Contact Energy Limited (MNW) Earnings Call Transcript & Summary

Welcome to today's conference call, where Contact Energy will present on the proposed acquisition of Manawa. I'm pleased to present Mr. Mike Fuge CEO and Mr. Dorian Devers, CFO of Contact Energy. [Operator Instructions] I will now hand across to Mr. Fuge.

[Foreign Language] and welcome, everyone. I'm delighted to be here today to announce that Contact Energy has agreed to buy Manawa Energy, bringing together 2 independent companies committed to delivering and accelerating New Zealand's decarbonization. If we can just flip through the slide -- sorry, just the usual disclaimers because of the announcement today, it's a little bit longer. And just the overview of how we're going to run the presentation today. So just summarizing the acquisition. The strategic rationale for combining Contact with Manawa is compelling and is underpinned by the following: 2 geographically and temporarily diversified hydro schemes, which are very complementary to each other. Largely due to Contact and Manawa hydro power stations generating higher amounts of electricity at different times of the year. This enhances the overall portfolio resilience and the ability to support the energy market more broadly. This combination accelerates our Contact26 strategy to some degree to grow Contact's renewable generation portfolio and to decarbonize its overall generation. Post combination, Contact will boast a diversified development pipeline of over 10 terawatt hours in addition, which will be supported by complementary development capabilities across the companies. The scrip-based transaction structure has been specifically designed to ensure that Contact maintains the capital flexibility to deliver on its development pipeline while maintaining its BBB credit rating. The structure also enables Manawa shareholders to retain exposure to New Zealand's electricity market and sector and share in the future combination benefits. These strategic benefits are expected to deliver attractive financial benefits for both Contact and Manawa shareholders, including greater stability of energy generation and cash flow is expected to enhance and turn Contact's dividend per share profile by $0.01 per share in FY '26, bringing it up to $0.40 per share and by $0.02 to $0.03 per share in FY '27. Bringing it up to $0.41 to $0.42 per share. There are significant future embedded value within Manawa stand-alone portfolio. There are portfolio combination benefits and cost synergies are expected to support the transaction. And as well, the margin -- what we've talked about earlier, Manawa normalized EBITDAF contribution of around $220 million. The transaction implies a 10.7x normalized EBITDAF acquisition multiple, which we believe is a fair value, given the nature of Manawa's unique very long-life hydro assets and attractive development opportunities. We expect the transaction to be value accretive for Contact with forecast -- internal rate of return forecast to in turn exceed Contact's own internal rate. Now just moving on to the next slide. Thank you. We all know it's been a volatile period for New Zealand's energy market. Winter 2024 has seen one of the dry seasons on record for South Island hydro lakes and this combined with unseasonably low wind and a rapid and unexpected decline in natural gas supply has meant that unhedged electricity purchase have faced high costs on the spot market. And a number of generators, including Manawa have issued forward earnings revisions, reflecting lower generation volumes and higher cost to serve their energy commitment. It does need to be noted that prices have subsequently softened as the rain has come and as the market internals reacted to dramatically increased supply through the contract to get gas from Methanex and the early spring rainfall. We believe the benefits of the Contact and Manawa combination are important for the New Zealand energy market and energy transition, ensuring New Zealand makes the best use of its existing renewable assets for the good of our environment. It allows for the more effective use of the combined hydro assets, as we show here. For example, we expect to see less spills. We won't need to carry [ lake ] levels as high going into winter. This means, in turn, that the combination increases renewable output and reduces reliance on expensive thermal generation, whether that is from coal, gas or diesel. This reduced generation volatility will lower Contact's reliance on thermal generation and increases the ability of our combined business wide offer competitive risk management products to the market or place a higher volume of fixed price variable volume supply agreements into the market. I've talked earlier today about the enhanced development pipeline and in-house capabilities together with the transaction structure that sees the capital options retain. This will increase Contact's ability to develop and invest in renewable development opportunity to increase renewable generation capacity, which, among other benefits, will enhance energy market security and contribute to putting downward pressure on wholesale electricity prices with the increased supply. With the combination, we will not only be best placed to accelerate renewable generation projects being built, but ensure that the best projects are built first which ultimately will reduce prices for consumers. This competition for capital is critical to ensure that consumers will pay the lowest cost possible for electricity going forward. Now just in terms of the deal, Contact has entered into a scheme implementation agreement with Manawa to acquire 100% of Manawa via mixture of Contact shares and cash. As consideration, Manawa shareholders will receive $4.79 per share in Contact shares and $1.16 in cash, implying a total consideration of $5.95 per share or an EV enterprise value of around $2.3 billion. As a result of the share-based transaction structure, Manawa shareholders are expected to own around 18.5% Contact share post completion of the transaction. The final cash consideration and the number of shares issued to Manawa shareholders are subject to adjustments for dividends paid by Contact to Manawa between the scheme signing and its actual implementation. For continuity and to help support the realization of the combination benefits of Manawa's business and the assets and the growth of the combined business, it's intended that Manawa Chairman, Deion Campbell, will join the Contact Board following the implementation of the scheme. The estimated cash consideration and repayment of outstanding Manawa Bank debt and bonds will initially be funded by new committed Contact bank debt facilities. Major Manawa shareholders, Infratil and TECT Holdings, who between them hold or control about 77.9% of the company, have committed to vote in favor of the scheme subject to certain conditions being met. The primary one of them says transaction is subject to New Zealand Commerce Commission clearance amongst other conditions, and this is targeted to be implemented in the first half of 2025. Now just to give you an overview of Manawa and the 25 hydro. So Manawa owns and operates 25 hydro schemes around New Zealand. It is a unique independent New Zealand electricity generator. It has around 500 megawatts of generation capacity, which, as I said before, winter-weighted. And this means its generation is skewed with electricity demand is higher and prices are generally above the average for the year. Manawa's generation, as you can see from this slide, is diversified across [ Aotearoa ] with approximately half in the North Island and half in the South Island and its generation is almost entirely from renewable hydro sources. In FY '24, 99% of its generation was from renewable sources. As I said earlier, Manawa also has a significant development pipeline with over 1,200 megawatts of geographically diversified and secured development options in wind and solar. Land has been secured for all these sites and 3 major developments; Huriwaka, formerly known as Central Wind, Kaihiku Wind and [indiscernible] Argyle Solar Farm, which collectively represent an expected annual output of around 1.5 terawatt hours in the advanced development stages and we're delighted to have them in our portfolio. Dorian.

Thank you, Mike. So Manawa has no retail business. It's a generation business that sells renewable generation under long-term contracts that provides it with stable cash flow, which really makes it quite infrastructure in nature. However, those sales volumes were contracted into -- in a lower price environment, meaning the embedded value within them as they reprice up to market transfers to Contact as part of this acquisition. Relative to other generators, Manawa's pricing and therefore, its EBITDAF has been depressed by the Mercury PPA which was entered into in a lower price environment. The price of that PPA, which you can see on the chart on the right-hand side, an estimate is significantly below the market price. If you consider the ASX curve going out to FY -- to 2027 or even if you consider Contact's long-term view of pricing of $120 per megawatt hour real in 2024 terms. The PPA accounts for 2 terawatt hours of the sales, which is about 66% of Manawa's sales. And as Mike said, it's very valuable because it's 60% winter-weighted. And that's the time when national demand is at its highest and the price of electricity is at its highest. . Importantly, it starts to roll off the PPA from the 1st October 2024 at a rate of 250 gigawatt hours every year, allowing this to reprice the market. And then in parallel to this, any remaining volume on the PPA has a market-based escalation that kicks in from the 1st of October 2026. This unlocks significant embedded value. So we're now just going to get into the strategic rationale for the deal. I'll start on this now. So the acquisition is strategically compelling. There's 4 key benefits from the combination that I'll just talk you through. So the geographic diversification of the combined hydro assets delivers some unique benefits from how they complement each other, and I'll talk to that in a minute. The next benefit comes from a combination of the wind and solar development pipeline. Contact has 6 terawatt hours. Manawa has 4 terawatt hours, meaning the combined business has a 10 terawatt hour solar and wind development pipeline and great people across both businesses in order to develop and execute on these projects. Combined, we can ensure the very best projects get built first and as Mike said, that leads to lower electricity prices because the very best projects need the lowest electricity prices to be economic. And when you combine this with Contact's funding structure, which is unique across all of the major generated, it means we are best placed to access the capital to build out this combined pipeline. The next benefit then complements the last one as consumers don't want to purchase intermittent renewables. They want firm electricity that they can rely on at all times. And the flexible hydro in Manawa's portfolio can be used to firm the intermittent renewable pipeline as it is built out. And the last benefit sees a larger, more resilient business with over 10 terawatt hours of generation. That's 94% renewable with lower hydrology risk, less need for thermal fuel. It has, therefore, more stable cash flows, which reduces its cost of capital, which combined with Contact's funding options allow for more renewables to be brought to market than could be if we were 2 independent businesses. These strategic benefits underpin significant financial benefits, which we will talk to later. This next couple of slides are going to sort of elaborate a little bit on the benefits from the hydro schemes being complementary. So the map here really does highlight the increased diversity that Manawa brings to Contact with hydro assets across the length and breadth of New Zealand. Importantly, you can see the extensive North Island footprint of Manawa's hydro assets where Contact has none. And so this really complements the portfolio because North Island hydro generation tends to be winter dominated as opposed to contract -- Contact South Island hydro, which has higher in place in the summer. And this slide back -- up on the left-hand side, you can see the Manawa's hydro generation across the year where it's highest in the winter. And then you can also see Contact's hydro generation there. It's highest in the spring going into summer, and that's due to the snow melt. The chart on the right really highlights how complementary the hydro generation is over time. As you can see that in the years when hydro generation is low for Manawa, for example, it tends to be high for Contact and vice versa. This means together, the hydro generation is more predictable, reducing our risks, and therefore, allowing us to sell 200 to 300 gigawatt hours more fixed price volume per year to customers than we could if we were 2 separate businesses. This is what we refer to as portfolio benefit. It is unique to Contact Manawa combination. The benefit comes from the most effective use of New Zealand's renewable assets. This means less need for fossil fuel and less money going offshore, for example, to procure [indiscernible]. The next strategic benefit we talked about, this was the flexibility. And Manawa's hydro schemes provide flexibility, all types of flexibility. Some do more run of river that provides daily and weekly flexibility in the same way that the Clyde and Roxburgh dam do for Contact. Others like Coleridge, Cobb, Waipori can store water for many months in the same way that the [ Hawea ] dam does for Contact. With the role of thermal generation reducing in part due to the decline of domestic natural gas, this flexibility is key to supporting the energy transition. And the build of the intermittent renewable pipeline, allowing volume to be firmed and sold to customers at renewable -- sorry, reliable fixed price contracts. It's a unique opportunity to acquire this renewable flexibility into our portfolio with its ability to store fuel not just in the short term, but in the long term as well. Whilst we have identified $10 million to $20 million of portfolio benefits from this combination, our hydro asset we believe there are additional flexibility benefits over and above this that can be unlocked.

Just moving to the next slide and building on that point with the new combination Contact will have a more diversified generation portfolio, which is both Dorian and I have reiterated is underpinned by complementary hydro assets across the North and South Island. This in turn is expected to reduce our reliance on thermal peaking going forward and increases our renewable generation to over 10 terawatt hours. The impact is that Contact's average renewable contribution increases 2% to 94% and Contact's share of hydro storage capacity increases from 7% to 11% nationally. The combination with Manawa aligns very much with our Contact26 strategy, which we've been talking about consistently for the last 3 to 4 years, allowing Contact to accelerate its renewable generation growth and portfolio decarbonization. Importantly, the combined portfolio increases Contact's ability to provide a higher volume of fixed price supply agreements or hedging products, helping in turn to support the broader energy market. Accelerating Contact's Energy's renewable generation strategy aligns with Contact's decarbonization led, "it's good to be home" brand proposition. And as I talked about earlier, the combination also significantly increases Contact's renewable development pipeline and provides immediate consented development option. Post-combination, Contact will boast a diversified development pipeline of around 10 terawatt hours and wind and solar together with over 1 terawatt hour of remaining consent geothermal. Solar under development will increase from 2 terawatt hours to 3 terawatt hours while wind under development will increase significantly from 4 terawatt hours to 7 terawatt hours, including the Huriwaka and Kaihiku development for which consenting is already underway. Contact can advance the highest value development project options from an attractive and diversified combined development pipeline. But this is not just about assets. The combination also enhances Contact's in-house capabilities, both on the management of geographically diverse hydro generation and wind development where Manawa brings particular expertise. There are balance sheet and scale efficiency including cost of capital benefits, and these are expected to support the financing of new development.

Thanks, Mike. So I'll just start on the financial impact. So the combination is financially compelling with the benefits being captured across 4 buckets, which I'll just talk you through. So there is significant embedded value in Manawa, which will be realized that most of the PPA volumes reprice the market based on the contract. This starts to happen, as I said earlier, in October 2024 as the volume start to roll off the PPA. And by October 2026, volumes will link to market -- or volumes will lead to market pricing as the remaining PPA volumes adjustment [ fix ] price to a market-linked price. If the volumes reprice to our long-term view of pricing of $120 real in 2022 terms, you get an uplift of EBITDAF of $21 million. But as you will all be aware, the ASX curve is considerably above $120 going out to 2027 and for every $5 per megawatt hour extra you get over and above $120, that's an additional $10 million of EBITDAF per year, which is quite significant. We also expect Manawa's hydro generation to increase by 90 gigawatt hours from FY '24 levels. With the return to normal hydrology and the completion of the asset enhancement program, which is already 1/3 of the way through and delivering value. Whenever you get 2 similar businesses like this operating in a similar market, combining [indiscernible] cost synergies, normally the bottleneck with fast and effective delivery is complications associated with the integration of the systems. In the electricity industry, the complicated systems sit with the retail businesses. And since Manawa doesn't have a retail business, it means the implementation of the cost synergies will be far simpler. The portfolio benefits come from more reliable hydro inflows of the combined businesses, meaning that 200, 300 gigawatt hours of extra fixed price sales can be made to customers every year relative to what the 2 stand-alone businesses could do. This reduces the combined businesses' exposures to the spot market and low prices in wet years. This means, on average, across all hydro sequences, EBITDAF will be $10 million to $20 million per year higher. There are also a whole heap of other benefits, which we haven't qualified on these slides, but they are very real. So overall, the combination benefits being talked through today are balanced with an opportunity for upside. This then all translates positively into financial KPIs with shareholders seeing higher dividends than they would see relative to a stand-alone Contact across a wide range of financial metrics. The transaction is accretive on a per share basis and the compelling combination benefits mean the IRR of the transaction exceeds the Contact WACC even though the business that is being acquired is lower risk, and that is reflected in [indiscernible] got a lower WACC for Manawa than they have for Contact. Ultimately, we'd expect cost of capital benefits, reflecting the greater earnings stability of the combined business and less exposure to thermal fuel. This chart demonstrates the movement from Manawa's reported EBITDAF for FY '24 to our normalized view, which reflects the embedded value of repricing of those sales volumes to the market, which should just naturally happen. Hydro volumes returning to the levels, which again should naturally happen and the completion of the asset enhancement program. Also, you have the overlay of the relatively low-risk duplication cost synergies. And then you have the portfolio of benefits that we've talked about, which don't need to be implemented. They just naturally happen due to the complementary nature of the hydro assets. So this gives a normalized view of EBITDAF of $218 million, which we believe better reflects the underlying value of the business combined with Contact. So that means long life, flexible hydro assets are being acquired 10.7x EBITDAF on this basis, which is financially very compelling in our view. It is also worth considering that over the last few years, the cost of building renewables has increased, but the valuation of Manawa has reduced, making the proposition of acquiring established renewable assets very attractive. There is $23 million to $28 million of value from a range of cost efficiency. As you'd expect from a combination of this nature, they largely come from duplication of systems and people. There is very little change to operational areas due to the need to continue to operate the assets and trade. The timing of delivery of the cost synergies is fast with 70% happening within the first 6 months after completion and full delivery within 24 months. This reflects my earlier comment that as Manawa has no retail business with the associated complicated systems, it makes the integration process far simpler and we can go faster. There are synergy integration costs of $44 million systems relating to systems, people changes and program management. There are also [ $2 million ] per year of financial synergies, which I haven't covered on the slide as they fall outside of EBITDAF, but they're still very real. These are typically that the combined business doesn't need any extra liquidity over and above what Contact has already because it's a less risky business. Therefore, we don't need the [ $2 million ] per year that covers the undrawn bank facilities that Manawa has. It's important to say that Manawa has got some great people who will be important to the realization of the combination benefits. And we are keen for them to be part of the business going forward, ensuring that the combined business is the best that it can be. So we have supported retentions to help with this. We think about this combination over 3 horizons. The first horizon covers FY '25 to '26 and it's about combining the 2 businesses with the completion of the transaction expected in the second half of FY '25. We want to work efficiently and effectively to minimize uncertainty for people and get into the final operating structures as quickly as possible. Horizon 2 is all about delivery. By the time we get to the end of Horizon 2, which is the end of FY '27, we'd expect all the cost synergies to be delivered along with the portfolio benefits and the embedded value from the existing PPA volumes repricing to market. The asset enhancement program will be largely complete with mainly hydro generation from Manawa's assets expected to be 1,991 gigawatt hours. Horizon 3 then really starts to get into the delivery of longer-term benefits from the development opportunities and the capital flexibility. And this is where we see the acceleration of renewable development relative to what the 2 independent businesses would have achieved. [indiscernible] shareholders share in the value from the combination, we also plan to step up our dividend by $0.02 to $0.03 over the first 2 horizons with the first increase in FY '26. This reflects the nature of these benefits available, meaning we can be confident in the delivery of them. And it also reflects that the combined business is less risky, meaning dividends can be held higher in the operating free cash flow range. The combination -- the consideration, sorry, is paid as a combination of scrip and cash. The scrip-based transaction structure has been designed deliberately to ensure that Contact maintains the capital flexibility needed to develop the combined pipeline and maintain its S&P BBB credit rating. The structure also enables Manawa's shareholders to retain exposure to the New Zealand's electricity sector and share in the future value of the combination. Manawa's shareholders will receive their consideration for each of their shares in the form of $4.79 of scrip, which is roughly 57% of Contact shares and $1.16 of cash. There are some consideration adjustments to dividends on a go-forward basis with cash consideration reducing for any dividend Manawa pays between now and completion and scrip consideration increasing for any Contact dividend with an ex date between now and completion. The cash consideration is $363 million, and we will also refinance the $452 million of Manawa's existing debt. This will all be financed by a bank facility, which has already been secured. Whilst this causes our net debt to EBITDAF to go temporarily above 3x on a spot basis, it will quickly drop back down below 3. We expect S&P to reaffirm our BBB credit rating with a stable outlook. The dividend profile is enhanced due to greater generation and cash flow stability from the combination. This enhancement is prior to the full realization of the combination benefits, reflecting the nature of these benefits and our confidence in delivery. With the dividend increasing $0.02 to $0.03 in the period of FY '26 -- FY '27, this means we can expect the FY '27 dividend to be $0.41 to $0.42 per share. That's an increase of up to 8% by FY '27 relative to a stand-alone Contact, and that is purely being driven by the combination benefits of the acquisition. It supplements the $0.04 per share increase already announced from $0.35 to $0.39 per share, reflecting the [ Te Mihi ] deal and Tauhara being online. And what that means is from the period FY '23 through to FY '27, dividend per share is expected to go up to 20%. Contact dividend policy is to pay out 80% to 100% of the average operating free cash flow of the previous 4 years. However, as the historic cash flows won't capture Manawa's cash flow, the Board will need to apply discretion in the first few years that the policy doesn't constrain us and our ability to deliver the expected dividend. Regarding the dividend reinvestment plan for the final FY '24 dividend and the new information about Contact's acquisition of Manawa to ensure fairness the Board have modified the DRP program to allow shareholders to reelect the DRP preference to opt-in or opt out. Just to remind that DRP strike price has already been set in the New Zealand dollars, it's $8.2352. Then on the transaction prices. So the transaction will be achieved through a scheme of arrangement. It has the normal conditions that a transaction of this nature would have, including requirement of Commerce Commission approval. Transaction doesn't require OIO approval. The 2 major shareholders who collectively own 77.9% of Manawa have entered into voting agreements which subject to some conditions being met have committed them to vote in favor of the scheme. We expect Infratil to own around 9.5% and TECT to own just under 5% of Contact. For continuity and to support the integration, it is intended that Manawa's Chair, Deion Campbell, will join the Contact Board. And more generally, he's a very experienced director and ex-energy industry executive and will be available in addition to the team. And just in terms of time line, we're expecting the scheme implementation in the first half of 2025. As you can imagine, the time line is largely a function of the Commerce Commission clearance application process. For that reason, the draft application was lodged today to get that process moving.

Right. Thank you for that, Dorian. And in summary, we both are very excited to be announcing this combination with Manawa today to create a more diversified, resilient and efficient Contact business. This business will be well positioned to deliver renewable development opportunities going forward and support New Zealand's energy transition. The scrip-based transaction structure has specifically been designed to ensure Contact maintains the capital flexibility to deliver its development pipeline while retaining its BBB credit rating. . The structure also enables Manawa shareholders as they stand today to retain exposure to New Zealand's electricity sector and share in those future combination benefits. We are looking forward to having the opportunity to partner with the Manawa team to unlock the significant value within Manawa's existing hydro asset base and its strategic development pipeline. And working together with them to realize significant synergies between the 2 businesses, its assets and its people. And with that, I would like to close and open for questions. Thank you.

[Operator Instructions] Our first question comes from Vignesh.

Mike and Dorian. Can you hear me?

Yes, we can.

Congratulations on the deal. It seems like an immense amount of work from the team. Three questions from me this morning -- this afternoon. Firstly, can you talk a little bit about, at a high level, perhaps the challenges or the required changes from a human capital and also generation control systems perspective as you kind of transition from operating a handful of very large generation assets to a very long tail of smaller and more remote hydro assets?

Yes. So obviously, that transition is top of mind. Remember, Manawa is very successfully operating those hydro -- the 25 hydro schemes today. And we don't see, given the due diligence we've done, any particular problem with integrating the 2 control systems, remembering that Manawa operates [indiscernible] centralized control out of Tauhara at the moment.

The other thing I'd add to that is that in the middle we've undertaken a rigorous review of their assets, which has culminated in their asset enhancement program, which they're in the middle of as well. So as you can imagine, there was a lot of deep due diligence done on this area. We've got a high-quality hydro team and they were involved in the DD and actually were very -- so very positive things around the quality of the people around those hydro assets.

Okay. Understood. Secondly, just on the valuation, sort of after accounting for the synergies post deal, sort of implies an EV/EBITDAF at 10.7x, which is broadly in line with how Contact currently trades at its 1 year forward multiple. For Contact shareholders then, where does the actual additional incremental value sit in the deal. Maybe the way to answer this is, where do you think you've been conservative on potential benefits post integration across the 2 businesses?

You want to start.

Yes, there -- we'll get into the conservatism in effect. And, I mean, the one thing I would say -- what I said at the start is, Manawa is actually fundamentally a different type of business from Contact. It's got -- it's purely generation, long-life assets. I said it's more infrastructure like in nature. Contact obviously got a retail business. It's got thermal assets. It's got geothermal assets, which need to be replaced. So the fact that after -- what we consider just embedded value delivery and some relatively low cost synergies you can get to a business that's got us the same multiple as Contact has at the moment. We think it's quite positive and that's where the value lies. You're getting a lower risk business and it to Contact portfolio and that will be very valuable ultimately to Contact shareholders. As you'd expect, there are lots of different areas where there are potential value upside here. We can talk about the ability to build out additional development opportunities that we can do, that we couldn't have done without this. I think also you probably have been -- if you're at the Meridian Investor Day, I expect were, but they were talking a lot about the value of flexibility and how ultimately that's going to start to see the generated weighted price of flexible hydro going up Relative to sort of baseload prices. And as we know, Manawa has got some flexible hydro assets. So we haven't factored any of that sort of stuff into our analysis ever at this stage or a valuation at this stage. So we think the overall deal is, it's both fair and reasonable for existing Manawa shareholders. But we also think it's a very positive deal to Contact shareholders team.

Okay. That's very clear. And finally, so just looking at the time line, provided the transaction is completed in the first half of calendar year '25, is it fair to assume a 2-year kind of integration and synergy realization process? And sort of implying FY '28 being the first year where we expect to see the full normalized EBITDAF of $220 million being added to the business?

Yes, that's very much covered. Dorian covered that on Slide 26 (sic) [ Slide 25 ] where we see 75% (sic) [ 70% ] of the benefits being delivered within 6 months of completion. And then another 18 months to complete the full delivery with the more complex system integration and the like.

I don't want to [ track ] back here, Vignesh, but based on where the ASX is, I'd like to see it actually outperform that in the next sort of 3 or 4 years because the ASX curve is considerably higher than the last $120, which means that embedded value is even higher than the short term relative to the long term.

Our next question comes from Grant.

First question. You've got -- you're buying a very thoroughly priced Manawa asset. And you're base loading against an undervalued Contact asset. How does your Chair think about the outlook that you guys gave at your Strategy Day a few years ago for [ mid-60s ] cash flow per share for the shareholder of Contact that's been patiently waiting for that relative to a dividend of $0.39. And now you're diluting that? Can you talk to those 2 issues a little bit, please?

No, the intent is certainly over the medium long term, not to dilute, but to strengthen our case towards getting to more to that grant.

Yes. This -- you see -- if you're looking at operating free cash flow per share in the first few years, there's a little bit of a dilution as you expect with a controlled premium being paid but also you've got a slightly higher, elevated spend which is CapEx for Manawa with their asset enhancement program, that's also everyone knows about that. And then after sort of the first 2 or 3 years, it's up in line with Contact. And then you're in this situation where you're comparing -- you got an operating free cash flow per share comparable with Contact, but it's obviously low risk infrastructure in nature. It doesn't have any assets needing to be replaced in the near time life like Contact. So there's nothing in this deal that takes away from anything that we previously said. In fact, we see it being additional.

Okay. And then a follow-up question on, Mike spoke about that your debt is 3x and that you still have the ability to build out this huge pipeline. I just don't see that without an equity raise now that you've gone and diluted your debt a little bit more, increased your debt a little bit. Can you talk about how you've build the pipeline out?

Yes. So we've taken a conservative approach and actually consult with S&P prior to the transaction taking place and they've reinforced BBB rating. So the debt facility at the moment enables us to build out certainly the geothermal, the battery, and solar which is already underway. Remember, our solar opportunities are off-balance sheet, nonrecourse project finance [ SPVs ]. And then the broader question will be as and when we come to when -- how we achieve that, and there's a whole range of balance sheet options available to us on that.

We have an increased equity base as well, and we continue to keep the DRP going as well, which will get more capital reinvested back or hopefully through that as well, grant that helps. So we're comfortable that we can continue to build with the structure that we've got.

Our next question comes from Andrew. Andrew, if you'd like to unmute yourself to ask your question?

A few questions for me. First question is just a simple clarification or confirmation really. I take it -- I understand there's no escrow period for Infratil or TECT?

That's correct. That's correct.

Next question is just, I guess, around the time frames and obviously, the Commerce Commission process is going to be the critical one here. Have you sort of had engagement with them around that at this point? And then I just -- have they given any indication that we've got an underplay with, I guess, some of the government reviews into the electricity sector and how that might interplay through this?

Look, there's always chatter about that the Commerce Commission is a very clear legal mandate to assess us in terms of market efficiency and competition. And whatever the retail politics is playing out at this time but specifically have no remit to go there. Of course, we have an engagement with Commerce Commission prior to us because one of the features of today's announcement is that it has been kept very confidential, Which has been key to delivering value for shareholders. So we're looking forward to engaging with the Commerce Commission, and we wouldn't be announcing today that we didn't have a high degree of confidence that we would come through that process.

Great. And a follow-up on that is, I think you indicated this -- the scheme must be satisfied with 9 months subject to limited extensions and certain circumstances. I assume that the Commerce Commission process is one of those circumstances?

The Commerce Commission process is a key driver of that, yes.

Yes. We get -- if the Commerce Commission clearance came through right at the end of this year, if we can get an automatic extension of 50 days to do all the court and things like that to finish off the transaction. And then if we -- if we want to extend it beyond 9 months, we can do that through mutual agreement. And our expectation was, if we're looking good on the Commerce Commission, it is just taking them a little bit longer than we would be able to mutually agree that.

Next question I just had was just around the cost synergy side of things and $23 million to $28 million is roughly -- I guess, from $23 million to $28 does seem to be the cost base. Just trying to get, I guess, a bit of comfort around the amount of due diligence you've done on that and the achievability of that?

Look, so we have done extensive due diligence on it and a significant number of the gains through the IT, for instance, IT systems rationalization. There's, obviously, further savings in the rationalization across the corporate services. And it's fair to say that I think it's a conservative estimate on the same way we want to go. We'd like to see those benefits sooner. I think as we get together with the Manawa team, we'll [ unleash ] further opportunities. Dorian, is there anything?

Yes, that rigorous DD as you'd expect, Andrew, and the -- these would be typical duplication synergies, which have the lowest execution risk of any synergies. Doesn't mean we don't take that -- we're taking it lightly. We will absolutely execute on this stuff aligned to business case to deliver the value.

I think, Andrew, just to highlight that we do have the [ laws operating ] -- for operating cost in the business. And we are very proud of that, and we protect that, and we look forward to continuing that.

Our next question comes from Stephen to ask your question.

Just on the fourth bucket that you talked about, Dorian, the -- and you're noticing the potential, I think, for the peaking factor for Manawa's hydro schemes to improve over time. You obviously noted Meridian's Strategy Day discussion around [indiscernible] look like you're predicting a 30% uplift over the next 30 years, which is colossally large. At the same time, the peaking factor for the majority of their assets, including Manapouri are at best holding, and in some cases, solar declining by a similar amount. Could we see the same thing across this portfolio, given the nature of their hydro schemes?

No quite -- they don't have quite the same amount of flexibility as say Meridian has, but they've certainly got some and we absolutely agree. I mean, we've been talking about this, Stephen, for quite some time. around the value of flexibility. We have a view of what's going to happen if the intermittent renewables will tend towards a sort of WACC like return for wind. In the long run, solar will probably just become uneconomic because of the quality of the resource in New Zealand. But what that means is because you still got that baseload price of $120 real that we talk about, which is required to encourage businesses to invest. The gap between that lower GWAP that's being achieved on intermittent renewables and that baseload $120 real is just covered by flexibility, and that's just the increased value of renewable flexibility, and that's one of the attractions of this. And what it allows us to do is then couple that with building more intermittent renewables and bring them to market, fund them and then sell them to customers who are looking for firmed electricity. So absolutely agree with that, but not quite -- unfortunately, not quite to the same degree that Meridian has got.

Yes, that's useful. Just on your thermal output share. I think you're ticking up by about 200 basis points. Can you -- sorry, this should be something that I'm lecturing you on, but can you just remind us what the thresholds are for various ESG shareholders that you understand?

I think they normally talk about sort of 5% -- if you've got 95% renewable, 5% thermal. So we're getting very close.

Very close to that now.

And just two more quick ones. Your gearing target under your current credit rating. I mean, obviously, lower volatility generation and cash flow. This is an important theme in you presentation. To what extent might your debt providers view that lower volatility favorably as well and translate that through into higher debt allowance, I suppose, for a given credit rating?

Well, it's more of an SMB type question. What I say here, I mean, if you look back in the history of Contact, it's already been above 3x more than it's been allowed. And S&P have always been comfortable with that, so you don't surprise them and as long as you've got a path to get back below 3. WACC of Contact has historically been above 3x. It's been in a market where the aluminum smelters had a 1-year termination on the contract, and therefore, a lot more market risk. We're now in a situation where my view is that the market risk is probably some of the lowest that it's ever been because we've got a long-term [indiscernible] in place. We still don't want to go above 3, but our view is S&P wouldn't have any problem if we did for a short period of time, and we can surprise them with it, and we have that capability to get back or plan to get back below it. So I expect there will be some flexibility.

There is flexibility and potential upside, but we're always going to take a very conservative approach to this because remember this is 2 independent companies coming together. We don't have a cornerstone shareholder or 51% shareholder. We need to be prudent, and we need to be smart about how we manage this. Remember, we're bigger as well, so we have more ability to do capital bond this year as well.

And just one last quick one. You don't need OIO approval. And obviously, you are rather unique in the sense that you can issue shares. To what extent do you think that sort of played into your hands in this transaction? Sorry, both of those factors?

Yes, I think that's been critical. There are some unique synergies but we don't require OIO. We are both Kiwi companies. And the fact we've talked Dorian and I have talked repeatedly over the last 4 years about the balance sheet flexibility option that we have. And so all of those factors were absolutely critical to making this deal happen. But noting also that Manawa coming -- shareholders are coming on board as Contact shareholders, which is a remarkable both confidence in us and the company as well.

[Operator Instructions] It looks like we have a follow-up question from Andrew, if you'd like to go ahead and unmute yourself to ask your questions.

Sorry, I think there was a mistake.

No problem. Thanks, Andrew. As we have no questions for the moment, I'll hand back to the Contact's Energy team for any final remarks.

Look, I need to reiterate, we think this is a fantastic combination for investors, but we also think it's good for the market and it's good for the country in allowing the acceleration of renewable development. It's not just about assets, it's also about the people that will come together and the execution capability that will result from this combination. So looking very much forward to the completion of the deal sooner rather than later. Thank you.

Thanks, everyone. Thank you.