outages of plants or if weather is unusually high or unusually cold, we start to see volatility in prices. So there is a strong case there for investing in plant that can help remove that volatility. That would help our business. It would help the customers because that volatility flows through into energy prices. And clearly, it would help the system in terms of being able to absorb more renewable energy as that continues to be developed in Australia. So we think these are very sound investments.

We have some opportunities at existing sites where we have gas-fired plant. And where you have gas-fired plant, you have a gas pipeline and you have a transmission line so adding new machinery there can be done relatively cost effectively and that can provide some extra peaking capability. We are also working on -- with some battery technology, and we have contracted for the offtake from 2 batteries in the Victorian system. So that provides some storage. And pump storage is something that the CLP Group has experienced in -- with our pump storage scheme in Southern China. So that is again a proven technology and that can also help smooth out imbalances of supply and demand. Now looking on the innovation side, there is also demand-side management tools where you can work with your customers as a retailer to help manage the demand side of the equation. So these are all areas that we're exploring.

Your second question was on the Hong Kong business. Our Hong Kong business is actually quite predictable. We have seen a reduction in the permitted return coming in from the 1st of October last year. We do see a $52.9 billion development plan, which took effect from the 1st of October. So as we develop those assets, we start to see those flowing into our asset base. So if you deduct the depreciation from the CapEx, you'll see how the asset base will grow and the permitted return is now fixed through to 2023. So the maths is fairly straightforward there.

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

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Okay. We might take a question from the web if that's okay. Janice, if you could read it out, that would be great.

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Janice Cho, [15]

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Yes. There are 2 questions from Jerry on China. Firstly, as China resumes to approve new nuclear projects, do you see some possibility for Daya Bay and Yangjiang to add more units in the future? Secondly, Fangchenggang is developing a large manufacturing base for products such as steel and aluminum. Could you please share your thoughts on the potential demand of electricity from your plant there in the next few years?

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

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Okay. Well, thank you very much for the questions. Firstly, both Daya Bay and Yangjiang are very large power plants. Yangjiang has 6 units now in operation. And in the Daya Bay complex, there are also 6 units there. So at the moment, there are no plans to expand those further. With Fangchenggang, it is in Guangxi Province and Guangxi Province is looking to attract more energy-intensive industry into the region. We see Fangchenggang as being a very important location. It is a critical port for exports for trade with ASEAN countries. And with the support of the Guangxi government, we would expect more industry to be growing there. There are some very large areas that have been set aside for industrial parks and our plant at Fangchenggang has actually been modified recently so that we are now able to supply not just electricity but also steam to help with these processes. So we believe that the potential for demand growth in Guangxi is good. We believe that the fundamentals of investing in a power plant in that province has been good. But with the slowdown in China's economy, the pace at which that investment is being attracted into Guangxi has slowed down a little bit over past years. So longer term, we think it has very sound potential but we may see a little bit more time needed for that potential to grow.

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Angus Guthrie, CLP Holdings Limited - Director of IR [17]

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Are there any other questions either from the floor or -- Evan?

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Ming-Hon Li, HSBC, Research Division - Head of Utility and Alternative Energy and Analyst [18]

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Evan Lee from HSBC. I have a couple questions. First of all, you mentioned about potential plans for the Greater Bay Area. Just wanted to see if you have any more elaboration on what specific opportunities that we are looking for in that front. That's our question number one. And question number 2 is, obviously, in the past -- I understand that you -- the companies have sort of mentioned about how we should think about our dividends without asking for a specific guidance. Obviously, we've seen that operating cash flows have declined under the new environment. But with the CapEx obviously on the rise, specifically for Hong Kong as well, how should we think about the logic of holding up our dividend for the company going forward? And along with that, if I could ask as well, for the CapEx in Hong Kong, which is planned to obviously increase for the next 5 years, how should we think about that CapEx deployment for next 5 years? Is it going to be more of a linear increment? Or is it going to be curved in some way?

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Richard Kendall Lancaster, CLP Holdings Limited - CEO & Executive Director [19]

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Thanks, Evan. Firstly, with the greater Bay Area, CLP -- our electrical system is already interconnected with the Greater Bay Area. We have very close relationships with the electricity industry in the Greater Bay Area. And with the electricity industry undergoing reforms on the Mainland, we see opportunities for private investment to go into more than just the generation sector, which is where we've been largely capturing opportunities in the past. So it's early days yet. We are exploring, for example, independent distribution networks. And when I answered the last question about Fangchenggang, we have recently been awarded a contract to supply an independent distribution network in the Fangchenggang area. So these are some examples that we are looking at, at the moment. But it's a little bit too early to really take a view on how extensive those opportunities would be and which are the ones that we would like to participate in. For our dividends, as I mentioned in our presentation, we have seen a reduction in cash flow from the -- particularly from the Hong Kong business because of the reduction in permitted return. But you quite rightly point out that we'll be investing CapEx each year and so that cash flow will come back. This is not unlike the last time our permitted return was lowered back in 2008. At that time, we saw a flattening of the dividend for a few years before it came back to growth.

Our business today is bigger. We have more overseas investments. We are in stronger financial shape than we were in 2008 and the reduction in permitted return is lower than it was then. So we have been planning ahead. We do believe that we can maintain our dividend practice, and I can't speak on behalf of the Board who decide the dividends, but our second interim dividend today is the same -- at the same level as our first interim dividend. So for the time being, we are supporting the practice that we've seen in the past.

And your question on Hong Kong for the CapEx. We have a steady level of investment. If you look over previous years, we have typically invested around $7 billion a year just in maintaining new customer growth and maintaining our -- the reliability of the electricity system in Hong Kong. And that's always been a very steady level of investment. To make up to the $53 billion in Capex, we see a number of projects that will be needed to support carbon reduction in Hong Kong. So the first of those is the new Combined Cycle Gas Turbine, which will be completed in the early part of 2020. We'll see work then pick up for the LNG import terminal. And then before 2023, towards the back end of the plan, we'll see a second Combined Cycle Gas Turbine. So if you think of that $7 billion as being evenly spread out and then 3 big projects all coming consecutively, I think you could safely figure out that we'd see a fairly steady level of CapEx.

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Angus Guthrie, CLP Holdings Limited - Director of IR [20]

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Are there any other questions from the web? If not, Richard, with your permission, I might just supplement the answer you gave on Yallourn, if that's okay? Pierre, going back to your question just about the potential for Yallourn to replace earnings from retail. We don't give guidance and so I'm not going to do that. But I would just say that if you do look at the second half earnings for 2017 and 2018, you will see that 2018 was considerably lower than 2017. And if I was to just give a very broad, sort of, direction, I would say that we have obviously entered the beginning of the second half of 2019 with the unit still being constrained at both Yallourn and Mount Piper. And as such, the sort of earnings out of the Australian business would probably be more like the second half of 2018 rather than the second half of 2017. Again, that is not guidance. I'm just giving you some practical underlying way of thinking about what's physically happening in the business there. Okay.

Are there any other questions either from the audience here or from the web? If not, ladies and gentlemen, I'll call this to a close. So thank you for everybody who has come here to our venue in Hong Kong. Thank you for those who've attended on the website. I and my team will be available to take further questions during the course of the afternoon and hopefully, early evening, not late evening. But please feel free to be in touch if you have further questions. Many thanks. And I'll call the webcast closed. Thank you.