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Edited Transcript of AST.AX earnings conference call or presentation 10-Nov-20 11:00pm GMT

·48 min read

Half Year 2021 AusNet Services Ltd Earnings Call Southbank, Victoria Nov 11, 2020 (Thomson StreetEvents) -- Edited Transcript of Ausnet Services Ltd earnings conference call or presentation Tuesday, November 10, 2020 at 11:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * 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 ================================================================================ Conference Call Participants ================================================================================ * Ian Myles Macquarie Research - Analyst * James Nevin RBC Capital Markets, Research Division - 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 ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you for standing by, and welcome to the AusNet Services Half Year Results Conference Call. (Operator Instructions) I would now like to hand the conference over to Mr. Tony Narvaez, Managing Director. Please go ahead. -------------------------------------------------------------------------------- Tony Narvaez, AusNet Services Ltd - MD & Director [2] -------------------------------------------------------------------------------- Thank you. Good morning, everyone, and welcome to our half year 2021 results presentation. My name is Tony Narvaez, Managing Director of AusNet Services. I'm joined today by Mark Ellul, our Chief Financial Officer; Alistair Parker, Executive General Manager, Regulation and External Affairs; and Chad Hymas, Executive General Manager, Growth & Future Networks. It has certainly been a challenging period for everyone. From our perspective, there have been plenty of obstacles during the half. It has also been a very rewarding period particularly with regard to how our people have delivered against an uncertain operating environment and how we have supported our customers. I'm really proud of our efforts. Let's get into the results. On to Slide 4. I'd like to take a brief moment to call out some key attributes of our business, which contribute to the investment proposition. By virtue of wholly owning and operating around $11 billion of critical infrastructure assets, AusNet Services generates predictable cash flows largely set on a regulated revenue basis or under long-term fixed-price contracts. This, together with the maintenance of prudent financial settings, provides a high degree of financial stability. As an essential services provider, AusNet Services has obligations to upgrade and expand our networks particularly to support a clean energy future. These obligations provide a significant growth opportunity for our business. And the resilience of our people and our networks is something that I am most proud about. Given the challenging operating environment and rapidly changing energy landscape, resilience and adaptability are key to future success. Turning to Slide 5 on responsible and sustainable business. Operating sustainably is part of our culture, shaping our strategy in a way that delivers long-term value for all stakeholders. Our #1 priority continues to be safety, and we must stay vigilant despite our continued improvement during the half, our lowest recordable injury frequency rate or RIFR on record. Due to COVID, the delivery of key safety programs has been adapted, and we have sharpened our focus on what matters most. We remain committed to putting our customers front and center in all that we do. And we are pleased to release our first Customer Interactions and Monitoring Report, our publicly available report of our progress against customer experience commitments. Our people continue to make this company what it is today. And we are committed to building from our existing capabilities further. Diversity, of course, as you'd expect, is a key ingredient for our success, and we continue to support a range of initiatives. On the environment, we've been reminded firsthand of the impacts of our -- on our networks through more frequent and severe bushfires and storms. Our approach to manage climate risk is to enhance network resilience, reduce emissions where possible and develop a portfolio of assets which facilitate the energy transition. Turning to Slide 6 and the first half operating environment, which saw some great progress. As COVID continued to impact Victoria, we refocused our efforts to ensure our people were looked after with various support programs. Investments over the last few years ensure that we have the resources and the culture in place to adapt quickly and enable our people to continue to work productively away from the office. We did that without missing a beat. As COVID unfolded, we quickly implemented a 3-phase strategic response, which included Phase 1, ensuring the safety and well-being of our people and our customers; Phase 2, cash preservation and an operating model review; and Phase 3, embarking on a company-wide transformation program. These measures have put us in a strong position, protecting us from uncertainty and allowing us to continue our focus on growth. As has been the case for much of the last 12 months, severe weather challenged our operating environment. And in late August, there was a major storm, which impacted around 140,000 customers. This was the largest storm event to hit the electricity distribution network since 2003 and resulted in extensive damage, with over 260 construction jobs requiring to restore the network. The display of resilience and teamwork from our employees and delivery partners in safely restoring supply to our customers despite the additional COVID-related challenges has been a true reflection of our values in action. Against this challenging backdrop, we were still able to commence a new multiyear transformation program. Over to the next slide. AusNet Services transformation program is crucial to sustainably delivering our core purpose to improve customers' access to safe, reliable, affordable energy. Our growth opportunity involves unlocking considerable renewable energy in Victoria and supporting the rapid uptake of distributed energy, presenting significant value-accretive growth opportunities. However, to be successful, AusNet Services requires holistic changes in the way it operates to respond to these competitive opportunities that are transforming the energy sector. We need to make it easy to get things done and operate with pace, be more adaptable and quicker with our decision-making. Furthermore, we need to maintain our social license -- or I should say, the need to maintain our social license has never been stronger in working with both government and regulators and meeting evolving customer expectations. Transformation is targeting 5 key themes aligned to our strategy. Core enablers include improvements in digital and organizational capabilities to drive growth and efficiency to ultimately deliver better customer outcomes. An early focus for us is seeing the implementation of a new operating model aimed at making us clearer, and that is with individual accountabilities and greater empowerment to be leaner with fewer layers and larger spans of control to be bolder with more centralized teams and reduced duplication and nimbler to make it easy for our people to get things done. I'll now hand over to Mark Ellul to discuss the financial performance. -------------------------------------------------------------------------------- Mark Ellul, AusNet Services Ltd - CFO [3] -------------------------------------------------------------------------------- Thanks, Tony. Hi, everyone, and welcome to the call today. I'd like to cover with you 3 key items in terms of our financial results. First, I'll give an overview of our current capital management position and approach. Next, I'll take you through our financial and cash flow performance, including the impact of COVID-19 and how we have managed the uncertainty. And then finally, I'll take you through our capital investment profile and funding mix for the year, both for CapEx and for dividends. But starting with capital management. And our approach is disciplined and proactive, taking a long-term view to support our growth and drive shareholder returns. Slide 9 shows how we have continued this approach over the last 6 months. We've worked really hard to have the strength of balance sheet. That's one of our key levers to support our significant CapEx pipeline. It's also been really important in maintaining our resilience in these uncertain times. We were pleased with the hybrid raising we did during the year. It provides credit metric support and diversification of funding at very competitive pricing, taking our total hybrid portfolio to just under $1.4 billion. We're also announcing today as part of our capital management actions an underwriting of the DRP at up to 50%. This underwriting provides incremental equity and complements the series of actions we've undertaken over the last 6 months. While the capital management review we announced at the full year is complete, we will continue to have a strong capital management focus, adapting it as we navigate our upcoming regulatory resets and growth opportunities. In summary, we continue to manage our capital prudently and to maintain our resilience and support future needs of the business, all underpinned by maintaining our A-, A3 credit rating. We are very well-placed to support our future growth objective while providing sustainable shareholder returns. Now looking at our financial and cash flow performance. And our proactive response to the uncertainty of the current environment continues to deliver strong financial results. On Slide 10, it shows that several items have driven our 5.7% increase in EBITDA and our 31.4% increase in net profit after tax. While I will provide some details on our EBITDA performance on the next slide, there are essentially 4 key themes to our results. Firstly has been the impact of COVID-19 and, in particular, the additional electricity distribution revenues, which will be returned to customers in future periods. Second is the improved financial performance of our Mondo business, now expanded to be part of our Growth & Future Networks segment. Third is our continued delivery of cost efficiencies to offset several one-off impacts on our cost base. And finally, we had some unusual noncash gains in our interest and tax. We've been very pleased with how the business has shown its resiliency, responded proactively to the uncertainty of COVID and gotten on with the job of continuing to deliver strong financial outcomes while supporting our customers during this period. While our network relief package has provided much needed support to vulnerable customers, effectively enabling them to defer or waive network charges, it has not had a material impact on our financial results. Deferral of revenues continue to be offered to customers in need. Finally, our interim dividend is at the upper end of our guidance range, franked at 40%. Now having a look at our EBITDA performance and a bit of a breakdown on Slide 11. Firstly, COVID-19 has significantly contributed to the $21 million of volume outperformance in electricity distribution when compared to our revenue cap. This represents a $17 million year-on-year movement. Under the revenue cap regime, this will be returned to customers. Growth & Future Networks is a new segment as a result of our operating model changes and brings together our Mondo business with customer-facing excluded transmission and network innovation. Growth & Future Networks has shown strong financial growth across all businesses while effectively managing its cost base. The completion of Stockyard Hill and Dundonnell in FY '20 have been the main contributors, adding $9 million of revenue and interest income for the half. This has more than offset our exit of low-margin materials sales and has driven double-digit growth in EBITDA after leases. For our regulated businesses, our continued efficiency drive has resulted in further cost reductions across all networks. This performance has offset the one-off transformation implementation costs and higher storm costs in the first half. Under our transformation program, we will continue to sharpen our focus as a business. This will include some targeted reinvestments to not only deliver improved bottom line financial performance but also enhance network performance, improve customer experience and drive an uplift in our talent and capabilities. So once again, strong results in an uncertain environment, demonstrating our stable and resilient businesses. Looking now at how our financial performance has translated in terms of cash flow. And on Slide 12, there's been a 21% increase in operating cash flow. Even after taking into account the $21 million of electricity distribution revenues due to be handed back as well as the $20 million payment in the prior year to Downer as part of our outsourcing arrangement, we still recorded 9% growth in operating cash flow. This is on the back of strong cash EBITDA growth of 7.8%. In terms of tax paid, the current period had a $20 million payment for the finalization of the FY '20 tax return. This is just a function of the installment regime, which generally has a lag effect to taxable income growth. Our strong and stable cash flow performance continues to provide an effective source of CapEx funding as well as ultimately support shareholder returns. Now taking a look at our capital investment profile and funding mix. And we continue to invest and deliver our program in a changing environment. As foreshadowed at the full year, Slide 13 shows that CapEx was somewhat lower than the prior year. This is primarily due to Growth & Future Networks. Approximately $75 million of prior period spend was for the completion of those large wind farm connections. Currently, the Growth & Future Networks portfolio includes a greater proportion of early works and planning and design activities, which are less capital-intensive. Chad will provide a bit more details on these opportunities in his presentation. COVID-19 has had some impact on our CapEx program primarily in electricity distribution where we have deferred noncritical works to reduce our planned outages and support customers working from home. In terms of regulated CapEx, the higher spend for REFCL and our Western Victoria tower rebuild have been offset by completion of several zone substation replacements at our Northwest comms upgrade. Although CapEx is lower than prior year, it still represents a significant program, contributing to our overall growth in regulated and contracted asset base. As is normally the case, we expect an uptick in CapEx in the second half particularly as we execute a number of transformation initiatives. Now turning to 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. The strong financial performance I talked about earlier, combined with the deferral of noncritical maintenance works to support customers through COVID-19, have contributed to very strong cash flow coverage of our dividend. However, while we have strong first half performance, we are maintaining our full year guidance at $0.09 to $0.095 per share given the current economic backdrop and the continuing uncertainty of COVID-19. As is normally the case, given the seasonality of the business, the proportion of growth CapEx funded by cash flows is expected to be lower in the second half. Despite all of this, we continue to generate strong cash flows and provide a prudent mix of dividend and CapEx funding. In summary, the business has responded extremely well, and we've worked hard to deliver an excellent result in a rapidly changing and uncertain environment. And our capital management actions over the past 6 months have proactively provided support and flexibility to our balance sheet. Our strong financial settings put us in a very good position to navigate the uncertain environment while taking advantage of future investments and delivering long-term shareholder value. I'll now hand over to Alistair to talk about our regulated businesses. -------------------------------------------------------------------------------- Alistair Parker, AusNet Services Ltd - Executive General Manager of Regulated Energy Services [4] -------------------------------------------------------------------------------- Thanks, Mark, and good morning, everybody. Thanks for joining us. So turning to the operational highlights on Slide 16. We are pleased that from an operating cost perspective, we now have a fully outsourced delivery model across all 3 networks. We've set them some tough targets, and we're seeing even the most challenging metrics trend in the right direction. We will keep that commercial and performance pressure on them, but they've passed some big tests recently for us. So for example, in transmission, we're very close to replacing the 7,500 kV towers in Western Victoria, which were damaged by that massive wind event earlier in the year. Really important to get this done as they connect 4 major generators. They interconnect Victoria and South Australia, and of course, they supply energy to the Alcoa Portland smelter. And in electricity distribution, as Tony mentioned earlier, the network experienced the severe storm in August, and that impacted about 20% of our customers. But along with our delivery partners, we responded really quickly to minimize the disruption to our customers. On REFCL, we continue to make inroads on the program, and we're working closely with Energy Safe Victoria on time extensions. We expect to have about 11 units in service this summer. Gas continues to perform well, and we've made some great progress, as you'll see, on customer satisfaction. As you know, there is a big push into hydrogen. As a member of the Australian Hydrogen Centre, we have been selected for a feasibility project on the ability to produce and distribute hydrogen in regional towns. This is great. This work will help us understand opportunities for blending hydrogen in our gas distribution network, better understand the associated economic, technical and regulatory challenges and understand other market applications for hydrogen. So exciting. Turning to our regulatory resets on Slide 17. On the electricity distribution price review, we were pleased that the AER's draft decision, and it is a draft, endorsed the Customer Forum agreements. Both our proposal and the draft decision delivers lower CapEx and OpEx per customer than in the current period. CapEx is lower due to some major safety and replacement programs coming to an end. The CapEx does include new expenditure to enable solar and distributed energy resources to export, where this provides a net benefit to all our customers. OpEx has also fallen due to efficiencies delivered in the current regulatory period, such as smarter work practices, new workforce contracts and a continual focus on cost management. And we expect it to be maintained at this lower level. We're still working through our response to the AER's draft decision, and we have some customer engagement to work through. However, we did want to highlight some areas we're looking at closely. The first is the Essential Service Commission's forthcoming decision on Guaranteed Service Levels scheme. And that will increase OpEx, reflecting the scheme's new parameters. Secondly, there's been a sharp rise in insurance premiums for bushfire protection since we submitted our original proposal. This is an industry-wide issue that we will be discussing with stakeholders over the next few weeks in quite a bit of detail. We're also looking closely at the adjustments the AER made to account for COVID and updated economic data. The impact of both the restrictions and economic stimulus packages, as Mark said, are uncertain. As we are a heavily residential network, though, a persistent change to working-from-home habits could result in permanent changes to demand in some of our areas. We submitted our transmission revenue reset proposal to the AER at the end of October. And it's available on our website for the real enthusiasts there. It takes account of our Customer Advisory Panel's views in particular on affordability concerns. The CapEx forecast is similar to the current period, but the makeup is different, now focusing on key terminal stations, insulator and ground wire replacements. Our OpEx is expected to increase driven mostly by increased council rates. These increases have been offset most notably in relation to the cost of capital. So overall, our proposed total real revenue will be about 8% lower over the 2023 to 2027 period compared to the current period. Look, this proposal was prepared in uncertain times, and we recognize that there's further to go with the AER on how to forecast and treat the impact of COVID over the period. So turning then to regulated return on Slide 18. The AER began consulting on its 2022 rate of return instrument by releasing a series of working papers on key topics. And from our perspective, they highlight some areas where the AER's approach could be improved. The active phase of the review will start in mid-2021, and the final instrument will be published in December 2022. This will set cost of equity and debt for regulatory determinations from December 2022 to December 2026. Changes in economic conditions since the 2018 instrument have placed regulatory settings under pressure. There is a need for forward-looking financeability analysis in the development of the 2022 instrument. And that's to make sure our networks remain financeable, consistent with the benchmark credit rating under a number of plausible scenarios. On the inflation review, the AER has released a draft decision that proposes moving from 10- to 5-year forecasts. And that lines up with the duration of regulatory periods. Its new approach will result in a material improvement in the accuracy of that forecast. And that's positive for industry revenues if it is confirmed in the final decision. And the AER is also considering a transition in its consultation. At this stage, we expect the outcome to apply to our distribution price reset from 1 July 2021. But I would note that it's not a final decision and the application of that would be subject to any transition. If we turn to the right of the slide, AEMO has published its second Integrated System Plan, the ISP. As you know, AusNet Services is very supportive of the ISP process. That said, we believe more weight needs to be given to the possibility of early closure of coal-fired generation in the Latrobe Valley. Projects such as the Victoria-New South Wales interconnector, known as VNI West, and further upgrades for the transmission network are all critical if we are to ensure that we can maximize the benefits of renewable generation and avoid supply issues into the future. VNI West will continue with early works, around $150 million to $200 million with an indicative date of 2027/'28. This project is key to mitigating future Victorian supply risk with full project approval subject to further AEMO decision rules, including whether there's evidence of early coal closure. Otherwise, the project timing is deferred to 2035/'36. Marinus Link continues with early works approved of around $140 million but, as you'll know, is subject to the resolution of who will pay for this development. As you would expect, we are pushing hard to see renewable energy zones developed in Victoria that support higher levels of renewable penetration and support the development industry. So in summary, really good to see our delivery partners coming along. Some pleasing regulatory developments, but some way to go to final decisions and much work to do on the network to enable renewables to their full capacity. So thanks for your time. And with that, I will hand over to Chad. -------------------------------------------------------------------------------- Chad Hymas, AusNet Services Ltd - Executive General Manager of Mondo [5] -------------------------------------------------------------------------------- Thanks, Alistair, and good morning, everyone. Turning to Slide 20. As part of the operating model transformation, Mondo has now been included into a broader Growth & Future Networks division. This new division will lead market development and innovation for AusNet Services, delivering strategic and accretive growth in existing and emerging markets. I'm very pleased with the results year-to-date particularly given the tougher COVID environment. Having recently completed some major projects, our efforts have now shifted to early works for the next round of transmission projects that will connect renewables to the grid, including commencing stage 1 of the Western Victoria transmission project, involving stakeholder engagement, planning and design; playing our role as the network partner to Neoen and Victoria on a world-leading large-scale energy storage project; and undertaking early works for various wind farm connections, including Golden Plains Wind Farm in Southwest Victoria; Ryan Corner and Hawkesdale Wind Farms also in Southwest Victoria; and Star of the South, Australia's first proposed offshore wind farm. Growth & Future Networks will continue to take an active role in network upgrades that are investment opportunities within our core skill set that facilitates the continued growth of renewables. Turning to Slide 21. Growth & Future Networks is leveraging mature business operations in energy data and technology solutions to enter new markets disrupted by renewable energy. Some key business highlights this year include developing the EDGE Project; partnering with ARENA and AEMO to develop a marketplace pilot where distributed generation and storage assets can be aggregated for customer value. The Flexible PV Exports project is a technology solution and a customer connection offer that will enable enhanced access to the network for customer solar generation. We've also been accredited by South Australian Power Networks to use our technology to manage remote disconnect/reconnect capability for future generating units installed behind the meter on their network. And finally, the Deakin microgrid development is a prime example of partnering to achieve a new energy ecosystem of renewable energy sources and storage. We're extremely excited by the opportunities that exist for AusNet Services, creating a sustainable new energy future for our customers in Australia. With that, I'll hand back to Tony for some closing remarks. -------------------------------------------------------------------------------- Tony Narvaez, AusNet Services Ltd - MD & Director [6] -------------------------------------------------------------------------------- Thanks, Chad, and we're on Slide 22 now. So looking forward, we will continue to adapt to the ongoing effects of COVID-19 to ensure the safety and well-being of our people and our communities, along with the support we provide to our customers. We put considerable groundwork in this year, and we didn't shy away from any of the difficult decisions. And while we can't be complacent, we do believe that we are well positioned to play a key role in supporting the energy industry transition and deliver the benefits for our customers. It's an exciting time to be particularly active in the sector. Our financial strength provides us the headroom to reinvest in our customers, our communities and our people and to ensure we remain a resilient and sustainable business for the long term. Thanks for listening. I will now hand over or back to the operator for Q&A. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Tom Allen with UBS. -------------------------------------------------------------------------------- Tom Allen, UBS Investment Bank, Research Division - Director in Equities Research & Lead Analyst of Utilities [2] -------------------------------------------------------------------------------- Congratulations on a solid first half result. It's obviously a very challenging operating environment in Victoria. A quick question on capital management. With FFO to net debt at 11.4%, which, if I'm correct, is up from 10.3% at the full year '20, is the recently raised hybrid and DRP sufficient to meet your CapEx requirements and achieve your contracted asset base and your RAB growth target? Or is additional equity still possibly on the card that you mentioned at the full year '20 result? -------------------------------------------------------------------------------- Mark Ellul, AusNet Services Ltd - CFO [3] -------------------------------------------------------------------------------- So Mark here. In relation to our capital management, and Tom, when we think about that, obviously, we went through a review through the period. As a result of that review, we obviously, as you know, raised the hybrid, which we're really happy with. And with the incremental equity that we'll get from the underwriting of the DRP, we think that gives us a really good and solid base. As you know and based on our history as well, we always take a proactive approach to capital management. So it's something that we will continue to closely monitor. There's certainly not a position that we need to be in right now in terms of any immediate raise. As you highlighted, our metrics are quite strong and quite good. But I would also note that we've still got a challenging phase ahead in terms of lower resets coming through. We've got a CapEx pipeline ahead of us. And we'll continue to monitor that situation and where we need to put proactive measures in place. -------------------------------------------------------------------------------- Tom Allen, UBS Investment Bank, Research Division - Director in Equities Research & Lead Analyst of Utilities [4] -------------------------------------------------------------------------------- Okay. No, that's clear. If I could just sneak another quick one. I was just hoping to get some further guidance on the range of further incremental OpEx savings that are being targeted as part of your multiyear organizational transformation program? And which parts of the business do those savings come from? -------------------------------------------------------------------------------- Mark Ellul, AusNet Services Ltd - CFO [5] -------------------------------------------------------------------------------- So I'll touch on that, and then maybe Tony might add if there's anything further. Essentially, with regards to our transformation program, it is an organizational wide -- we're looking at a range of levers. I think as Tony kind of highlighted, it's not just focused on cost efficiency either. We are looking at some targeted reinvestment to improve customer experience, to improve our network performance as well. And we also acknowledge the fact that because we've been on this cost journey for a little while now, the initial phase of our program will require some investment in order to achieve those further line savings down the track as well. -------------------------------------------------------------------------------- Tony Narvaez, AusNet Services Ltd - MD & Director [6] -------------------------------------------------------------------------------- Thanks, Mark. And I won't add too much to that, Tom, other than to say it is fairly early in the program. So it's only 4 months old at this stage. We have got quite a fair bit of activity, which was already a challenge during these circumstances of obviously COVID and managing that. We are obviously directing our efforts towards the existing pillars that we've got in our strategic plan. So that's the energizing futures around growth and customer and efficiency in digital and people. So it is wide ranging. We'll see more of that. Some of it involves actually redirecting our capital focus and spend so that we see some long-lasting and sustainable benefits to our OpEx in the future. So you'll just have to watch this space, but it's early days still. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- Our next question comes from Rob Koh with Morgan Stanley. -------------------------------------------------------------------------------- Robert Koh, Morgan Stanley, Research Division - VP [8] -------------------------------------------------------------------------------- Can I ask another question about funding? I guess, as you've highlighted, things like Marinus Link and Star of the South, these are projects that potentially have pretty long lead times before revenues come in. And I guess one of the other -- or 2 of the other transmission providers are putting forward a rule change to try and change funding arrangements. Could you comment on that particular aspect of it, please? -------------------------------------------------------------------------------- Alistair Parker, AusNet Services Ltd - Executive General Manager of Regulated Energy Services [9] -------------------------------------------------------------------------------- Yes, Rob. Alistair here. Maybe I'll just help with the rule change. So look, I highlighted in what I was saying that we're in a particularly difficult environment given the low equity returns when, as you observe, big investment and long-dated investment is needed. So we think it's good that the AEMC is looking at this. We think the WACC review and the inflation review has a chance to get the settings right given the wider economic circumstances. But look, I think -- and maybe I'll sort of hand over to Mark for this a little bit. We've done a lot of work and made a lot of commentary over the years about the importance of our balance sheet. And so I think that strong track record and maintaining that sort of positions us well for going after these growth opportunities. And look, just one thing on that rule change from TransGrid. Important to note that, of course, we compete for the contestable projects in Victoria. So they have a very different funding profile from the regulatory model, and you get the cash back earlier. I might just hand over to Mark as well. -------------------------------------------------------------------------------- Mark Ellul, AusNet Services Ltd - CFO [10] -------------------------------------------------------------------------------- Yes. So thanks, Alistair. I guess a couple of additional points that I'd add. And Rob, as you noted, certainly, the revenue profile has a long lead time. But does -- so does the project itself. There's a fairly long lead time, and there's a fair amount of works that go into the design, the plan. Obviously, there's approval processes that will need to be worked through as well. So we're very conscious and minded to that and constantly look at those things and reassess those things. And I think just further to Alistair's point from before, it's why we maintain such strong financial settings and really take a prudent approach around our balance sheet and around capital management, to make sure that we're ready to be able to do these things if and when they arise and come through. -------------------------------------------------------------------------------- Robert Koh, Morgan Stanley, Research Division - VP [11] -------------------------------------------------------------------------------- Okay. Cool. Sounds good. Next question, I guess, is about tax. I'm sure you watch with great interest the Powercor Supreme Court decision where it was held that gifted assets were not taxable income. Assuming that plays out, is that an approach that AusNet would look to follow? -------------------------------------------------------------------------------- Mark Ellul, AusNet Services Ltd - CFO [12] -------------------------------------------------------------------------------- Yes. So obviously, that decision has been handed down. I guess the ATO will need to consider its response in relation to that. From our perspective, we've always treated gifted assets, both cash and noncash, as assessable income and so have essentially paid tax on those. At the point under which that decision is finalized through whatever mechanism the ATO decide that we will look to reconsider that and potentially amend assessments in line with the final decision. -------------------------------------------------------------------------------- Robert Koh, Morgan Stanley, Research Division - VP [13] -------------------------------------------------------------------------------- Okay. Cool. Yes, and I guess in the same vein, we've got some federal government CapEx and tax measures this year, tax carryback and deductibility for projects that can be completed. Could you comment on if that's something that AusNet can avail itself of in the next couple of financial years? -------------------------------------------------------------------------------- Mark Ellul, AusNet Services Ltd - CFO [14] -------------------------------------------------------------------------------- Certainly, Rob. So in relation to the tax benefits announced under the recent budget announcement from the federal government, certainly, that is opportunity for us. And I guess what essentially the federal government is trying to drive is increased and accelerated investment. It's worth certainly looking at that for our business. We think a reasonable portion or a portion of our CapEx can avail itself of that, bringing forward tax benefit, in effect. Couple of points just to note in relation to that, though. There is a bit of a timing element to it in terms of completed projects. Some of our CapEx actually won't be completed projects during that 21-month phase. But the federal government has announced, you really have to have started the project after the 6th of October and it has to be completed by 30 June 2022. So given that, there is some of our CapEx that just won't meet the timing eligibility requirements around that. The other point to note is that under existing rules, we already have a portion of our CapEx, and it's kind of circa 8% to 10%, that's already immediately deductible under existing tax rules at the moment. But we are certainly looking at the announcement and the rules and looking what we can do to help accelerate CapEx going forward. -------------------------------------------------------------------------------- Robert Koh, Morgan Stanley, Research Division - VP [15] -------------------------------------------------------------------------------- Yes, okay. Cool. And then just last question. I guess I might be just splitting hairs a little bit, but the -- in the outlook statement, the RAB growth number is now expressed as 2% to 2.5%, previously around 2.5%. Just wondering, Alistair, if you've just done some recounts. Or what's going on with that, please? -------------------------------------------------------------------------------- Mark Ellul, AusNet Services Ltd - CFO [16] -------------------------------------------------------------------------------- It's Mark. I might take that, and if Alistair has anything further, he can add to it. But essentially, what we're looking at is obviously, the AER is going through a process around our resets. There's a draft of EDPR. We've just logged our TRR. There is some accelerated depreciation in those proposals. And so they have some bit of time to work through. In addition to that, obviously, as you know, there's an inflation review going up at the moment around how the AER estimates inflation. And we just thought with all of that uncertainty and things to work through, at this point in time, our range to our RAB growth was probably a better and more prudent way to state it at this point in time. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- Your next question comes from Peter Wilson with Crédit Suisse. -------------------------------------------------------------------------------- Peter Wilson, Crédit Suisse AG, Research Division - Associate [18] -------------------------------------------------------------------------------- I did want to follow up on the rule change request that TransGrid submitted. So I know that it is meant for these major transmission projects. But I just wanted to just confirm whether you'll look to take advantage of that rule change should it go through for any of your BAU-type work. -------------------------------------------------------------------------------- Alistair Parker, AusNet Services Ltd - Executive General Manager of Regulated Energy Services [19] -------------------------------------------------------------------------------- Yes. I mean good question, Peter. If it goes through, we would have a look at that. It's really highlighting, though, I think, more a bit of an issue that, as I said earlier, relates to the whole of the WACC setting and even tips into inflation, a little bit that are these businesses financeable if you slavishly follow the credit settings that the benchmark model uses. So I think that's the point that TransGrid's made well in that rule change proposal, that there's a sort of inconsistency in these circumstances that the benchmark entity doesn't look as though it passes the benchmark entity credit rating. So we would obviously look at the nature of that rule change as it goes through and think about which reviews that would apply to. -------------------------------------------------------------------------------- Peter Wilson, Crédit Suisse AG, Research Division - Associate [20] -------------------------------------------------------------------------------- Okay. And then a couple on the Neoen Big Battery in Moorabool. Can you give us a bit more color on your role there? And also, I guess just I'm curious whether or not your role has changed versus some of the initial planning maybe 6 months ago, whether that your role has actually diminished on that project on that battery. -------------------------------------------------------------------------------- Chad Hymas, AusNet Services Ltd - Executive General Manager of Mondo [21] -------------------------------------------------------------------------------- Yes. Thanks, Peter. It's Chad. Our role, as sort of what we've clearly sort of articulated, is the network partner role. So our role is really to connect the asset into the grid. The asset will sit alongside our Moorabool Terminal Station. As all deals go, structures and relationships change as you move forward to get the project away. So we think this is a fantastic opportunity for the state. We've been very active in supporting our partners in Neoen and Tesla because we think those partners have proven capability delivered at Hawkesdale in South Australia. And we're very excited to be part of it. So that's probably all I'll say on that at the moment. -------------------------------------------------------------------------------- Peter Wilson, Crédit Suisse AG, Research Division - Associate [22] -------------------------------------------------------------------------------- Okay. And I guess a question with regards to ringfencing and what's regulated and nonregulated. Like given that, that battery substantially is for network services, why would that not be a project that you would be pursuing in your own right? -------------------------------------------------------------------------------- Chad Hymas, AusNet Services Ltd - Executive General Manager of Mondo [23] -------------------------------------------------------------------------------- We certainly did pursue it with the consortium. That project is also related to generation and retail trading market services. So substantially, I'd say for system integrity, AEMO run a competitive process. But part of making that consortium or the value stackup is also linked into market trading, which we don't participate in. -------------------------------------------------------------------------------- Peter Wilson, Crédit Suisse AG, Research Division - Associate [24] -------------------------------------------------------------------------------- Okay. But I'd be right in saying that, that project itself effectively, I guess, reduces the need for future network CapEx or transmission network CapEx, right? So it is kind of effectively competing with your network in a sense. -------------------------------------------------------------------------------- Alistair Parker, AusNet Services Ltd - Executive General Manager of Regulated Energy Services [25] -------------------------------------------------------------------------------- Yes. I'm not sure I'd treat it quite like that. It's only 250 megawatts. And of course, when you put the transmission lines in, you get sort of 2,000 megawatts uplift. So it probably helps plug a bit of a gap until these big projects can go ahead. I'm not sure it affects the timing of them materially. -------------------------------------------------------------------------------- Tony Narvaez, AusNet Services Ltd - MD & Director [26] -------------------------------------------------------------------------------- And then -- and even the -- it's Tony here, Peter. Even the solution will vary. It can be generation. It can be batteries that are dispatched differently to obviously traditional cost of generation. So there's a number of options, and that's just one of them. -------------------------------------------------------------------------------- Peter Wilson, Crédit Suisse AG, Research Division - Associate [27] -------------------------------------------------------------------------------- Okay. And Tony, is this -- in your presentation, you talked about a culture change to go after some of these, like, competitive opportunities. Is this the kind of things that you're thinking about when you make that statement? -------------------------------------------------------------------------------- Tony Narvaez, AusNet Services Ltd - MD & Director [28] -------------------------------------------------------------------------------- Yes, absolutely. So one of them was to make sure that we were clearer and we could transact internally a lot -- in a nimbler sense, a lot quicker but also making sure that we were a single point of contact for the customer. I think that was important, too. And then we can make the decision as to whether or not it's appropriate for a business development top opportunity to fall into the regulated side of the business or on Mondo. So that's part of simplifying the organization. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- Your next question comes from Ian Myles with Macquarie Equities. -------------------------------------------------------------------------------- Ian Myles, Macquarie Research - Analyst [30] -------------------------------------------------------------------------------- Just on that vein at the moment. Just community batteries, I think a couple of Victorian guys are doing some trials, Ausgrid doing some trials. Interested in what your attitude towards those are at the moment. I know you've done some stuff up in -- I can never pronounce the name, Yackandandah or somewhere. But also then virtual grids to where you're creating virtual connections as opposed to physical collections and whether there's been much movement there. -------------------------------------------------------------------------------- Chad Hymas, AusNet Services Ltd - Executive General Manager of Mondo [31] -------------------------------------------------------------------------------- Thanks, Ian. It's Chad. Yes, we're pretty active in looking at batteries both on the distribution network of AusNet Services and in a commercial sense. And we're very keen on -- in exploring that market behind the meter to see how we can unlock renewables that are owned by customers or businesses and how they virtually interconnect and how they then trade and share the information or the asset back into the grid and to other communities. So one of the most important trials we're doing, we think, is the EDGE Project, which we're doing sponsored with ARENA and AEMO, that will effectively take that Yackandandah project and make it more scalable to look at those assets behind the meter, how they interrelate with each other, how we unlock the benefit for the customer behind the meter, but also how it interacts with the grid and the network and then further into the overall market and settlement and how it plays its role. So I think that's probably one of the leading trials you'll see nationally and probably one we're really keen to pursue. And it will include something up to the order of 100,000 sort of end points behind the meter up that region and a mixture of households, residentials and larger C&I-type customers. -------------------------------------------------------------------------------- Ian Myles, Macquarie Research - Analyst [32] -------------------------------------------------------------------------------- And how long are you seeing before -- like we've been doing a lot of these trials. How long before we actually get to a point where there's more serious commitment of capital to this style of network, for want of a better word? -------------------------------------------------------------------------------- Chad Hymas, AusNet Services Ltd - Executive General Manager of Mondo [33] -------------------------------------------------------------------------------- So -- and I'll just say, and Alistair will chip in behind me. But I still think we're in the sort of 2-year window, 2- to 3-year window. There's a lot of desire for it. There's a lot of movement particularly from large industrial and businesses who want to invest in renewables as part of their corporate social responsibility. So I think you see the activity increasingly picking up, but those markets are still to be proven out, no doubt, to your point. But what we're trying to do is position and unlock value both behind the meter but also back into the network. So things like the implementation of technology and value stacks that sit on the side, it will take some time to unfold. Sorry, Alistair, did you want to... -------------------------------------------------------------------------------- Alistair Parker, AusNet Services Ltd - Executive General Manager of Regulated Energy Services [34] -------------------------------------------------------------------------------- Yes. Look, I'll just add one point. And I think there's a little bit of, yes, battery prices will need to come down, and agree with Chad. But also, I think the regulatory framework doesn't make it easy to find those -- batteries are just a fantastic technology. They do a ton of things and making sure people can actually see that value when they use them as important. -------------------------------------------------------------------------------- Ian Myles, Macquarie Research - Analyst [35] -------------------------------------------------------------------------------- Okay. And then curious, as I've got you, Alistair, the STPIS, so you've gone from being a -- I think, a contributor, and you sort of flagged that you're going to STPIS loss or penalty in the subsequent -- or in the FY '22 year. I'm sort of just interested in what the cause of that is and how you think you -- when you think about it longer term, whether you can get to being a more positive STPIS outcome. -------------------------------------------------------------------------------- Alistair Parker, AusNet Services Ltd - Executive General Manager of Regulated Energy Services [36] -------------------------------------------------------------------------------- Yes. That's an area we have targeted pretty aggressively looking forward in. There was probably a couple of factors there in terms of the results. One, we've been implementing this REFCL project. It has quite a significant impact on some of the smarter technologies that we use. And so we've got a program to re-enable that, for want of a better word. We also just are really bringing some focus to the impact to vegetation, how we get after multiple faults and so on. So we probably just had a few too many balls in the air, but there's a really laser-like focus on that now. -------------------------------------------------------------------------------- Ian Myles, Macquarie Research - Analyst [37] -------------------------------------------------------------------------------- So should we expect going forward, beyond sort of this one-off penalty or this penalty, that you can actually get back to a positive sort of thing? Or are the hurdles pretty onerous into the next reset for you? -------------------------------------------------------------------------------- Alistair Parker, AusNet Services Ltd - Executive General Manager of Regulated Energy Services [38] -------------------------------------------------------------------------------- I probably wouldn't -- weather has a massive impact on this, Ian. So I wouldn't be so bold as to sort of guess at it. If we see -- of course, with the sort of exemption regime there, if you see a string of small storms, that can absolutely smash your results. And if you see one big storm, you get the exemption, and it sort of looks great, although a worse outcome for your customers. So yes, we wouldn't predict that, I don't think. -------------------------------------------------------------------------------- Ian Myles, Macquarie Research - Analyst [39] -------------------------------------------------------------------------------- Okay. Was that... -------------------------------------------------------------------------------- Tony Narvaez, AusNet Services Ltd - MD & Director [40] -------------------------------------------------------------------------------- What I can say, and Alistair already touched on it and he said it, it's really a high-priority initiative for the transformational program. Alistair is absolutely right in the sense that weather does play a big role. But what I will say is that we've now placed a dedicated team just looking at STPIS alone. They kicked off some 6 months ago. We do know that, of course, it's a free journey in the sense that it may be 3 and 4 years away until you actually see the results in your bottom line because you've got that 2-year delay in any case. But we're putting a lot of resources and time behind it simply because it is such a big initiative in the sense of its value. So we can't ignore it. -------------------------------------------------------------------------------- Ian Myles, Macquarie Research - Analyst [41] -------------------------------------------------------------------------------- And that's where some of the extra CapEx spend is going to go? When you're talking about your transformation programs, spending money to create money, it's in this sort of area? -------------------------------------------------------------------------------- Tony Narvaez, AusNet Services Ltd - MD & Director [42] -------------------------------------------------------------------------------- Yes, absolutely, no-brainer. So in terms of upgrading elements to your control room, in terms of fault locators, in terms of how that equipment sort of behaves with Revcor that Alistair pointed to as well, all those sorts of things, it really is a no-brainer when it comes to redirecting your CapEx spend to put that downward pressure on OpEx. -------------------------------------------------------------------------------- Ian Myles, Macquarie Research - Analyst [43] -------------------------------------------------------------------------------- And are there any other big areas -- and pardon my ignorance, any other big areas of CapEx spend where -- is actually there to spend money to create money within that existing business that you're targeting within this restructuring or reorganization program? -------------------------------------------------------------------------------- Mark Ellul, AusNet Services Ltd - CFO [44] -------------------------------------------------------------------------------- Ian, it's Mark here. I guess the one that I'd kind of highlight or flag, spending a bit of money or looking at digital and just in terms of how we can enable. So things like our [sealed] area and other operational teams, how digital and technology can help them, just through some simplification of process through automation or through other things as well. That's probably another area of focus for us as well. -------------------------------------------------------------------------------- Tony Narvaez, AusNet Services Ltd - MD & Director [45] -------------------------------------------------------------------------------- Yes. In terms of analytics and the way you've maintained your planned -- yes, there's a lot of upside there for the business in terms of future investment. -------------------------------------------------------------------------------- Ian Myles, Macquarie Research - Analyst [46] -------------------------------------------------------------------------------- Okay. So -- and that should be like a 1- to 2-year sort of CapEx spend, and I presume then it's in these years 2 to 3 that you might see the productivity savings and maybe reduce staffing coming through? -------------------------------------------------------------------------------- Tony Narvaez, AusNet Services Ltd - MD & Director [47] -------------------------------------------------------------------------------- That's probably about right, yes. -------------------------------------------------------------------------------- Operator [48] -------------------------------------------------------------------------------- (Operator Instructions) Your next question comes from James Nevin with RBC Capital Markets. -------------------------------------------------------------------------------- James Nevin, RBC Capital Markets, Research Division - Analyst [49] -------------------------------------------------------------------------------- Yes. Just a little bit further on some of the OpEx savings you've seen in the current period actually. So as you said decreased OpEx by around $1.4 million, and then there's a number of items that are kind of going the other way. You've called out that looks to be about $23 million or so from higher customer compensation and transformation implementation costs. And if you take out those, it looks like OpEx might have gone down by something like $24 million or something like that in the half. Just wondering how much of that you could say is going to be ongoing kind of OpEx savings. -------------------------------------------------------------------------------- Mark Ellul, AusNet Services Ltd - CFO [50] -------------------------------------------------------------------------------- Sure. Yes, James. I'll cover that just in terms of some of our OpEx performance. And really, if you refer to Slide 11, there's probably some of the detail there that I'll talk through a little bit. In relation to the OpEx savings, some of the kind of key items that have contributed to that, it's been probably the first period where we've had the full impact of the outsourcing arrangements that we announced last year. So we've seen some continued benefits and savings associated with that. We've also seen some reductions through some renegotiations and some works around some network support, payments that we make as well. There is some timing in relation to that $18 million number you see on the graph. So some of that vegetation management, I think it's about $4 million of timing associated with that. But in addition to that, in our Growth & Future Networks business, they've really spent the last 6 months focusing on their cost base as well. And that's why you see some reductions in the OpEx, which are sustainable over the long term as well. -------------------------------------------------------------------------------- James Nevin, RBC Capital Markets, Research Division - Analyst [51] -------------------------------------------------------------------------------- Okay. And just a question on the Mondo business and the outlook for the contracted asset base, and you're kind of maintaining the $1.5 billion by FY '24. Just with progress on the Western Victoria transmission, I was just wondering, do you have any, like, updates as to maybe cost estimates on that? I think early estimates could have been $350 million to $400 million, which you get to most of the way there. Any idea on where that might be landing at the moment? -------------------------------------------------------------------------------- Chad Hymas, AusNet Services Ltd - Executive General Manager of Mondo [52] -------------------------------------------------------------------------------- Yes. Thanks, James. Maybe in 2 parts. The growth target of $1.5 billion, you are holding for now. We do -- it's probably important just to remind people that we recognize on financial close of those projects contribution to that target. So albeit we're in early works with Western Victoria project, Golden Plains and Ryan Corner, Hawkesdale, it's not until those projects reach financial close. I will say we continue to remain very positive about our opportunity. As Tony has alluded to previously, sort of once-in-a-generation shift in the market in terms of investment opportunities, and we're strongly positioned to make sure that we deliver that as soon as possible. Pleasingly, we hit our prior target 2 years early. I'm hoping to do the same with Tony in the chair now. So we'll work towards that. On the Western Vic, we can't talk to the dollar value of that project. Just to remind people, it is in 2 stages. The first stage is sort of a lot of rounds, stakeholder engagement, planning and design, which is about 2 to 2.5 years of the total 4- to 5-year project. At that point, we'll formalize costs. I will just point people back to reports about 12, 18 months ago in the market from UBS. And I think it was Macquarie at the time that sort of referenced a dollar value on that, which is probably fairly accurate. So -- but until we get through stage 1, we won't have a firm price in terms of that project value. -------------------------------------------------------------------------------- Operator [53] -------------------------------------------------------------------------------- Your next question comes from Rob Koh with Morgan Stanley. -------------------------------------------------------------------------------- Robert Koh, Morgan Stanley, Research Division - VP [54] -------------------------------------------------------------------------------- Thank you for indulging me with a further question. Just looking at the segmental disclosures, I noticed that Chad appears to approach about $19 million of Alistair's revenue from transmission and excluded -- prescribed and excluded negotiated. Just wondering if you could tell us, what are those? And what's the rationale for shifting them if that's okay, please? -------------------------------------------------------------------------------- Mark Ellul, AusNet Services Ltd - CFO [55] -------------------------------------------------------------------------------- Yes. So Rob, it's Mark here. I'll start, and then I'll kind of hand over to Chad in terms of the rationale. Essentially, that related to our excluded prescribed contracts that were previously part of our transmission business. Ultimately, those contracts will roll into the RAB at a future reset date. But we've really brought them together because they are customer-related works and customer-initiated works. And I might talk to Chad -- hand over to Chad a little bit further around the rationale for that. -------------------------------------------------------------------------------- Chad Hymas, AusNet Services Ltd - Executive General Manager of Mondo [56] -------------------------------------------------------------------------------- Yes. Thanks, Mark, and thanks, Rob. I think as Tony alluded to in his operating model, we found there's parts of the business interfacing into the external market in multiple areas across AusNet Services. So we've sort of consolidated that. I guess in a practical sense, if we're to use an example where a wind farm connects into our regulated business, there's a part of that line which is just a contestable component. And where the interface component hits the terminal station, that would have been captured under our regulated business previously. Previously, what we were doing was having 2 separate contracts into the developer and 2 teams to deal with. So we've just sort of integrated that as one interface across the business. So we're truly representing, I guess, all the external market contracts in one area for the market to see. -------------------------------------------------------------------------------- Operator [57] -------------------------------------------------------------------------------- There are no further questions at this time. I'll now hand back to Mr. Narvaez for closing remarks. -------------------------------------------------------------------------------- Tony Narvaez, AusNet Services Ltd - MD & Director [58] -------------------------------------------------------------------------------- My single closing remark is obviously for everyone to stay safe. We're very grateful for the year, recognizing, of course, that it's been a very challenging period for our community, our customers and our people, but I thank you for listening in. We look forward to talking to you soon.