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Edited Transcript of AST.AX earnings conference call or presentation 13-May-19 12:00am GMT

Full Year 2019 AusNet Services Ltd Earnings Call

Southbank, Victoria Jan 9, 2020 (Thomson StreetEvents) -- Edited Transcript of Ausnet Services Ltd earnings conference call or presentation Monday, May 13, 2019 at 12:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Adam Newman

AusNet Services Ltd - Former Executive GM & CFO

* Alistair Parker

AusNet Services Ltd - Executive General Manager of Regulated Energy Services

* Chad Hymas

AusNet Services Ltd - Executive General Manager of Mondo

* Nino Ficca

AusNet Services Ltd - Former Director

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Conference Call Participants

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* Ian Myles

Macquarie Research - Analyst

* James Nevin

RBC Capital Markets, Research Division - Analyst

* Nathan Lead

Morgans Financial Limited, Research Division - Senior Analyst

* Peter Wilson

Crédit Suisse AG, Research Division - Associate

* Robert Koh

Morgan Stanley, Research Division - VP

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the AusNet Services Full Year 2019 Results. (Operator Instructions) I must advise you that this conference is being recorded today, Monday, the 13th of May 2019. I'd now like to hand the conference over to your first speaker today, to Mr. Nino Ficca. Thank you. Please go ahead.

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Nino Ficca, AusNet Services Ltd - Former Director [2]

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Good morning, everyone. My name's Nino Ficca, I'm the Managing Director of AusNet Services, and welcome to our full year results presentation for 2019.

What I'm going to cover off today, there'll be 5 areas we'll cover off. First, I'll give a short introduction and recap our strategy and progress to date. Then I'm going to hand over to Adam Newman, our EGM and CFO, who'll provide an update on the financials and discuss our capital management and financial settings. Alistair Parker, who's our EGM of Regulated Energy Services, will then go on and provide an update of our network operations and regulatory developments. Chad Hymas, who is our EGM of Mondo or our unregulated part of our business, will provide an update on our unregulated and commercial portfolio. And lastly, I'll just conclude with an outlook and we'll then go on to some Q&A.

So if I can take you over to Slide 4, and as we always have, we'll just commence this presentation with a discussion on safety and our safety performance.

Safety remains a very strong and fundamental focus for our business for which we have shared responsibility. And during the year, we sought to extend the sustained success of missionZero program in reducing injuries by refocusing on safety engagement and care and -- which -- these were the original building blocks upon which missionZero was built.

So far, to reinforce the ownership of safety, we established new accountabilities at each level within the organization and better than to (inaudible) individual performance plans. We also introduced a new incident management system, which provided a significant step forward in our ability to analyze and report on data that we're seeing out of our system.

The outcome of these initiatives was an improvement in our recordable injury frequency rate to a new record low of 3.53, which is an improvement of 35%.

If I move across to Slide 5. And I don't want to spend too much time on this slide, you've seen a number of these figures previously. But just as a key point I'd like to make, that we own and operate and control a very significant asset base in transmission, electricity distribution and gas distribution within Victoria. And that asset base has now grown to 10.3 billion. And we service about 1.4 million both electricity and gas customers across Victoria.

If I take you to Slide 6 and just having a quick look at our strategy. So we recently adopted a new corporate strategy called Energising Futures, which really builds on the strategy that we've spoken to you about over the last few years called Focus 2021. We thought it was time and it was the right time to refresh this strategy, given the significant progress we've made and the (inaudible) changing landscape, and that landscape is changing at a very rapid rate.

Energising Futures' response to the new energy environment, which is characterized by a very rapid shift towards renewables, new technologies, change in customer expectations and pressure on energy affordability.

Some of the objectives within Energising Futures you all have already been quite familiar with. However, we've recognized the need to be -- for there to be a greater emphasis and a stronger focus on customers, our digital utility and, in fact, culture and capabilities.

Our focus of -- on efficiency and growth through digital delivery and the right culture and capabilities is critical to improving customer experience.

So far, worth noting that, through the year, we recruited to support this objective, Prue Crawford-Flett. She's joining the executive leadership team here at AusNet Services. And Prue will lead our operations and services division, which brings together our field operations and service delivery to our customers. Prue's appointment is in response to the increasingly complex regulatory and policy landscape. And Prue brings a wealth of experience from previous senior leadership roles right across Australia.

Lastly, we retained a very strong focus on achieving top quartile, inefficiency benchmarking on all 3 of our networks.

If I take you across to Slide 7 and looking at investment proposition. And stability is at the core of AusNet Services' investment proposition. We've got a very strong record -- track record of delivering stable, predictable cash flows and long-term dividend growth in a sustainable manner.

The new energy landscape that we're seeing demand that we place customers at the center of what we do. We're continuing to explore new technologies, which facilitate customer interactions with the group. This include distributed generation, energy storage and electric vehicles, which allows you to significantly impact the energy sector, creating opportunities for us.

We continue to play an essential role in supporting the transition to renewables, having invested over $200 million in 2019, connecting new renewable generation projects to our transmission network. And we continue to perform well in benchmarking for gas and electricity transmission and have made some significant improvements in electricity distribution where we expect to outperform our OpEx allowance in the current regulatory period.

So turning to our 2019 achievements, which are outlined on Slide 8. 2019 has been another strong year performance. On safety, particularly network safety, we've made substantial progress on our REFCL program or Rapid Earth Fault Current Limiting program. Our bushfire mitigation program is delivering strong instinctive or (inaudible) factor performance and materially reducing fire risk to communities. We've recorded strong growth in our asset base, with our RAB up 3.5% and (inaudible) contracted asset base up over 30%.

Continued focus on efficiency has delivered further reductions in our operating costs, and Adam will expand a little bit on this a bit later. It's also very pleasing to deliver another year of strong dividend growth to our shareholders. The 2019 dividend is up 5%.

The integration of new technologies is a key focus for the business. We are participating in a number of leading-edge projects, including battery storage, market grids, community mini-grids and behind the meter systems.

So with that, I'll now hand it over to Adam.

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Adam Newman, AusNet Services Ltd - Former Executive GM & CFO [3]

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Thanks, Nino. Hi, everyone. Thanks for taking the time to join us today. I'll talk about 4 key items or areas. First of all, our financial performance for the FY '19 financial year; our cash flow generation; capital expenditure profile; and our funding and balance sheet positions.

So if we can turn to Slide #10, and I'll start with a high-level overview of the financial performance for the FY '19 year. You can see that there was a decline in revenues, which impacted profit. The trend in regulated revenue was in line with expectations and consistent with what we flagged previous results releases. Just to recap, the underlying reasons for the decline in revenues are threefold. First of all, there was the metering revenue hand-back commence; second is lower electricity distribution incentive scheme revenues; and third, the lower gas prices as the GAAR came into effect.

Worth telling, however, that our continued cost reduction efforts helped to partially offset these changes in revenue. And you can see this, given the overall EBITDA was down 0.8% despite revenues being down 2.5%.

Consistent with guidance, final dividend of $0.0486 per share, franked at 45%, which brings the annual dividend to $0.0972 per share. This is an increase of 5% on last year and franked to 42.5%.

If we just move now to Slide #11, and we'll look at our cash flow. Cash flow from operations remains strong despite the 8% decline year-on-year from that $886 million to $814 million.

The 3 main areas giving rise to this decline: first, there was lower profitability as a result of the fall in revenues; second, in FY '18, there were lower tax payments when we received a $25 million tax refund as a result of overpayments in FY '17; and third, we experienced less favorable working capital movements this year with the timing of receipts and payments partially offsetting last year's favorable movement. It is worthwhile noting that despite the year-on-year declines in cash flow from operations, it's only the second time that we've generated cash from operations in excess of $800 million.

If you turn now to Slide #12, and I'll provide some details on the key drivers and our underlying profit performance. You can see that net profit after tax declined from $291 million to $254 million. Revenue was down $48 million or 2.5% for the year after being down $46 million at the half. As expected, there was improvement in the second half with prices restating in both distribution businesses in the 1st of January '19.

If you look at revenue within the various parts of the business, within electricity distribution, revenue declined $25 million. This is due to $29 million reduction in incentive revenue and also a $29 million of metering revenue hand-back. These were offset by $22 million increase in customer contributions.

Within the gas business, revenues were down $10 million. This was due to the regulatory price path effective from the 1st of January 2018 when tariffs declined 9.4%.

While in Mondo, revenue declined $34 million, due to the strategic refocus to exit low-margin maintenance contracts. This also resulted in a similar reduction in Mondo's OpEx. Offsetting these declines in revenue, there was an increase in transmission relocation projects of about $20 million.

Our operating expenses declined $40 million, and we'll talk a bit more about OpEx on the next slide. Depreciation increased broadly in line with our asset base growth. However, if you look forward to FY '20, depreciation is expected to decline within electricity distribution as a result of technology assets becoming fully depreciated.

If you turn now to Slide #13, and I'll just stop and talk a little bit about our overall cost base. As you've been aware, over the past 2 years, we've been able to reduce costs through both the refocus of Mondo and the ongoing cost reductions within the regulated business. This is the second year of our cost-out program, which has embedded the benefits of outsourcing and simplification and further rationalized and rechanged the activities, benefits of which it's able to flow-through to our results. Generally, it's about sustainable cost improvement and in this regard we are establishing enduring foundations that both better support our Network business and the future AusNet where it will be less about transactional activities and more about information.

Pleasingly, our cost-efficiency initiatives have impacted electricity distribution with calendar year '18 regulated OpEx declining by mid-$41 million when compared to calendar year '16 OpEx, and this, in turn, has had some favorable impacts upon our benchmarking performance.

If we turn now to Slide #14 and we can look at our capital investments for the year, and this rose $220 million year-on-year. The main driver being wind farm connection spend of approximately $160 million. Customer contributions also increased $64 million due to the Ballarat Battery Storage Project and tower relocations to the Metro Tunnel and Waverly Park developments. Within electricity distribution CapEx, this increased due to safety program spend, in particular, the REFCL program that Nino alluded to previously and increasing customer connections.

Spend on upgrades at the West Melbourne and Richmond terminal stations is consistent with the prior period and accounted for approximately 23% of total transmission CapEx. We expect CapEx in FY '20 to be at similar levels due to continuing wind farm connection spending and continued work on the REFCL program.

If you turn now to Slide #15, and this slide highlights the source and use of funds and how we have funded our capital expenditure. The proportion of our growth CapEx funded by operating cash flow declined in the second half as we flagged at the November results release due to the seasonal nature of the business.

The DRP represents the interim dividend take-up only. You may recall that the DRP was suspended on last year's final dividend due to the Singapore Stock Exchange delisting. In summary, we remain comfortable with the funding of our growth capital consistent with our capital management framework.

Turning now to Slide #16 and have a quick look at our debt portfolio. Our balance sheet and credit metrics remained strong, and we continue to target an A-range credit rating. During the year, we issued 3 long-term bonds that raised $556 million in support of both our asset growth and debt maturities. We also put in place $700 million with a revolving bank debt facility.

In terms of repayments. In June '18, there was a repayment of $537 million Australian bonds. And in April of 2019, we repaid a $283 million Swiss franc bond from cash reserves. We have 3 bonds maturing in quarter 4 of FY '20 that totals $500 million. We had $778 million of available undrawn facilities as at the 31st of March 2019, which continues to remain materially undrawn.

So in summary, there are 3 key messages that I'd like to leave to you with. First, we remain fully focused on reducing costs in order to deliver improved customer outcomes; second, we continue to deliver strong cash flows that support both our capital expenditure program and dividend to shareholders in a sustainable manner; and third, our balance sheet continues to support an A-range credit rating in order to deliver regulatory outperformance and provide flexibility to help us fund future growth opportunities.

Thank you, and I'm now going to hand over to Alistair Parker, our Executive General Manager of the Regulated Energy Services business.

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Alistair Parker, AusNet Services Ltd - Executive General Manager of Regulated Energy Services [4]

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Thanks, Adam, and good morning, everybody. It's a bit of an overcast morning here in Melbourne. Thanks for your time.

So I'll dive into Slide 18. We've spoken to you before about the customer forum, and I'm pleased to say we've done some great work with them. It's culminated in the early release of our electricity distribution price review proposal, the draft of that. And we're currently taking further feedback on that from other customer representatives prior to submission to the AER.

I will just draw your attention to the footnote on the page. We are increasingly expecting the kickoff of that process to be delayed by 6 months due to some work by the Victorian government, and that's firming up.

So just a couple of things to note about the feedback we received from the customer forum, particularly around customer experience. By and large, customers are happy with us keeping the lights on and the job we're doing there. However, arranging a new connection can be long and bureaucratic, and communications and planned outages and even unplanned blackouts can be inaccurate. So we've really taken this feedback onboard, and we've put together some plans to do something about that and really improve experience for our customers.

In terms of market reforms, our industry has become well-accustomed to working within a range of conflicting coexisting policy objectives. We have continued to advocate for certainty, stability to support positive outcomes for our customers and new technologies are providing much of the momentum for change in the sector as our networks manage increasingly dynamic energy flows for both generators and also more and more consumers.

We're engaging in all fronts with the Australian Energy Market Commission, the Australian energy market operator, the Australian energy regulator and governments to get the right frameworks in place so that customers can make the most of their distributed generators and batteries.

To support this take-up, we're working very closely with the Victorian government on the implementation of its solar and battery package, that provides financial assistance to customers including interest-free loans and so on. We're supplying data and advise to government on the best way to integrate this distributed generation, including batteries without unintended and potentially expensive impacts on the grid. And then the final point in this slide, we're seeing the final rate of return guidelines and tax review, so let's move to the next slide to discuss them in a little bit more detail.

So we've laid out the broad impacts here. We are disappointed with the outcome of both reviews, but the finalization does always provide us with some certainty going forward. The changes will be progressive for us, and it really highlights the benefits of having staggered regulatory resets. We won't see an impact on the business until sometime in FY '21, and it won't actually be until FY '24 when all 3 networks will have reset for a full 12-month period.

I know you would appreciate a forecast revenue impact, however, there is quite a bit of water to go under the bridge between now and when all the networks are reset. Particularly, the tax impact is a function of timing, nature and percentage of CapEx that is ultimately deductible, and that could change materially over time. For your benefit, the tax changes mostly apply to the electricity distribution network. So the impact should become a little bit clearer once we receive our draft electricity distribution price review decision sometime next year.

So turning to the operational highlights on Slide 20. I'm delighted that we've completed the rebuild of Richmond terminal station, as Adam alluded to. This was a major undertaking for the group. It involved a number of engineering challenges, the sort of tight comparison as changing the engines on the jumbo jet while it's landing, and it needed a lot of community consultation to get that done. Our West Melbourne redevelopment is also going well, and we're almost halfway through that.

In electricity distribution, I'm pleased that we've passed the REFCL program tranche 1 compliance deadline of 1st of May 2019. Tranche 1 has seen 11 growing fault neutralizers or REFCLs installed across 8 zone substations. We have achieved conditional compliance in accordance with the performance criteria at 6 out of those 8 zone substations.

At the remaining 2, we're working through the extension of time, process with Energy Safe Victoria. Those 2 sites are Woori Yallock and Kinglake, and we expect to receive that extension of time shortly.

It's been complex and demanding. It's involved a lot of teams working very long hours over a very long time, and their efforts and ongoing commitment are greatly appreciated by me and by the business. We still have a number of things to do at the tranche 1 zone substations and associated networks before the 2019 and '20 bushfire season. And then we're into tranches 2 and 3, so it really does get a lot of commitment.

We started on delivering tranche 2, and we expect to launch a proposal with the Australian energy regulator in May to seek the funding for tranche 3, and we would expect a decision before the 30th of September.

So in gas, performance continues to improve given continued investment. And we're seeing some really tangible benefits from that. We've got lower unaccounted-for gas, and that's contributed $2 million to the business.

So thanks very much for your time. I'm really pleased, operationally, how this year has done. We've made a lot of progress on complex projects, so that's pretty pleasing.

So thanks for your time, I look forward to your questions. And I'll hand over now to Chad.

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Chad Hymas, AusNet Services Ltd - Executive General Manager of Mondo [5]

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Thanks, Alistair, and good morning, everyone.

Turning to Slide 22. Commercial Energy Services has been rebranded to Mondo. Mondo plays a key role in delivering commercial growth with a vision to lead the creation of an efficient, secure, sustainable and integrated new energy future across Australia. Mondo is well placed to build, own and operate contracted infrastructure with credible strategic partners that deliver stable, long-term returns.

Some business highlights over the last 12 months in this area include: A $1 billion target is almost achieved 2 years ahead of plan; completing projects, such as Salt Creek, Crowlands and Bulgana Wind Farm, in addition to the Ballarat Battery. The first full year financial results for these projects will be seen in financial year '20.

We're currently constructing Stockyard Hill, Dundonnell and Murra Warra stage 1 wind farms, all currently on track to completion during financial year '20.

Mondo has a strong national pipeline that supports increasing our target to $1.5 billion by the end of financial year 2024. Contracted infrastructure opportunities remains our core focus, whilst Australia's energy transition to renewables maintains momentum.

Turning to Slide 23. Mondo has built capabilities to develop new energy services behind the meter that leverage our mature business operations in energy data and technology solutions that give our customers greater control of their energy needs. Some business highlights over the last 12 months in this area includes: Proudly supporting Yackandandah's journey to 1-gigawatt hours of locally generated renewable energy; constructing the Deakin University's smart energy micro-grid system in Geelong and expanding this into the border-bound community.

Innovating and partnering with customers like Toyota on their transition to renewables and continuing to work with global utilities and energy start-ups as these new energy markets evolve. We are very excited by the opportunities that exist for Mondo, creating a sustainable new energy future for our customers in Australia.

With that, I'll hand back to Nino for some closing remarks.

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Nino Ficca, AusNet Services Ltd - Former Director [6]

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Thanks, Chad. Just before I go to the outlook, I just wanted to spend a few minutes talking about our people, mainly for the people within the business who've delivered the results as we see them today and have over the last number of years and will continue to do so into the future.

This slide highlights some of the important things that we're doing to ensure that we have the right capabilities moving forward in a much more complex environment. So we've developed a culture blueprint that outlines 8 attributes that we see as critical to the culture of our future.

We've conducted a company-wide cultural engagement survey and recorded a score of around 66%, which is just below the competitive benchmarks, but it certainly gives us a lot of room to work with and certainly gives us some priority areas to focus on leading up to 2020.

We continue to place a high priority on diversity and inclusion, and during the year, we refreshed our diversity and inclusion council and are broadening our program beyond gender.

During the year, we saw an increase in female representation across the business as a result of targeted campaigns. With the Board's endorsement, we've also committed to addressing any areas of gender pay inequality by 2020.

We have engaged our people on strategy and vision through town halls, roadshows and new digital channels, including the launch of a new in-house video channel to help connect employees. But the speed of change is unprecedented, and so we've also established a change management community, which has resulted in a more integrated approach to the various change initiatives across the business.

So I'll move across to Slide 25 and an outlook. So we're pleased to provide the 2020 dividend guidance of $0.102 per share, which is up 5% from the prior year and franked in the range of 40% to 50%.

We've got a strong pipeline of growth opportunities, which we expect we will deliver sustainable and accretive growth in our asset base underpinning future dividends.

The energy landscape continues to undergo remarkable change. Our role is to shape positive change for customers and shareholders and, in fact, employees. We understand the pressures our customers are facing. We are responding with a relentless focus on innovation and efficiency and are committed to building a truly customer-focused modern energy business.

Facilitating customer explorations in an efficient, affordable, and timely fashion is a prerequisite to sustainable business success and one we take very, very seriously.

Investing in culture, capability and digital tools will help us deliver for our customers. As we navigate through these challenges and opportunities faced by our business, we'll continue to ensure that safety is always front of mind.

And lastly, as I've announced, I advised our Board that it's my intention to retire at the end of the year. The 15 years since our IPO has gone quite quickly. But in that 15 years, I've had the opportunity of working with some really great people, some great stakeholders, investors, analysts, customers and communities, and I know that's partly what I'll miss the most.

I'm confident I'm going to leave the business in good shape with a very capable team and an exciting future. So thanks to you all. I'll be around for a few months here, but now happy to take any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today is from Rob Koh from Morgan Stanley.

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Robert Koh, Morgan Stanley, Research Division - VP [2]

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Congrats on the result. Just a question about the kind of longer-term RAB growth of 3% to FY '22. I wonder if you could perhaps give us some color on the composition. Is that mainly transmission? Is that mainly electricity distribution? And what the kind of update has been since the last year? The previous target was like 3.5% to FY '21.

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Adam Newman, AusNet Services Ltd - Former Executive GM & CFO [3]

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Rob, it's Adam here. I wouldn't read too much into the 3.5% to 3%, that's just the adding of the extra year, and I actually think there's probably a bit of rounding in there as well. The main driver of the decline in that year would have been sort of predominantly through the REFCL expenditure, which has been elevating spend within electric distribution over that time period. I don't know that we want to go specifically into each of the networks and breaking down the growth, but it would be reasonably even across the 3 of them.

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Robert Koh, Morgan Stanley, Research Division - VP [4]

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Okay. All right. And If I move to the new Mondo business and we try to think about returns on the contracted asset base, I guess there's still quite a lot of transition in that business. But if we were to take the FY '20 EBIT for -- and divide it into the contract asset base then, would that give us a good sense of the kind of return run rate on the contracted asset base? Or how should we think about that?

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Adam Newman, AusNet Services Ltd - Former Executive GM & CFO [5]

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So Robert -- I -- yes, so we basically try and get returns that are over -- I'm just trying to think through the mental gymnastics of what you just said there. Where I think we've guided in the past is that we seek on a risk-adjusted basis to get returns for the contracted stuff that's in excess of the returns in our regulated business. I think that's probably the best way -- I mean, obviously -- there's obvious reasons why we don't want to give specific guidance with regards to individual projects. That would be the best way I think to look at the process for the return generation from those particular investments.

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Robert Koh, Morgan Stanley, Research Division - VP [6]

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Yes. I guess there is quite a lot of change coming through there. So I appreciate that. I guess if I go for FY '19 and just divide EBIT into contract asset base, I'm getting kind of 5% or 6%. But it seems like there's probably a few things transitioning in and out of that number.

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Adam Newman, AusNet Services Ltd - Former Executive GM & CFO [7]

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Yes. Yes, there is. Look, FY '19 didn't have a -- had a lot of the capital expenditure, but not a lot of the earnings growth that starts to pick up in FY '20, so -- and from a full run rate from FY '21, from a phasing perspective, I think you can roughly assume that FY '20 has about 2/3 of the full ongoing run rate that's achieved in FY '21.

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Robert Koh, Morgan Stanley, Research Division - VP [8]

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Okay. Great. Yes, that's basically what I was asking. I should have asked it that way. I guess final question for Mr. Ficca. And if you don't wish to answer, then I totally understand. But I guess if this is indeed your last result, congrats on a wonderful career. I wonder if you have an advice -- any advice for the poor person who has to follow in your footsteps?

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Nino Ficca, AusNet Services Ltd - Former Director [9]

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That's a very loaded question, Rob. No, look, I think just going through, I think, we are -- business in good shape. It's got a quite challenging future, but it's quite an exciting future. I think that we've done, both on the regulated business and with Mondo and the way we manage our capital structure and our balance sheet, I think puts us in a good position. So there's a lot of excitement about the future, so I'm -- seems almost envious that I'll move on and someone else comes in.

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Operator [10]

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(Operator Instructions) Our next question today is from Peter Wilson from Credit Suisse.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [11]

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Apologies if these questions have already been asked, I got on a little bit late. On the operating costs, so you've, I guess, changed the way that you're representing in this presentation. So could I just ask, so you've given a figure of cost savings from '17 to '19. Can you say how much incremental savings were achieved in FY '19 versus '18? And also confirm whether that $56 million that you show on Slide 13, whether that includes the step down from prior year storm and IT impacts in FY '17.

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Adam Newman, AusNet Services Ltd - Former Executive GM & CFO [12]

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Yes. So I think, broadly, Peter, if you just assume that the cost reductions during FY '18 and '19 are broadly evenly split. And in relation to the items that you said, that does impact out of that particular analysis. And you can see that in the footnotes to the slide which calls out what's in and out. That would take you back to what is sort of ongoing sustainable OpEx type stuff.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [13]

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Okay. So those are legitimate, I guess, efficiency savings, that $56 million?

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Adam Newman, AusNet Services Ltd - Former Executive GM & CFO [14]

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Yes. And -- so just I called out a bit earlier, that you'll benefit in the electricity distribution when you go calendar year '16 to calendar year '18 regulated OpEx. That declined on a net basis of $41 million, so the majority of the savings have been on -- in electricity distribution, which is the one where we had the most amount of work to make up in terms of where we sat in a relative sense from a benchmarking perspective.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [15]

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Okay. Excellent. And then with the impact of the tax review, the tax allowance review. You said earlier that you weren't [trying] to give any kind of revenue estimates. But can you confirm how large the deductions you were taking on refurbishing CapEx per annum were?

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Adam Newman, AusNet Services Ltd - Former Executive GM & CFO [16]

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You can see that really in our accounts when you go to -- the majority of the timing differences that relate to electricity distribution and in terms of, as you said, the accelerated deductions that we get, I think on an annual basis, they are broadly speaking roughly about $150 million.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [17]

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Okay. And what would be the distribution between these 3 assets of that $150 million?

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Adam Newman, AusNet Services Ltd - Former Executive GM & CFO [18]

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It's all in [ED]. That changes over time depending on what the profile is in relation to what that spend is.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [19]

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Great. Okay. And then lastly, the dividends. So 5% growth target for next year. Can you give us an idea of maybe how the Board is thinking about dividend growth? Because 5% is pretty strong when you, I guess, consider that to your asset base grew just 1% last year and cash flows available for distributions last year represented, was actually down a couple of percent?

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Adam Newman, AusNet Services Ltd - Former Executive GM & CFO [20]

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Yes. So the cash flow from operations, so we look at how we fund overall growth CapEx at the end of the day, and we do that via a combination of equity, which we get out of our DRP, debt and overall cash from operations. So we give guidance each year. I suppose when we sit down and talk about it, we've got some good visibility into where we're going from a reset perspective, we don't have a reset until electricity distribution comes along. And then as we've talked about in the past, we do have the benefit of staggered resets. So on top of that, I suppose, the other 2 things that factor into it is we've got some good traction on our cost-out program, which is helping. And we've also -- as we were talking about before, starting to see some traction in relation to the element of our strategy which was to grow our unregulated earnings, which you heard from Chad. We've been pretty proud of the track record of what we've been able to achieve from that perspective. So that will factor into why we're comfortable to give that guidance for this particular year. I don't know where you got the 1% from. That seems a bit low from our asset base growth.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [21]

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I did take it from your presentation, but maybe I read that wrong. I guess based on what you said, is there any expectation that your actual operating cash flows will grow at that 5% level? Or is it effectively kind of blending in, the cash flows you expect to get from the DRP and other things?

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Adam Newman, AusNet Services Ltd - Former Executive GM & CFO [22]

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Yes. Sorry, I don't know if you mentioned that you're late on the call, but this is only the second year as a business that we've generated $800 million in cash flow, and we're a bit of the victims of our own success, if you like, that last years was extraordinarily high. And I think FY '18, if I remember was something like a 20% increase on the prior year. However, FY '18 had the benefit of a tax refund and some favorable working capital movements that were rolled out. So if you looked at it on a more normalized basis, our operating cash flows do remain strong. We think we're very lucky in terms of having some of the growth opportunities that we've got ahead of us because, obviously, in this type of business, your ability to grow your asset base plays into future revenues, albeit there's a bit of a lag in both the way you spend from an unreg perspective and also with the way the regulated model works at the end of the day. So I mean, once again, we look at it in terms of how do we go about funding in a sustainable manner. In that source and uses of funds chart, I think we're quite comfortable with how the process is working and how our framework works in terms of growth CapEx and being able to support that going forward.

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Operator [23]

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(Operator Instructions) Our next question is from Ian Myles from Macquarie.

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Ian Myles, Macquarie Research - Analyst [24]

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A couple of questions. Just firstly, can you maybe just give us sort of color? The 6-month extension potentially on the reg resets for distribution, what sort of -- is there a proposal on WACC rates and the likes of that? Is it a continuation of the current regime? Or is it something different?

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Nino Ficca, AusNet Services Ltd - Former Director [25]

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Thanks, Ian. That's a really good question. So we haven't got to that level of detail with the AER yet. What we've done historically is for the period of the extension, you just reloan the current price review. But then as you do, the delayed price review process, you then come back and claw back or, in the unlikely case, add on any difference in the period. So you sort of redo that 6-month period when you get into the main body of the price review process. Okay, definitely yet to be agreed. We've got to go through the details. It's very early days.

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Ian Myles, Macquarie Research - Analyst [26]

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Okay so for all intents and purposes, the next period is really a 5.5-year period as opposed to typically a 5-year period?

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Nino Ficca, AusNet Services Ltd - Former Director [27]

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Yes. We've got to work through that, but that would be on us as well.

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Ian Myles, Macquarie Research - Analyst [28]

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Okay. Okay. That's good. In terms of the actual program itself, you've been working with the customers. How well progressed are you in actually having them accept your sort of proposals in your CapEx and OpEx? How -- can you just give more color on how that program's actually gone?

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Nino Ficca, AusNet Services Ltd - Former Director [29]

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Yes. Look, it's been really good in and it's been a real learning process for us and I think for the customer forum, for sure. We have substantially agreed that CapEx proposals, and that's been a little bit of give and take on both sides. And we've looked at some of our augmentation maybe through different eyes, but we are very happy with where we're landed on that. One area that we actually will use this 6-month delay to do a bit more work on is the impact of the Victorian government's Silver program. We think there's going to need to be some capital expenditure to make sure we can meet as many customer demands for solar and batteries as possible. It's not just a case we can plug it in and it will get to operate. So the customer forum are very happily engaging on just what that should look like and we kind of have a view that it should be a reasonably economic process. But this is all published, Ian, and we're really very happy to point you to it. So we're much more opened about a proposal than we would have been at the last price review. That's all available even though we haven't submitted to the AER yet.

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Ian Myles, Macquarie Research - Analyst [30]

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Okay. I appreciate it, I didn't necessarily (inaudible). Also, on the transmission side, you kind of faired amount of excluded transmission revenues, which are being quite strong. Are we going to see a step back down in those revenues as we come to the end of some of these -- like the Metro program and moving to Waverley Towers and the likes?

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Adam Newman, AusNet Services Ltd - Former Executive GM & CFO [31]

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Yes, we -- they're the true ones that you called out. They come in ebb and flow a little bit. It's a bit unusual in transmission. I wouldn't say we typically have this in the past. It tends to be a bit more in the distribution side of the business. The expectation is that we won't get the same levels that we've got necessarily this year, albeit there's still some carry over, I think, in relation to the Metro tunnels into next year.

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Ian Myles, Macquarie Research - Analyst [32]

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Okay. And in terms of -- I saw there's a little redundancy charge inside transmission. Should we expect that sort of redundancy save equal charge to actually come through in cost reduction next year?

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Adam Newman, AusNet Services Ltd - Former Executive GM & CFO [33]

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Yes. The redundancy costs that you would see relate to initiatives within our cost saving profile. That's correct.

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Ian Myles, Macquarie Research - Analyst [34]

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So that will start flowing through? At a quarter level, can you give a bit more color?

Yes, because at a broader level, can you maybe give more color of the run rate that you're sort of currently getting in FY '18 and FY '19 and how it will step up or change to FY '20? Because, obviously, you've got a lot of programs in place, which are coming through this year.

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Adam Newman, AusNet Services Ltd - Former Executive GM & CFO [35]

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FY '20, I mean I think you can kind of see in the actual numbers themselves within the financial statements that we're getting some good traction with regard to our overall program. The run rate that you're referring to for the last couple of years that's been split to the 50/50, FY '18, FY '19 with -- in terms of the total amount, it's a bit more of the regulated OpEx coming out in FY '18 than it did in FY '19.

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Ian Myles, Macquarie Research - Analyst [36]

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Okay. Two more questions. On the acceleration of your 1 point up from $1 billion to $1.5 billion, is that factoring in a lot of the potential labor policy? Or is there still upside scope around that sort of target given if you go to a 50% renewables target?

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Nino Ficca, AusNet Services Ltd - Former Director [37]

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Thanks, Ian. We've got a strong pipeline built on what we're seeing in the marketplace sort of regardless of where the election outcome falls to. We probably -- the recent success we've really realized that many projects have been developed over the last 5 years. So -- but that said, we're going to take a really disciplined approach to that growth. So won't forecast over and above what happens in a few days' time on Saturday, May 18. But we're confident in the growth target we put forward for $1.5 billion based on that kind of pipeline, largely based on what we're seeing out of Victorian jurisdiction and other things, like the (inaudible) ATM process and plan, et cetera.

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Ian Myles, Macquarie Research - Analyst [38]

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That's good segue. There's obviously been a favorite talk about interconnectors across the market. Just -- your presentation doesn't really talk much about that. And I was wondering if you can give us a bit more color on the implications of that integrated system plan, and each interconnectors and what -- how the governments potential -- sorry, the Labor Party is potentially offering $5 billion of funding to some of those connectors. What it might mean for your business?

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Nino Ficca, AusNet Services Ltd - Former Director [39]

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Yes, thanks, Ian. Probably too early to call it with any precision. We do know Mark Butler has taken a real interest in the ISP and making sure that can go ahead. We probably favor more role for government to underwrite some of the investments rather than directly invest in it. But we see in broad terms, as usual and obviously, whoever is being positive for renewable investment and the network needs to come along with that. And I think Mark Butler in particular recognizes that. So we'll obviously meet them at the door if they happen to end and really seek to understand the impact. Pretty broadly and (inaudible) and looking at the implementation of the ISP and looking at how that impact can happen over time. So that's all in time. Some of those projects are interconnected, others are intra-region. So if you'll start to see almost take over overtime so they have got to go through the regulatory investments assets etc cetra.

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Operator [40]

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Our next question today is from James Nevin from RBC.

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James Nevin, RBC Capital Markets, Research Division - Analyst [41]

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First question just on the electricity distribution. I think you've given the target of in the top quartile by FY '21. I'm just trying to understand if that's still kind of the timeline for us. And then -- because if you look at that kind of a 4-year kind of target for the last couple of years, there's a strong performance and then if we should maybe expect something similar over the next 2 years. And yes, if that kind of time line is still there?

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Nino Ficca, AusNet Services Ltd - Former Director [42]

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Yes, thanks, James. Without getting into the sort of exact numbers, that remains our target. It's always been something that's related to the next electricity distribution price review. We're pretty comfortable with where we are and our plans. And -- but of course, it's critically dependent on what some of the other businesses can do. So yes, it remains our target.

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Adam Newman, AusNet Services Ltd - Former Executive GM & CFO [43]

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And I will just add. It remains what the other businesses are going to do. And there's also some operational factors that fall into the benchmarking as well, so it's not just cost related. And I think like a lot of businesses and it's about being able to support better customer outcomes, so it doesn't mean that we stop for the next electricity distribution price. But I would say it will be an ongoing process for us at the end of the day once we get past that.

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James Nevin, RBC Capital Markets, Research Division - Analyst [44]

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Thank you. And then just on the Mondo. I am just trying to get a better handle of where that kind of similar growth is going to come from. So you talked I think in the presentation a bit like a national pipeline of opportunities. If you just -- I think most of it is probably in Victoria. How much of it [outside] of Victoria that you've been looking at to fund that growth. And then I think you talked about the different types of assets as well between renewable connections and then technology solutions for energy data and asset intelligence services? And just is there another of that growth that will be nonrenewable kind of connections there?

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Nino Ficca, AusNet Services Ltd - Former Director [45]

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Thanks, James. Just in terms of the growth in Mondo, we do have a national pipeline and I've said -- I think I've said previously that 30% to 40% of our pipelines in the state. That said, we see Victoria as our prime base for growth in that space, purely on the presence in Victoria, owning the transmission network in Victoria and being incumbent to provide connections to those renewables. So albeit it's national, it is much harder to compete in the state. But we are seeing a lot of proponents and developers approaching us given that the national rules change, July 2018, to have enough competition particularly in New South Wales and Queensland. So we're very active in pursuing that. We do take a partnering approach with our customers in Victoria to see how we can work with them nationally on emerging opportunities. So our first priority is to get around Victoria with them and then look nationally with them. In terms of the split between infrastructure and behind the meter of the business community and energy space, our #1 priority for the next 2 to 3 years is in infrastructure, that's where we see the real growth. We do see emerging opportunities behind the meter, but we're still exploring in a number of development cases and innovation models with customers to see how those markets evolve. But for the first part, we see that market sort of 2 to 5 years away.

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James Nevin, RBC Capital Markets, Research Division - Analyst [46]

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All right. And then just the last one, is that target fairly reliant on the Western Victoria renewable integration and strength in the transmission network there?

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Nino Ficca, AusNet Services Ltd - Former Director [47]

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That target's based on a lot of opportunities, both in Victoria and across Australia. I won't go into specifics around particular items within our pipeline given the competitive nature of the environment.

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Operator [48]

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Our next question is from Nathan Lead from Morgans Financial.

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [49]

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First up, I'll just really interested in seeing your draft ED proposal, a slice of that incentive revenue, $180 million over the 5 years. What sort of probability do you attach to that to be able to push that through the AER? And can you give us an idea of just where gas distribution and transmission is in terms of their potential incentive revenues going forward?

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Nino Ficca, AusNet Services Ltd - Former Director [50]

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Yes. I won't get into the detail of it too much, Nathan. Largely, the incentive revenue is mechanistic. So the targets are set by reference to how it's performed over the previous 5 years. And then, obviously, the turn out of that just flows directly from those targets. So I don't want to overstate it. We've got 1 or 2 smaller schemes that we're proposing changes to, particularly over 1 customer experience. But for the larger schemes, there's not really a lot to approve. If you see what I mean, it's all in the mechanics of the scheme.

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [51]

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So based on your efficiency targets, are you able to -- you're likely to get big incentive revenues coming out of gas distribution and transmission? It looks pretty material within electricity.

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Nino Ficca, AusNet Services Ltd - Former Director [52]

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Yes. It wouldn't be to the same extent. It would be my high-level answer to that.

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [53]

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Okay. I've just noticed you've obviously put the 2% discount on the DRP. What sort of level of DRP proceeds do you sort of think that will come into the business from that?

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Adam Newman, AusNet Services Ltd - Former Executive GM & CFO [54]

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Thanks, Nathan. So the range that we generally get when we get a 2% discount is somewhere between 30% to 40% take-up. And when we have a 0% discount, we get about a 10% take up.

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [55]

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Okay. So -- percentage in that 5% growth rate for FY '20 for the DPS, is that something that we should think as being sustainable amount, that sort of level of DPS through the next resets? Or is that in your thinking you get to the next resets and then you reconsider what the distribution level is?

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Adam Newman, AusNet Services Ltd - Former Executive GM & CFO [56]

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The Board only gives distribution guidance each year, so we can't sort of be making longer-term views in relation to where we come out from a dividend perspective. Obviously, the next -- the issue -- like I spoke to earlier about the clarity we have in relation to our revenues given the fact that we don't have an EDPR reset coming up. So obviously when we've set those things, assumptions, with regards to where we think things are going to end up at the end of the day. So to the extent that, that reset is different to where we're at, that might be informative from the way we think about it at the end of the day. But out past this current year, we're not really in a position to do much more.

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [57]

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Can I ask how you're framing your thinking around the loss of the hybrid equity credits that are going to expire in FY '21, '22?

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Adam Newman, AusNet Services Ltd - Former Executive GM & CFO [58]

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Yes. We -- our thinking currently would be that we would roll the hybrid.

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [59]

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Okay. And does that mean the rating agency would then give you the 50% equity credit again? Or...

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Adam Newman, AusNet Services Ltd - Former Executive GM & CFO [60]

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The hybrid is a cost of capital play, right? So the 50% equity-credit is an important part of it, otherwise, if you don't have it, it's expensive funding, which is why we would assume that we're going to roll it because, without the equity credit, there's better sources of funding for us available.

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [61]

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Yes. Okay. So then just one final one from me, just on the details. The operating cash flows, can you just give us an idea how much that is boosted by the customer contributions coming through? Plus you had to step up in customer contributions this period. There's the cash contribution with regard to the operating cash flow.

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Adam Newman, AusNet Services Ltd - Former Executive GM & CFO [62]

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There's about $40 million that roll through in terms of customer contributions into cash flow, I think, off the top of my head.

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [63]

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Is that a bigger -- I'm assuming that's a bigger amount than last period. Or is it the gift that actually increased this period?

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Adam Newman, AusNet Services Ltd - Former Executive GM & CFO [64]

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Yes. The gifted increased this period. As you know, gifted doesn't roll through the cash flow.

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Operator [65]

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There's no more further questions at this time. I'd like to hand the call back to the speakers for any closing remarks. Please go ahead.

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Nino Ficca, AusNet Services Ltd - Former Director [66]

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Thank you all for your attention, and we'll see some of you on the road. Thank you.

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Operator [67]

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Ladies and gentlemen, that does conclude the call for today. Thank you all for participating. You may all disconnect. Goodbye.