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Edited Transcript of AST.AX earnings conference call or presentation 12-May-20 12:00am GMT

Full Year 2020 AusNet Services Ltd Earnings Call

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

TEXT version of Transcript

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Corporate Participants

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* Alistair Parker

AusNet Services Ltd - Executive General Manager of Regulated Energy Services

* Chad Hymas

AusNet Services Ltd - Executive General Manager of Mondo

* Mark Ellul

AusNet Services Ltd - CFO

* Tony Narvaez

AusNet Services Ltd - MD & Director

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Conference Call Participants

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* Ian Myles

Macquarie Research - Analyst

* James Byrne

Citigroup Inc, Research Division - VP & 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

* Tom Allen

UBS Investment Bank, Research Division - Director in Equities Research & Lead Analyst of Utilities

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the AusNet Services Full Year Results Conference Call. (Operator Instructions) I would now like to hand the conference over to Mr. Tony Narvaez, Managing Director. Please go ahead.

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Tony Narvaez, AusNet Services Ltd - MD & Director [2]

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Thank you. Good morning, everyone, and welcome to our full year 2020 results presentation. My name is Tony Narvaez, Managing Director of AusNet Services, and I'm joined today by members of the executive leadership team, Mark Ellul, Alistair Parker and Chad Hymas, who will introduce themselves shortly.

Before commencing with the formal presentation this morning, I want to take a few minutes to acknowledge the difficult circumstances confronting us all as a result of the COVID-19 pandemic. Whatever your circumstances, I hope you are well, and I thank you for making the effort to join the call today.

As an essential service provider, AusNet Services is in a privileged position. Even in times of crisis, we remain financially stable, given the nature of our regulated and contracted revenues and given our ability to access capital off the back of strong creditworthiness. However, with this position comes an obligation to ensure business continuity, to ensure safe and compliant energy even in the face of extreme disruption, whilst keeping our people and our delivery partners safe. Catastrophic bushfires, extreme weather events and the COVID pandemic have seen us execute our well rehearsed crisis management responses, and I'm incredibly proud of the resilience demonstrated by our people and our business, particularly over the last 6 months. And I'm also very confident that our business will continue to adapt and to respond. Our obligations and responses don't stop with energy delivery today, it includes an obligation to meet and equate needs of tomorrow. Alistair and Chad will highlight our regulated business and Mondo, will respond to the significant pipeline of large-scale transmission opportunities. These opportunities are incremental to significant investments in our current and draft regulatory determinations as well as future investments by Mondo under contracted arrangements. These opportunities, of course, coincide with heightened economic uncertainty. And as the operating landscape becomes more volatile and as we meet our obligations to invest and as we enter staggered regulatory resets, prudent capital management is increasingly important.

And with that, I'd like to move to commence the presentation by moving to our safety performance on Slide 4. As you would appreciate, energy delivery is a hazardous business. Our goal remains to have 0 injuries and 0 harm to our people and delivery partners. Over the last 12 months to 31st of March, we've seen a 13% increase in recordable injury frequency rate. And whilst this is our second lowest on record, following a strong downward trend over the last 5 years, the FY '20 outcome show us that we need to push even harder when it comes to safety. To that end, we are working closely with delivery partners to refresh our critical risk and order programs to maintain a strong safety focus and to address our increased injury rate. Over the summer period, Australia experienced devastating bushfires. Our people worked tirelessly in hazardous conditions, particularly in areas of unstable vegetation to restore supply to customers. This was done without serious injury to themselves. And Alistair will expand upon the bushfire restoration efforts later, but I'm extremely proud of our people and how they responded.

Turning now to Slide 5. I've already touched on a number of significant events, which have shaped a challenging and fast-moving operating backdrop. Despite these challenges, our business continues to demonstrate incredible resilience. Our people have become accustomed to adapting and responding, which positions us really well to tackle the uncertain operating landscape. Through all of this, we remain committed to supporting customers and communities by providing safe and reliable network services. Access to essential services has never been more important. In response to COVID-19, in collaboration with Energy Networks Australia, we are proud to support and deliver a package of relief initiatives targeted to those residential customers who suffer hardship and for small business customers who have been forced to scale back or cease operations. We are pleased to provide these measures, but recognize there will be an impact on revenues, as the measures will evolve are the deferral, rebating, waiving of network charges between the 1st of April and June 30, 2020. The ultimate impact would depend upon hardship take up rates, which are uncertain and difficult to forecast at this particular time. Further details on the customer relief package volume and customer data are contained in the appendices of this presentation, and Alistair will expand on these measures and what we are seeing around volumes, along with the proposed regulatory changes.

Turning now to Slide 6. We've laid out some key points here for you, which highlight our strong capital position. Our financial strength is underpinned by resilient long-term revenues, prudent financial metrics maintained over many years. Mark will expand on our capital management discipline shortly. But as you can see here, that the group has substantial liquidity of $1.5 billion today and has a diversified funding mix across markets and currencies, aided by our A range credit rating. We are responding to the current environment with a number of operating and capital management initiatives. We talked about the operating and financial levers at the half year and the emergence of COVID-19 pandemic causes us to have an even sharper focus on these levers. Our priority has been to establish portfolio of options to ensure operational and strategic resilience. We have integrated our COVID-19 response with our continued transformational program. And lastly, we continue to explore capital management initiatives to support our investment pipeline.

Turning to Slide 7 now. It's been a pleasing year. We've achieved an awful lot, particularly given the backdrop of extreme events. On growth, we're really hitting our straps. We've recorded strong growth in our asset base with RAB up 4% and our contracted asset base up 19%, and this has facilitated a dividend growth of 5%. Mondo's had another great year. It completed 2 major wind farm connections and was announced preferred partner for the Western Victoria Transmission Network Project by AEMO. We are particularly excited about partnering with AEMO on this large transmission augmentation project. Innovation continues to feature prominently throughout the business as well. And during the year, we continued the LiDAR program to build a 3D digital network model to deliver business benefits through an automated vegetation assessment, 3D digital design and support for other digital use cases. This initiative will transform the way we inspect and monitor our network.

And lastly, on efficiency, we have now fully outsourced field service delivery model. This will allow us to optimize resource allocation, I should say, and lower cost for customers. This is a great development. We've have engaged Downer for gas and electricity distribution and partnered with Zinfra in terms of transmission.

I'll now hand over to Mark Ellul, our Chief Financial Officer.

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Mark Ellul, AusNet Services Ltd - CFO [3]

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Thanks, Tony. Hi, everyone, and welcome to the call today. In my presentation, I'll cover 3 items. First, I'll have a look at our finance and cash flow performance for the year. Next, I'll look at our capital investment profile and our funding mix. And then I'll go through our dividend settings and approach to capital management in the current environment. Finally, throughout the presentation, I'll provide some details as to how we're thinking about COVID-19 from a financial perspective.

But looking at our financial and cash flow performance, and we continued our strong performance on cost efficiency and operating cash flow generation. Turning to Slide 9. Revenue and costs were impacted by pass-through increases for easement tax and inventory sale as part of our transfer of O&M services to Downer. I should point out that revenues in FY '20 were not impacted by our customer relief package, which starts from the 1st of April, or COVID-19 more broadly. Overall, EBITDA increased 5.5% to $1.2 billion. Our bushfire response costs and higher TUOS were more than offset by regulated revenue and customer contribution increases. In addition, our cost efficiency focus continues to deliver. Regulated OpEx was down $17 million on an underlying basis. As guided, our final dividend for the year is up 5% to $0.051 per share. Despite several challenging external factors, we've delivered strong results across all of our key metrics.

Looking at a little bit more detail of our NPAT performance on Slide 10. And after adjusting for the easement tax and the inventory sale, revenue was up 3.7% due to a few key items. There was a $59 million increase in regulated revenues, predominantly on the back of regulated price increases. Also contributing were higher incentives across all 3 networks and a $15 million West Gate tunnel relocation works, which is noncash.

Customer contributions were up $22 million, and this includes $19 million for a prior year gifted asset catch up. For Mondo, while revenues were down $16 million, this is offset by a $13 million increase in interest income because of the new lease accounting standard. A loss of revenue as a result of one-off contracts in the prior year has been mostly offset by a $16 million increase in revenue and interest income from the completion of several wind farm connections.

Operating costs on a reported basis were up $6 million, which was all from our regulated businesses, and I'll talk to that on the next slide.

For FY '21, while we expect COVID-19 and customer support will have an impact on financial performance, we're responding, as Tony alluded to, by advancing cost management initiatives and reprioritizing our CapEx plans.

Looking at a little bit more detail on our regulated OpEx performance on Slide 11, and this has been impacted by $62 million of cost increases that have corresponding revenues as well as $15 million of incremental bushfire response costs. Looking through these items highlights our continued cost efficiency performance. In addition to general cost discipline, key initiatives that have supported the $17 million underlying cost reduction have included our transfer of O&M services for both electricity distribution and recently transmission. We've renegotiated several technology support contracts. And we've also implemented new asset management practices, including new technology for pole inspections.

In summary, we continue to manage our cost base through the ongoing delivery of efficiency initiatives and disciplined cost management. This has enabled us to deliver improved financial performance year-on-year despite significant bushfire and other events.

Looking at our cash flow performance on Slide 12, and there was a 12% decline in cash flow from operations due to a number of nonrecurring and unusual items. There were high tax payments due to $28 million relating to the FY '19 final tax position along with a higher installment rate. We paid down a net $11 million for the transfer of electricity distribution fieldworks. And interest paid includes $7 million settlement of a swap transaction, which was accrued over previous periods. In addition to those items, cash flows were also impacted by $24 million from the bushfire and TUOS costs that I mentioned earlier. While recognizing the need to support customers, we are well placed to navigate this period of uncertainty due to our regulated and long-term contract revenues.

Now looking at our capital investment profile and funding mix, and we continued our strong growth in our asset base that is prudently funded. Looking at Slide 13. Capital expenditure increased slightly on prior year, while our growth CapEx continued to represent approximately 65% of our capital spend. Electricity distribution CapEx was up $41 million due to safety spend, in particular, REFCL, as we continued with the rollout of the program. Transmission CapEx was up $16 million due to customer initiated works such as the West Gate tunnel relocation and major upgrade of the North-West coms loop. Mondo CapEx is lower due to the prior year completion of the battery energy storage system in Ballarat.

For FY '21, we expect CapEx to be somewhat lower due to our COVID-19 response as well as the Mondo portfolio, including a greater proportion of early works and planning design activities. Despite this, we continue to heavily invest in our networks with close to $1 billion spent each in the past 2 years. That supports both network safety and reliability as well as future growth and returns.

Looking at our dividend and CapEx funding on Slide 14, and this slide highlights the uses of our operating cash flow and how we have funded our CapEx and dividend. Despite lower cash flows from the nonrecurring and unusual items I mentioned earlier as well as our dividend growth, we still had good cash flow coverage of our dividend, which was fully funded by operating cash flow after maintenance CapEx. Our CapEx funding for the year had a good mix of debt and equity via our DRP, and this supports our net debt to asset base being below our 70% guidance. As we navigate the impacts and uncertainty of COVID-19 through FY '21, our cash flow will continue to be carefully managed.

Now turning to our capital management parameters, and we have always and will continue to take a prudent and deliberate approach to capital management and dividend settings. This has served us well in the past. And we'll continue to do so in the current environment. The key message on Slide 15 is that our guidance for FY '21 dividends is $0.09 to $0.095 per share. And let me take you through the detail behind our thinking. A lot has happened since we last spoke in November. COVID-19 is having an impact on us, our customers and the macro environment in which we operate. Future impacts of the pandemic are uncertain, and this has been taken into account. In addition to COVID-19, we have also considered our upcoming regulatory resets, our views of the growth pipeline in front of us, our operating levers and our active capital management considerations. All of these have been factored into our guidance for FY '21. We believe this is a prudent approach that incorporates a level of uncertainty and prepares us well for the future. Our capital and financial positions remain strong and these are key priorities for us to maintain. This is also why we're exploring a range of capital management initiatives to provide further support and to enable us to actively respond to significant investment opportunities that lie ahead.

Now looking at our debt maturity profile on Slide 16. And we continue to prudently manage our debt funding requirements, accessing a wide range of debt markets and maturities. Today, we have $1.5 billion of cash and available debt facilities, which more than meets our maturity requirements over the next 12 months. We think this is important in the current environment. The $1.5 billion includes the recent $500 million of bank debt facilities that were placed at very competitive pricing.

In summary, despite the challenging operating environment and uncertain future, we have delivered strong financial results and shareholder returns in FY '20. And we have and we'll continue to take proactive steps to remain in a strong financial position by prudently managing our capital settings and driving further operating efficiency. We are well placed to navigate this period of uncertainty and take advantage of future investments that will deliver long-term shareholder value.

I'll now hand over to Alistair, EGM of our Regulated Energy Services, to talk about our Regulated businesses.

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

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Thanks, Mark. Hello, everybody. I hope you're all well. And before I get into the main slides, I just thought I'd provide some color on what we've been seeing over the past month in terms of demand, and then some reflections in hardship provisions. We've provided Slide 29 in the appendix, and that shows demand in our electricity distribution network in April. So we were up about 18% in residential, down in small and medium enterprises and large business and net up about 2% compared to the previous April. If we were more exposed to the CBD, for example, we would see the SMEs down much more. And we know that compared to other networks, we are more heavily weighted to residential loads. So we feel good about demand at the moment. The next question is the impact of the wider economy on our revenues through hardship relief. It was important for us to develop and offer a relief package. This was very deliberately designed to support all retailers in providing hardship packages to customers and in particular, supporting the smaller retailers. Almost all of our retailers have signed up for the network relief package, although 3 of the 4 largest have not picked up the residential component. Historically, we estimated hardship programs accounted for about 2% of our customers, but we hear anecdotal evidence of large numbers of people signing up with the retailers. As yet, we don't see any hard data. We have seen a reduction of demand in small businesses that would mean about 8% would be eligible for the package that applies to them. The impact will become clearer over the next months as the billing cycle pulls through and (inaudible) is an effective offset to unemployment. When we pulled a small sample of customers in April, well over half expected that they were using more energy during the day, over 3/4 were aware of the network relief package and less than 1/8 thought that they would need it. It was a small sample. Important to differentiate between small retailers who account for about 20% of our revenue, they will get a rebate or waive if people go on their hardship programs. And to differentiate them from the larger retailers who only have the opportunity to defer revenue, and we would expect to see that return in September from the June quarter.

You will have seen the AER's rule change announcement on these relief packages. From the 1st of July, we defer network charges by 6 months for hardship or deferred payment plan customers. As it stands, it doesn't automatically apply in Victoria, and we don't believe it should. I acknowledge the circumstances it's been developed in, the sense of urgency that all policymakers feel at the moment, but we don't believe it's a good rule nor a necessary rule at this stage in Victoria. The network relief package that we have put together targeted the real pain points and is more flexible. We can adapt to circumstances. In Victoria, we've already enhanced some of the terms, and that's being well received. We don't want an inflexible rule.

Turning then to Slide '18. During the summer of 2019/'20, Victorian communities, among others, experienced devastating bushfires. In our network, the East Gippsland and Alpine areas were severely impacted. A peak, 7,500 of our customers were without supply, many of those areas were closed to access, and there was substantial damage to our network. AusNet Services and Downer employees worked tirelessly alongside emergency services in recovery efforts, clearing debris from easements, removing and replacing damaged assets and restoring supply as quickly and as safely as they could. As the slide notes, we got 98% of customers back within 2 weeks. Aside from the CFA and Police, we were often the first people back into these communities and we supplied generators to get a lot of their lights on quickly. Some of our employees also volunteered with emergency services. We made financial support available to impacted customers by fast-tracking compensation payments under the Victorian guaranteed service level scheme. We waived network standing charges for all customers who were without power for more than 7 days. And we waived fees and charges that would normally be applied to standard reconnections, and we'll stand by that.

As Tony mentioned earlier, our staff responded superbly, and this was acknowledged with some great feedback received from customers directly and from government as well.

I'll now turn to the operational highlights on Slide 19. It's been another big year. The most pleasing highlight is that from an operating cost perspective, we now have a fully outsourced delivery model with strategic alignment across all 3 networks. At the half year, we talked about finalizing arrangements with Downer for our gas and electricity networks. During the second half, we finalized similar arrangements with Sempra for our transmission network. All of these agreements allow us to streamline and optimize the deployment of work crews across our networks.

In electricity distribution, we've made good inroads on the Rapid Earth Fault Current Limiter program, tranche 1. We were granted time extensions for the remaining 2 zone substations until November 2020 and May 2021. And that was to address technical issues and achieve full compliance of those sites. Tranche 2 is progressing, but we will likely need time extensions at 2 zone substations out of a total of 10.

Gas continues to perform well, and we've made some great progress on customer satisfaction, as you'll see. During the period, we became a founding member of the Australian Hydrogen Centre. The center will assess the feasibility of blending renewable hydrogen into gas distribution networks in both Victoria and South Australia. Feasibility studies will look at 10% hydrogen blending, which we're reasonably confident about, but also 100% hydrogen networks.

Turning to our resets on Slide 20. We have 3 networks resetting over the next 3 years, and the staggered reset slow the transition to the lower rate of return environment. We launched our electricity distribution price review for '22 to '26 with the AER in January, and we await their draft decision, we expect that by September 2020. Recently, the AER published an issues paper on the various Victorian distributor proposals. In that, the AER recognized that our proposal compared favorably with peers, particularly with respect to customer engagement and also our OpEx and CapEx proposals. We still have a way to go in terms of getting the proposal approved, but we're really pleased with the initial feedback and this highlights for us the benefits of the engagement with the customer forum. Independent of the EDPR process, the AER has announced a review of inflation, including the current method for an estimating expected inflation. The first step will be the release of a discussion paper. The AER expects to reach final position by December 2020, and implement changes in 2021. At this early stage, we don't know whether the changes will apply to the EDPR. Any potential rule changes would mean it would take longer to implement. We welcome this review. The essence of the issue is that the AER's higher forecast CPI rate understates net regulatory depreciation, lowering building block revenues. It is simply not reflective of where we are in inflation today.

Turning to Slide 21 on the integrated system plan. AEMO was looking at some grid transmission augmentation projects to facilitate growing renewables demand. We're very pleased at how AEMO was handling the ISP and how other bodies, including the [ASP,] are working to get this implemented. Some of these opportunities are long dated. However, the VNI West will see the RIT-T completed in 2021, and it presents a great opportunity for the grid. The Victorian government is also active. On the 30th of October 2019, the renewable amendment bill passed the Victorian Parliament, bringing the VRET 2030 target into legislation. The increased target of 50% by 2030 builds on the existing legislated renewable energy targets of 25% by 2020 and 40% by 2025. In addition, the Victorian government announced its intention to amend certain elements of the National Electricity (Victoria) Act to allow the fast-tracking of transmission investment and bypassing some elements of the RIT-T process.

So in summary, the network relief package is supporting retailers to offer hardship packages. We've made good progress on efficiency with the arrangements now finalized with Downer and Zinfra. We've made a promising start to the EDPR, but we still have a way to go, and there are great opportunities from the ISP.

Thanks for your time, and I'll now hand over to Chad Hymas, who's our EGM of Mondo.

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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 23. I'm very pleased that Mondo has made excellent progress this year in delivering commercial growth through building, owning and operating, contracted infrastructure with credible strategic partners that deliver stable long-term returns. Some key business highlights this year include: completing the connection assets for Stockyard Hill and Dundonnell wind farms on time and on budget, being selected by AEMO in a competitive process to deliver the Western Victoria Transmission Project, signing an MOU with TasNetworks on project Marinus, the second interconnector between Victoria and Tasmania, and undertaking early works for various wind farm connections, including Golden Plains Wind Farm in Southwest Victoria and Star of the South, Australia's first proposed offshore wind farm. Mondo will continue to take an active role in AEMO led processes, the network upgrades that are investment opportunities within our core skill set and also facilitates the continued growth of renewables.

Turning to the next slide, we provide a little more detail on the Western Victoria Transmission Project. Firstly, what a fantastic result for Mondo winning this competitive process for this critical state significant project. The project includes stakeholder and community engagement, planning and approvals, land assembly and design and construction with final operation expected in 2025. These assets will form part of the transmission network in Victoria helping to unlock renewables. This project over the next 4 to 5 years will help deliver jobs and affordable clean energy to Victorians. Final details of the project are dependent on initial stage activities and final AEMO approvals. Broadly, however, the project once constructed, will consist of 180 kilometers of overhead electricity transmission lines and a new terminal station to the north of Ballarat.

Turning to Slide 25. Mondo is leveraging mature business operations in energy data and technology solutions to enter new markets disrupted by renewable energy and to be ready for a future where 45% of all electricity could be generated by customers. Some key business highlights this year include: winning the Clean Energy Council national award for community engagement and innovation, partnering with Indigo Power, a community-based retailer, enabling communities to benefit from their investment in renewables, with at least 50% of profits shared back into local communities. Innovating and partnering with Toyota with new energy offerings across their dealership network and a hydrogen demonstrator at their Altona site. Developing the Hume project, partnering with ARENA and AEMO in a marketplace for integration of distributed generation and storage assets across the national electricity market and providing solutions to communities impacted by bushfires, that could improve the resilience of their energy needs into the future. We're extremely excited by the opportunities that exist for Mondo, creating a sustainable new energy future for our customers and Australia.

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

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Tony Narvaez, AusNet Services Ltd - MD & Director [6]

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Thanks, Chad. And turning to outlook on Slide 26. Despite continued volatility in financial markets and the broader economy, we remain well placed to navigate this period of uncertainty. Our revenues remain relatively resilient, and our balance sheet is well placed to withstand current challenges. We are providing full year 2021 dividend guidance in the range of $0.09 to $0.095 per share, around 40% franked. This is a prudent outcome in light of our investment pipeline, lower regulated rates of return and the impact of COVID-19. We are also actively exploring capital management initiatives to help fund significant growth pipeline and further support our credit profile. This may include the issuance of hybrid capital securities, pro rata ordinary equity issuance within shareholder approval limits and/or funding initiatives in the near to medium term. We are responding to short-term financial impacts of COVID-19 by managing our cost base and pulling operational levers to offset any impacts, while also ensuring that we maintain a strong financial position to manage further potential downside risk and longer term implications. We are continuing to pursue growth opportunities and ensure we are ready to respond, and we have talked about the experience we have already in dealing with rapid change and significant challenges in the external environment, and this positions us well. And lastly, as always, we will ensure delivery of safe and reliable network services to support our customers.

Thank you for listening. I'll now hand over to the operator for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Tom Allen from UBS Investment Bank.

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Tom Allen, UBS Investment Bank, Research Division - Director in Equities Research & Lead Analyst of Utilities [2]

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And congratulations on the full year results. Just firstly, on the dividend profile. If the impact of lower regulated returns was already understood, is it the impact of COVID-19 specifically, that's a key change in the outlook that's led you to cut the FY '21 dividend. And if that's the case, can you just provide some additional color on, I guess, the range of possible financial impacts that could arise from that ENA hardship proposal?

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Mark Ellul, AusNet Services Ltd - CFO [3]

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Thanks, Tom. It's Mark here. So I'll take the question. In relation to our dividend guidance, certainly, COVID has had an impact. But as I kind of highlighted in the call -- or sorry, in the presentation, we have also taken in a range of factors as well. And when we think about COVID, we kind of think about it in 3 ways. First, obviously, the immediate impact of the customer relief package. And as we kind of highlighted, we're not quite sure that the hardship take-up rate's associated with that. But we're also thinking about it in terms of the broader uncertainty in the marketplace and also the potential impact on the macroeconomic environment. So all of that has gone into our dividend guidance.

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Tom Allen, UBS Investment Bank, Research Division - Director in Equities Research & Lead Analyst of Utilities [4]

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Okay. Perhaps then, is the additional risk, I guess, that might have come from that recent rule change request submitted by the AER, which seeks to extend the payment terms from retailers to networks from 10 days to 6 months from 1 July. Is that an additional risk element, obviously, you've factored in there, and I guess what might impact [their involvement?]

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Mark Ellul, AusNet Services Ltd - CFO [5]

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So I'll start, Tom, and I'll hand to Alistair to provide any further detail on the rule change. Certainly, that's gone into our consideration. Pleasing aspect to that, but from our perspective is it looks at a deferral as opposed to a waiving of charges. But I might hand to Alistair to give some more color around it.

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Alistair Parker, AusNet Services Ltd - Executive General Manager of Regulated Energy Services [6]

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Yes. Thanks, Mark. Thanks, Tom. Look, just to be very clear about this, the rules change proposal deals with the part of the national electricity retail rules. They don't apply in Victoria. So in fact, the Essential Services Commission would have to look at that rule change and would have to think that it was actually applicable to Victoria and circumstances. It's not at all clear to us what that process would look like. We believe and we're putting this strongly that we've got a good package in Victoria. It's flexible, and it can deal with what we actually come across, and we are working closely with the Essential Services Commission on that. So I don't think -- I won't speculate on whether it will come in, in Victoria, but it's not as simple as the AER passing a rule and then it applying to us.

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Tom Allen, UBS Investment Bank, Research Division - Director in Equities Research & Lead Analyst of Utilities [7]

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Okay. And then just on the unregulated growth. So you're maintaining that unregulated growth target $1.5 billion by FY '24. So [I understood that, that] target excluded the Western Victoria transmission upgrade project that you mentioned in the presentation that was awarded in December. Can you just provide some guidance on the range of CapEx that project might likely require? And then, I guess, considering that, that project plus the Vic government now introducing legislation to fast track key projects such as the Vic, New South Wales interconnected proposal that I think Mondo and Yallourn have a proposal in the market at the moment. Is there likely upside risk to that $1.5 billion by FY '24?

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Chad Hymas, AusNet Services Ltd - Executive General Manager of Mondo [8]

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Tom, it's Chad. I'll go into a little bit, maybe we'll break the question down and talk about the $1.5 billion target and then maybe a little bit more specific on Western Victoria. I won't go into reforecasting on this call, but -- and what projects make that up. But we have a number of projects in early works, and we only count those towards the target when those projects reach financial close. That includes projects like Western Victoria, Golden Plains, Star of the South, which I mentioned on the call. We do have an exceptionally strong national pipeline and built a reputation of delivery, and we are proud of in those projects. But however, we'll continue to take a disciplined approach to growth. But we'll also aim to outperform the targets we set ourselves. So in summary around that growth target, we do have a strong growth position. We're extremely proud of and confident of the progress to date going forward. But we'll continue to revisit that target and as necessary advise the market when appropriate as those targets are counting towards the $1.5 billion. The second part of the question in relation to Western Vic value, I'll probably just reiterate how excited and fantastic result that was for Mondo and the AusNet Services business. It really is a critical state significant project, and our focus is on doing the right thing by Victoria and Victorians to both augment the transmission network, but to unlock further renewables in the state of Victoria, which could connect into that part of the transmission network. I'm aware, like everyone, there's been a lot of speculation on the project value. I'm not going to add to that today, and the commercial agreements with the AEMO prohibit me from doing so and talking in detail. I will say, though, this project is a long-term infrastructure project for the state of Victoria. It has 2 distinct phases over the next 4 to 5 years. The first phase is around planning, design, scoping, which will take about 18 to 24 months and then construction. The final pricing will be approved at the end of the first phase and then counted towards the $1.5 billion target at that point in time when that occurs.

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Operator [9]

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Your next question comes from Ian Myles with Macquarie.

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Ian Myles, Macquarie Research - Analyst [10]

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A couple of questions for you. Just on the bushfires. Can you -- you spent obviously, $15 million. How much of that is actually recoverable?

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Mark Ellul, AusNet Services Ltd - CFO [11]

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Thanks, Ian. I'll take that. There are provisions, obviously, for a natural disaster pass-through. We have discussed this with AER, and they believe the bushfires qualify for that. So we've been getting into the sort of logistical arrangements of how we would submit that application. Obviously, like any pass-through application, the AER only has a certain amount of time to deal with it. And if they don't deal with it in that time, then it goes through automatically. So again, wouldn't speculate on whether they will approve that, but there's certainly provisions for us to make that application.

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Ian Myles, Macquarie Research - Analyst [12]

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And will that impact next year -- FY '21 or start in FY '22 sort of recovery?

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Mark Ellul, AusNet Services Ltd - CFO [13]

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So we are targeting, of course, subject to the AER, we're targeting that, that would go into the first year of our price review. And as you'll know, we're forecasting a reasonable drop in prices at that point. So we think that's the best place to do it for our customers.

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Ian Myles, Macquarie Research - Analyst [14]

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Okay. And then on the STPIS impact. Is there any impact on STPIS? Or you got relief over that period?

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Mark Ellul, AusNet Services Ltd - CFO [15]

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So again, there would be an impact on STPIS, but we're just working through the logistics of how we would handle that with AER.

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Ian Myles, Macquarie Research - Analyst [16]

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Okay. In terms of the dividend policy, how much has the CapEx profile shifted? Because on your word in COVID-19, whilst it will be an impact, it's relatively small of only 20% of your revenue base, it's potentially small retailers and only a portion of them are going for particularly hardship payment. How much of the shift of CapEx is there for forming dividend? And the second one around that is, are the hybrids which are sitting in the debt book, are they likely to be renewed as hybrids? Or are they going to go back to regular debt so you lose that equity credit?

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Mark Ellul, AusNet Services Ltd - CFO [17]

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Thanks, Ian, for that. I guess I'll take the second part and the easy part of the question first. In terms of the hybrids, our expectation at this point in time is we will roll them over or renew them to keep the equity credit. As I kind of covered before, looking at our capital management parameters, that's -- we take a prudent approach, and certainly, we would look to continue that equity credit. In relation to our dividend profile and implications of covered and CapEx profile as well, look, I won't get into the specifics or details, but certainly, we have reviewed and revisited our profile with the upcoming regulatory resets with our view of the pipeline as well, and that's all been factored in.

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Ian Myles, Macquarie Research - Analyst [18]

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Okay. On cost efficiency, you've done obviously a great job this year, taking out -- the $17 million out. Is there a material scope to further step changes in that cost base in the coming couple of years?

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Mark Ellul, AusNet Services Ltd - CFO [19]

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So I'll start with that, and maybe Tony can add. Certainly, that's something we are looking at. We are committing a transformation program initiative. Certainly, COVID has required us to accelerate some of those things as well as we look to pull our operating levers in order to reduce costs. But I might hand over to Tony to talk more broadly about the program.

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Tony Narvaez, AusNet Services Ltd - MD & Director [20]

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Yes. Thanks, Mark, and thanks, Ian. So certainly, what you've seen in previous years in terms of sort of Phase I of transformation, we'd like to see repeated. We'd like to see a target that either hits that number, if not exceeds Phase I. Clearly, we're in the phase right now, which is more around resilience, so really preserving cash and simplifying our operating model. I think that's going to probably yield the best results longer-term in a more sustainable nature. Then from around July onwards, we'll kick off with another more holistic transformational program, and that's where we start to really accelerate some of the cost-outs that we see in front of us at the moment.

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Operator [21]

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Your next question comes from Rob Koh with MS.

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Robert Koh, Morgan Stanley, Research Division - VP [22]

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Can I just ask a question trying to drill into the dividend guidance range? Should we be thinking that if COVID-19 impacts are better than we all hope, that you'll be then angling towards the top of the range. Is that the key variable given that the EDPR is really just 1 quarter of this financial year?

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Mark Ellul, AusNet Services Ltd - CFO [23]

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Thanks, Rob. Yes, certainly, the approach of taking a range has factored in COVID and the uncertainty to that. So that's probably a fair assumption.

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Robert Koh, Morgan Stanley, Research Division - VP [24]

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Yes. Okay. Great. If I can then ask a question maybe of Mr. Parker. Thank you very much for Slide 29 with the demand breakdown. If demand for the electricity distribution is net up, should we then be anticipating an over earn in electricity distribution this year? And then perhaps if you can remind us how should we be thinking about where the x factor adjustments of that plays out, given there's a transitional period coming up?

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Mark Ellul, AusNet Services Ltd - CFO [25]

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Yes. Thanks, Rob. Look, we've given one month's electricity consumption. So a big if, if we carried on ahead, then clearly we would over earn this year. But we just don't know. Another factor in this was a reasonably brisk start to winter. We've had some cold days already, so I wouldn't sort of bet the farm that this was going to carry on for the rest of the year. The second part of your question -- sorry, Rob, could you just repeat that?

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Robert Koh, Morgan Stanley, Research Division - VP [26]

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Was that, so if there is an over earn, and I appreciate that's a big if, can you just remind us how the x factor adjustments are supposed to play out with the transitional period?

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Mark Ellul, AusNet Services Ltd - CFO [27]

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Yes. Well, look, that would be a -- it's more -- less about the transitional period and more about our normal overs and unders process. So if there was an over earn, we would expect to give some of that back the following year -- I'm sorry, calendar year. So we would adjust that from January 1.

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Robert Koh, Morgan Stanley, Research Division - VP [28]

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Okay. All right. And then last question for me. I noticed that you have entered into a partnering agreement with Zinfra on the transmission front, and nothing wrong with that, many of my good friends work at Jemena. But I'm just wondering if you -- or how you have dealt with any potential related party concerns that the regulator might have or has historically had?

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Mark Ellul, AusNet Services Ltd - CFO [29]

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Yes. So the regulator hasn't had a concern about related party aspects there for quite a while under their definition. The key thing from us, though, was that was absolutely a thorough, rigorous process, very commercial. I think we have done well out of it. And so that would -- even if the regulator takes a look at it, it absolutely would stand up to examination.

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Operator [30]

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Your next question comes from James Byrne from Citi.

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James Byrne, Citigroup Inc, Research Division - VP & Analyst [31]

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Look, against all the uncertainty you're flagging and your record higher share price, why not just raise equity now? I mean the market's been really supportive of raises over the last few months. And yours would be used to fund CapEx. So presumably, the discount would be too wide. Is it just too early to raise that capital at the moment?

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Mark Ellul, AusNet Services Ltd - CFO [32]

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Thanks, James, for the question. In terms of an equity raise or potential equity raise, we're still working through our capital management process at the moment. You'd see that we've announced some elements to that in terms of our dividend guidance and also our additional debt facilities that we have placed. I guess it's just a function of where we're at with the process. In terms of announcing it now, we just wanted to be open and upfront with the market around our process. We obviously always take a disciplined and structured approach to capital management, and this is just a stage in the process we're at.

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James Byrne, Citigroup Inc, Research Division - VP & Analyst [33]

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Okay. Look, I might try to push a little bit harder on the dividend outlook, and I know you don't guide on dividends beyond the next 12 months. But for FY '21, strip out COVID, call it $0.095 per share is per your answer to Rob's question. Thinking then about FY '22, which is when you really get the brunt of the regulatory resets kicking in, you're flagging that to potentially raise your capital for CapEx. Is there a pathway in that context of being able to grow distributions again across the medium term. The broker average, for example, in FY '22, is $0.106 per share. It's just hard to see those expectations being met based on the disclosures today.

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Mark Ellul, AusNet Services Ltd - CFO [34]

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Thanks, James. And as you kind of pointed out at the start, I guess, we're only going to give 1 year's worth of dividend guidance. What I would reiterate though is certainly, we've taken a range of factors into account in coming up with that guidance, and we've taken a long-term view in relation to it.

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James Byrne, Citigroup Inc, Research Division - VP & Analyst [35]

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Got it. All right. Okay. So just to push a bit harder on the hardship as well. Is there any sort of rule of thumb that you can provide the market, each 1% take-up is a certain dollar amount of impact? Maybe I'm getting a bit too acute here, but just to help us on the public side understands the magnitude. Anything you can give us, I think, is going to be really helpful?

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Mark Ellul, AusNet Services Ltd - CFO [36]

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Yes. I don't think there would be a rule of thumb that could deal with all circumstances. So we've seen a month of this. I think it's a bit early to sort of be quite precise. But look, you could multiply a few of the numbers I've given you together, small retailers, 20% of our distribution revenue, 8% of them today meet the criteria of the small businesses that would sort of give you a flavor for the revenue loss so far. But look, I can't emphasize enough. This is unchartered territory for us, and so we'll give you a good flavor as we see what actually happens.

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Operator [37]

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(Operator Instructions) Your next question comes from Peter Wilson with Crédit Suisse.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [38]

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I just wanted to follow-up on some of these questions and understand the potential capital management decision around the dividend as well. So the fact that you continue to refer to as a significant growth pipeline, I just want to understand what's changed because the headline $1.5 billion target hasn't changed. And the FY '21 guidance is in line with the spend in FY '21 -- '20. So what's changed? And what kind of profile should we be expecting post FY '21?

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Mark Ellul, AusNet Services Ltd - CFO [39]

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I think I'll start with that, and I'll hand over to Chad. I guess, essentially, Chad talked about our opportunities that we have. We've got a lot of early works that we're doing at the moment, but I might defer to Chad for some more detail around that.

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Chad Hymas, AusNet Services Ltd - Executive General Manager of Mondo [40]

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Yes. Thanks, Peter. And it's an interesting cycle we go through because these are long lead time infrastructure projects. We've probably come up a period over the last 2 or 3 years where we had early works 2 or 3 years earlier. So we've now constructed those projects, and we're back at the start of some of these initial projects where there's a lot of design, scoping phase, which typically prior to finance -- financial close, we get involved 12 to 18 months ahead of the financial close. And so the -- that's where we are in the cycle. But at this point in time, we're not going to reforecast the $1.5 billion. We'll -- when projects hit financial close, that's when we'll recognize them against the target and then advise the market accordingly in terms of what that would be reforecast to.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [41]

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Okay. And so given the lead time, like you said, in the FY '21 CapEx guidance, it's more or less similar. I mean, should we be expecting a material increase in CapEx in FY '22, FY '23? Is that what you're trying to tell us?

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Mark Ellul, AusNet Services Ltd - CFO [42]

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I don't think we're saying that at this point in time. As Chad said, we're in early works and doing a lot of early design and inquiry works at this stage. We'll wait and see as to how much of that ultimately washes through.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [43]

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Okay. And how would you like us to take the dividend guidance for FY '21? Is that a rebasing? Or should we be expecting potentially another change in FY '22? And the reason I ask that is 2 of the factors called out CapEx as we just discussed, but also the regulatory reset is more of an FY '22 factor as well.

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Mark Ellul, AusNet Services Ltd - CFO [44]

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So in relation to the dividend guidance, I won't get into many details other than the 1 year that we will give suffice to say, and as I've said previously, that guidance takes into account our view of the upcoming regulatory resets and our longer-term CapEx profile as well.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [45]

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Okay. So it does take account of effectively the future level of revenues in FY '22 and beyond from the reset.

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Mark Ellul, AusNet Services Ltd - CFO [46]

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Sorry. Correct. Yes.

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Operator [47]

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You now have a follow-up question from Ian Myles from Macquarie.

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Ian Myles, Macquarie Research - Analyst [48]

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Sorry, guys, forgot to ask before. Can you maybe give us a bit of color on your joint venture bid with Neoen around the battery at one of your transmission sites? And how that might work within your system?

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Chad Hymas, AusNet Services Ltd - Executive General Manager of Mondo [49]

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Thanks, Ian. It's Chad here. I'm not going to speculate on any projects we may be bidding on or developing given their commercial sensitivities, obviously. That said, where there's an opportunity to participate in projects that are within our core capability, we will actively pursue them. And we're also very keen to have a key role in owning and operating energy infrastructure that combines traditional and emerging technologies that will form a key part of the energy transformation that we're all experiencing. So I'll probably leave it there on that for the moment, Ian, if that's okay.

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Ian Myles, Macquarie Research - Analyst [50]

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Could I ask some more generally, okay, without the specifics. Are you exposing the business to more sort of volatile revenues? Or is it more annuity-based style revenues when you look at these battery opportunities?

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Chad Hymas, AusNet Services Ltd - Executive General Manager of Mondo [51]

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I might just hand to Tony, but effectively, we don't take market risk on transactions, and we typically like to own and operate assets on an annuity-style contract. Tony, do you want...

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Tony Narvaez, AusNet Services Ltd - MD & Director [52]

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Chad has pretty much covered it off, Ian. But we take a really careful approach to viewing all unregulated projects. This one's met a couple of hurdles if we're talking the battery potentially. One being very core to our capabilities are very core to existing assets. The other one being the ultimate offtake. And if we talk in AEMO, very strong, and we consider that as close to regulator as possible.

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Ian Myles, Macquarie Research - Analyst [53]

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And I guess to extend that, again not trying to be specific about this project. Are there many other opportunities within your network of virtual transmission lines while using batteries and the likes at strategic locations?

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Chad Hymas, AusNet Services Ltd - Executive General Manager of Mondo [54]

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Yes. Look, Ian, I think there's -- as this future grid unfolds, there's a lot of opportunity to look at new technologies and how they integrate into the traditional networks. And that's why, I guess, in terms of the Mondo strategy, we sort of focused on a sort of a centralized approach where we're connecting wind farms and solar farms into the transmission grid, but also a decentralized approach where we get behind-the-meter and look at how we virtually integrate technology, energy platforms, data information to customers and how that integrates back into the grid also. So we think that combination of approach from a strategic growth perspective is the most sustainable and that are 2 elements we're focusing on both -- on most, sorry.

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Ian Myles, Macquarie Research - Analyst [55]

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And one final question on the growth opportunity. I see you're looking at Marinus Link and you're doing some early works with them as well. I was sort of wondering, are you looking beyond the Victorian border north into New South Wales, maybe for the red zone, which the New South Wales government is proposing or even into Queensland, or they just too far field and you've got too much work at home to need to pursue other markets?

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Chad Hymas, AusNet Services Ltd - Executive General Manager of Mondo [56]

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No, Ian, I'd love to get into Transgrid's backyard and take on a competitive profile with that of what opportunities avail up there. We do have a national business in our contestable metering business. We do have capability and partners that can go nationally. I think on the slide, we talked about 20% of the pipeline is in a state, but we do recognize the competitive advantages of the local transmission network that a service provider has in making that a more seamless connection for those developments. That said, I think one of those capabilities are far broader than just connecting transmission assets, and that's where we get behind-the-meter and create that virtual power plan effect and be able to own those renewable assets for customers who want to take that market risk.

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Alistair Parker, AusNet Services Ltd - Executive General Manager of Regulated Energy Services [57]

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And I might just add to that, Ian. Thanks, Chad, in saying that some of our strategic partners, so that's why we've been so selective in the likes of Downer and Zinfra and others are also coming to us with opportunities. So that may be a question of time in terms of whether or not we're successful in other jurisdictions moving forward. But certainly, if we picked up everything that was available in Victoria, that would more than keep us busy.

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Operator [58]

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Your next question comes from James Nevin with RBC.

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James Nevin, RBC Capital Markets, Research Division - Analyst [59]

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Yes. I just had -- just one further quick question on the distribution kind of guidance. And I'm just wondering, does this change your view on the use of the DRP as far as in the past, you kind of leaned on the DRP when you have a large kind of growth CapEx outlook if you need to fill some of that with equity. If you're rebasing the absolute value of the dividend to a lower amount, does that mean you'd expect less maybe use the DRP going forward?

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Mark Ellul, AusNet Services Ltd - CFO [60]

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So thanks, James, for the question. In relation to the DRP, and you'll note that we've also announced the operation of the DRP for this -- the FY '20 dividend, that is certainly part of our funding mix at this point in time. And as we go through our capital management initiatives and review, we'll certainly take that into consideration as to how we use a DRP going forward across the range of all other options that we look at.

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Operator [61]

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Your next question comes from Nathan Lead with Morgans.

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [62]

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Just a couple of questions on capital management, if I could. Just I suppose the first one is, internally, are you thinking in terms of your gearing? I've just noticed, within your outlook, you continue to reference the net debt to regulated and contracted asset base as being below 70%. Is that the key metric that you focus on internally when you're thinking about gearing?

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Mark Ellul, AusNet Services Ltd - CFO [63]

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Yes. It is.

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [64]

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Okay. So I suppose the rating agencies, what are they actually thinking about, I thought it was more FFO to debt.

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Mark Ellul, AusNet Services Ltd - CFO [65]

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I guess they -- Nathan, they actually look at both. So they have 2 or 3 key metrics that they look at. So it would be both our net debt to regulated/contracted asset base as well as FFO to debt. So we monitor both closely.

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [66]

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As you go through your capital management review, what is the sort of the gearing you're actually going to be sizing your debt on going forward?

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Mark Ellul, AusNet Services Ltd - CFO [67]

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Sorry, can I just -- again, I missed that one.

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [68]

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Yes. As you're going through your capital management review, what is the gearing metric you're actually going to be sizing your debt on going forward?

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Mark Ellul, AusNet Services Ltd - CFO [69]

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So I guess we'll continue to look at net debt to regulated/contracted asset base. We've got a guidance target at the moment of 70%. At this point in time, we don't have any change to that. But if we go through the review and decide that we want to amend that, we'll obviously let you know. But no change at this stage.

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [70]

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Okay. Do you know what the FFO to debt might be that the rating agencies are targeting?

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Mark Ellul, AusNet Services Ltd - CFO [71]

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So Standard & Poor's will target about 9.5%. Obviously, they take a multiyear view of that. So we can have a blip on a short-term basis as long as we've got actions and plans to address it. But their target is 9.5%. I think for Moody's, it's 9% flat.

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Operator [72]

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There are no further questions at this time. I will now hand back to Mr. Narvaez for closing remarks.

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Tony Narvaez, AusNet Services Ltd - MD & Director [73]

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Really just a big thank you for everyone dialing in. I know some of you would be dialing in from your kitchen table. So I really appreciate your patience. Thanks for listening in and look forward to catching up in the near future. All the best.