Earnings call: APA Group maintains strong outlook amid energy transition

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APA Group (ticker not provided), with its disciplined capital strategy and strong balance sheet, is navigating the complexities of the energy market with confidence. The company’s investments in growth and technology, along with its commitment to credit ratings, signal a stable and optimistic path forward despite the challenges of transitioning to renewable energy and potential regulatory reviews. APA’s diverse portfolio and strategic asset acquisitions, such as the Goldfields gas pipeline, position it well to capitalize on the growing demand for gas as a firming capacity in the energy mix and to play a significant role in the energy landscape of the future.

APA Group (ticker: APAJF) has been a consistent performer in terms of dividend reliability, having raised its dividend for 5 consecutive years and maintained payments for 24 consecutive years. This track record is a testament to the company’s financial resilience and commitment to shareholder returns, aligning with the full-year distribution guidance confirmed in their recent earnings call.

The company’s gross profit margins have been notably impressive, with a gross profit margin of 92.21% over the last twelve months as of Q4 2023, reflecting efficient operations and a strong pricing power within its market. This high margin level supports the robust financial performance APA Group reported, despite the slight dip in EBITDA margin due to increased corporate costs and lower asset revenue.

InvestingPro Data metrics also reveal that APA Group is trading at a high earnings multiple, with a P/E ratio of 9.05 and an adjusted P/E ratio for the last twelve months as of Q4 2023 at 40.29. While this indicates a premium valuation, it is essential for investors to consider the company’s strategic growth initiatives and its role in the energy transition when evaluating its price multiples.

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Operator: Thank you for standing by and welcome to the APA Group 1H ’24 results. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Kynwynn Strong. Please go ahead.

Kynwynn Strong: Thank you all for joining APA Group’s First Half ’24 presentation. My name is Kynwynn Strong, I’m the General Manager, Investor Relations and Capital Markets at APA. As you just heard, participants are in listen-only mode. There will be a presentation followed by question-and-answer session. [Operator Instructions] We will start with a formal presentation by our CEO, Adam Watson; and CFO, Garrick Rollason. We will then open up to Q&A. I would like to now hand the conference over to Adam Watson, CEO and Managing Director.

Adam Watson: Thank you, Kynwynn and good morning, everyone. Thank you for joining us on what we know is a busy day, nearing the end of a very busy reporting season. Let me start by acknowledging the Gadigal people of the Eora (E-ORA) nation, Traditional Custodians of the land on which I’m speaking today. First Nations people have taken care of our lands and waterways for the past 60,000 years. We acknowledge and pay our respects to their Elders past, present and emerging. Before we dive into the presentation, I’ll begin on Slide 4, with a safety share. As you’ll see in a moment, our safety performance is improving, but we know we can always do better. One area of focus is the protection of hands, they account for about a third of our injuries. We’re seeing hand injuries from simple daily tasks, such as cuts from Stanley knives and accidents from using vehicle winches. Raising awareness is key to addressing these injuries. And we’re doing this through programs such as Safer Together and Helping Hands. Our key message is simple. It’s not okay to get hurt at work. Today’s agenda is on Slide 5, I’ll discuss our first half ’24 highlights and touch on the outlook for the full year. Garrick will cover our first half financial performance in more detail. I’ll then finish with some observations on current market dynamics and regulation before we go to Q&A. Moving now to Slide 7. There are three key takeaways from today’s result. First, we’ve delivered a solid financial performance with earnings and free cash flow growth. EBITDA growth was largely driven by recent acquisitions and inflation-linked revenue increases. This was partially offset by lower revenue from the Victorian transmission system as a result of our warmer winter, while revenue from the Roma Brisbane Pipeline and the Diamantina Power Station, which had comparatively strong first half 2023 outcomes and higher costs associated with our investment in the business. Second point is we’ve demonstrated our ability to acquire quality assets to create value with both the Alinta, Pilbara and Basslink acquisitions. I’m pleased to say that their integration programs are on track, and their earnings are in line with their business cases. They are both performing well, and we remain confident about the growth outlook. The third point is that the outlook for our business remains positive. We have expectations about ongoing EBITDA distribution growth, and we have established strong long-term growth platforms. Moving to Slide 8, the key takeaway here is that first half revenue earnings and distributions grew in line with our expectations. Underlying EBITDA was up 5.8%. Free cash flow is up 4% on a normalized basis, and our interim distribution of 26.5 cents per security is at 1.9%. Looking forward on Slide 9, we’ve reaffirmed our FY ’24 distribution guidance of $0.56 per security. And in light of the recent Pilbara Energy acquisition, we’re also providing EBITDA guidance for FY ’24 of between $1.87 billion to $1.91 billion. Now, I must stress this guidance is consistent with the internal expectations we set ourselves at the start of the financial year. It’s also consistent with the statements we made on revenue and costs at our FY ’23 results presentation, and which we reaffirmed at our November Investor Day. Any ongoing provision of earnings guidance will be considered by the Board in future periods. On Slide 10, we call out some of the operational highlights for the half including using our three delivery pillars as a guide. Let’s go a little deeper starting with our people on Slide 11. We’re embedding a safe, respectful and inclusive workplace. There’s always more to do, but this slide does provide some proof points that show we are making good progress. Our safety outcomes continue to improve. Diversity and inclusion outcomes continue to improve and we are implementing tangible programs to enhance the wellbeing of our people. Slide 12 brings this to life with a case study. Our apprenticeship program is not only developing capability for the trades our business needs, but it’s also building an inclusive and diverse workforce from the ground up. Slide 13 capture some of the metrics that are core to our operational excellence pillar. We operate an expansive portfolio of energy infrastructure assets right across Australia, ensuring it’s done safely and reliably underpins our success. A case study to highlight is on Slide 14. On New Year’s Eve, a severe storm disabled our Solar Farm at Gruyere in Central Western Australia. Of the more than 25,000 solar panels, only 277 were damaged. But that was enough to shut down the entire solar farm. Despite that, our gas fired power generator immediately took charge to ensure there was zero supply issues for our customers. Our job at APA is to ensure we provide our customers with energy solutions that are available rain, hail or shine. Moving to Slide 15, you can see some data points that show the progress we’ve made with our climate transition plan and our reconciliation action plan. Both are great examples of the commitments we’re making to ensure the sustainability of our customers and our communities. Moving now through our third delivery pillar on Slide 16, creating value. As I mentioned, the two acquisitions we’ve made over the past 18 months are delivering in line with their business cases with integration progressing well. The takeaway here is that APA is a good acquirer of businesses, and we create long-term value when doing so. On Slide 17, we’ve provided a scorecard for our most recent acquisition, Alinta Pilbara, which we now call the Pilbara Energy System. It’s delivered earnings in line with our business case. And we remained highly confident in its ability to generate value in line with previously stated expectations. The integration process so far has been positive and hasn’t raised any red flags. We’re quite an impressive group of talent, and all employees have transferred across to APA and remain with the business. We are integrating our operational and safety systems and we’re working through the technology platforms. And we’re making good progress with customers on emerging opportunities. Moving to Slide 18, which reaffirms what we said at Investor Day a couple of months ago. The near and long-term opportunities for growth remain attractive. We’ve maintained our $1.8 billion near-term organic growth pipeline, and the acquisition of Pilbara Energy has added a further $3 billion to our growth pipeline. As we consider our growth opportunities, our capital allocation framework will come to the forefront. The framework which is presented on Slide 19, is designed to ensure we allocate our free cash flow to those initiatives that can create the most value for you as security holders. Our balance sheet is positioned to support our growth. And we have a disciplined capital strategy, which will ensure we make the right choices about how we deploy capital with a focus on maximizing security holder value. With that, I will now hand it to Garrick, who will take you through more details on our financials.

Garrick Rollason: Thanks, Adam, and good morning, everyone. I’m pleased to address you for the first time as APA’s CFO. Before I get into the detail, I’ll quickly call out the highlights. First, the results are in line with considerations for the 2024 full year provided last year and demonstrates good progress with our strategy execution. Second, existing earnings with inflation linked tariffs and the integration of our new assets is supporting security holder distributions and our growth projects. Third, at balance sheets and investments in systems and capabilities is positioning the business to create value by enabling our growth agenda. Moving to our headline financial metrics on Slide 21. Underlying EBITDA was up 5.8%, reflecting the solid performance from our recent acquisitions. This includes a 6 months contributions from Basslink and 2 months of contributions from our Pilbara Energy System, both of which delivered earnings in line with their business case. Excluding Pilbara Energy, underlying EBITDA increased by 3.4% and normalizing for both Basslink and all of us. The period-on-period increase was 1.6%. Free cash flow increased by 12.8%. Noting that this includes a delayed receivable in the prior corresponding period. After normalizing to these impacts free cash flows increased by 4%, a pleasing result. Normalized free cash flow growth was lower than EBITDA growth, reflecting higher than usual business CapEx investment, same business CapEx investment during the half year. And our interim distribution is 26.5 cents per security. Turning to Slide 22, where we’ve summarized the key drivers for the 2024 first half. I’ll go into more detail shortly. But in summary, EBITDA has grown because of the inflation linked tariff escalation and the contribution of our new assets. Corporate costs, investment in technology projects and CapEx are all aligned with the previous comments provided as considerations to 2024. The next slide provides a deeper dive on revenue. As segment revenue increased by 8.2%, driven by inflation and tariffs and contributions from our recent acquisitions. As Adam has previously mentioned, operating revenue was lower largely driven by: firstly, the Victorian Transmission System earnings being negatively impacted by the warmer winter and also higher revenues in the first half of 2023 from Roma Brisbane Pipeline, benefiting from gas supply volatility, and Diamantina Power Station, meeting additional customer requirements. Neither of these events reoccurred in the first half of 2024. 87% of first half of revenues in the Energy Infrastructure segment were from take or pay contracts or regulated revenue. With a small proportion of our revenues coming from flexible short-term services, and other variable volume linked revenue. Moving to the next slide, which captures our cost base, and includes the step up related to the new acquisitions. Corporate costs increased by about 10% or $7 million. Of this increase, $3 million related to noncash, mark to market accounting adjustments of long-term incentives. Excluding this item growth and corporate costs was broadly in line with wage inflation. Consistent with our previous comments, we anticipate the 2024 corporate costs to increase by approximately 13% compared with the financial year 2023. Furthermore, 2024 will reset the corporate cost baseline for the 2025 financial year and beyond. Moving to Slide 25. Our underlying EBITDA margin is slightly down on prior periods to 73.2%. The decrease was driven by three factors. First, we experienced lower revenue from three assets as discussed previously. Second, due to our investment in electricity, transmission, business development, and higher corporate costs. And finally, the inclusion of our Pilbara Energy assets, which are dominated by generation and have lower margins compared to our pipeline assets. Turning to nonoperating and significant items on Slide 26. Outside of the non-cash items, I’d like to call out our technology transformation project expenditure, an item which we’ve spoken to in the past. This expenditure includes a new enterprise resource planning or ERP system. Pleasingly the ERP system is about to go live, and he’s on time and on budget. The second call out is the $975 million significant item. This relates mainly to the accounting remeasurement of APA’s existing 88.2% interest in the Goldfields gas pipeline. This remeasurement occurs as a result of purchasing the remaining 11.8% through the Pilbara Energy acquisition. The adjustment is non-cash and these are required accounting treatment. This is offset in part by acquisition costs including stamp duty. Slide 27 summarizes the period-on-period movement in free cash flow. Like-for-like free cash flow was 4% higher. The benefits from the uplifting underlying EBITDA was partly offset by higher staying business capital expenditure. This reflects the inclusion of recently acquired assets, a focus on pipeline integrity works and maintenance at the Diamantina Power Station. On to Slide 28. You can see the significant investments we made in the first half. Excluding acquisitions, we spent $432 million on growth CapEx with the key projects being the East Coast Grid expansion and the Kurri Kurri Lateral Pipeline. Regulated asset expenditure included the Western Outer Ring Main or WORM project in Victoria. And on the West Coast, we completed the Northern Goldfields Interconnect. Foundational capital expenditure of $27 million is in line with our previous comments for the 2024 financial year, and is focused around our investments in technology solutions, emissions reduction, and enhancements to the physical security of our assets. Now turning to our balance sheet on Slide 29. Our balance sheet remains well-positioned with a healthy spread of debt maturities and a significant amount of liquidity. The increasing net debt and liquidity is a result of the recent debt and hybrid raisings as well as the equity capital raising used apart from the Pilbara Energy acquisition. The chart on the right confirms that our upcoming debt maturities will occur in the 2025 financial year. As expected, our funds from operations net debt decreased half on half due to the increasing in net debt to support growth. This metric remains consistent with our BBB / Baa2 credit ratings and is in line with the rating agency expectations. We remain committed to our current credit ratings. And finally turning to Slide 30. As Adam outlined, we’ve provided an underlying EBITDA guidance range for the 2024 financial year. The guidance is consistent with the internal expectations we set at the start of the financial year, and is consistent with the comments we provided on certain revenue and cost items at the 2023 financial year results and then reaffirmed at our November Investor Day. In the longer term, we expect underlying EBITDA will continue to benefit from the integration of our newly acquired assets and from revenue associated with both the East Coast Grid expansion with stages one and two expected to be fully contracted this coming winter and the Northern Goldfields Interconnect. We’re also focused on stabilizing our cost base. As we come near the end of our capability uplift program. To wrap up, I want to reiterate three key points. First, we have delivered an overall solid operating and financial performance in line with our expectations. Second, we are well-positioned to create value with the growth opportunities in front of us. And third, the outlook for our business remains positive with expectations of our ongoing underlying EBITDA and distribution growth and a strong long-term growth platform. And with that, I’ll hand back to Adam.

Adam Watson: Great. Thanks, Garrick. I’ll now talk to our strategy and how we’re responding with some of the trends we’re seeing in the market. So I’ll take you to Slide 32, and we set out our strategy which is important to note that remains unchanged. The market opportunities within Australia’s energy transition are significant. And we’re focusing on markets where we have clear competitive advantages. Our priority market segments represent billions of dollars of opportunity for APA. If we move to Slide 33, there are four market dynamics to call out that are particularly relevant to the success of Australia’s energy transition. First, we’re clearly seeing growing customer demand for large scale renewables as they look to move at pace to decarbonize. However, in contrast to the first point, the pace of the transition build out is unfortunately slowing. Project delivery is being impacted by a number of things, policy and regulatory concerns, community disquiet, growing costs, supply delays, and skilled labor shortages. Our job at APA is to work with governments, communities, regulators, suppliers, and our customers to ensure we can cut through these issues to deliver the infrastructure we need to decarbonize our energy systems. The third dynamic is that the role of gas is becoming more widely understood and accepted. This is a good thing, because without gas we’re going to see major disruptions to energy security and costs are likely to increase as we transition our energy system. However, again, in contrast to the growing acknowledgement of the role that gas plays, policy uncertainty is unfortunately increasing. We know we need to accelerate the introduction of large scale renewables to take coal out of our energy systems that need to be connected with electricity transmission lines, and they need to be firmed with batteries and gas. The problem is, however, the policy and regulation continues to be one of the key factors, that is putting a handbrake on the industry’s ability to move the transition forward at pace which is a good segue to Slide 34, where I’d like to update you on some regulatory matters that are particularly relevant to APA. We’ve spoken previously about our Basslink conversion application and revenue proposal. We expect the process will conclude later this calendar year. We’ve also commenced work on the next access arrangement for our Goldfields Gas Pipeline, and we expect to receive feedback from the regulator in the coming months. The third item I wanted to highlight relates to the new regulatory powers granted for the AER under the National Gas Law that came into effect in March last year. Please let me go into this in a bit of detail because it’s important, it’s not misinterpreted. As provided for under the legislation, the AER has indicated to us that they are initiating reviews on all significant pipelines in Australia over the coming years. They have commenced with APA South West Queensland Pipeline, given its significance in transporting gas from Australia’s northern supply sources to the southern demand markets. While we get to receive a formal notice with the details about the process, let me step through our understanding of how it will work. This review is to determine whether the asset should remain lightly regulated, or it should be subject to heavier regulation under what they would call reference price regulation. In making this determination, they will weigh the cost and benefits of the current form of regulation with those that would occur if the regulatory regime were to change. Importantly, the AER has reassured us that they have no predetermined outcome in mind. They are simply following a process under the powers granted to them in March last year. We’ll be working collaboratively with the AER and we expect this assessment to be concluded prior to the end of calendar 2024. If it is determined the pipeline should be subject to reference price regulation, there will be a further process to work through, which would likely take another 2 to 3 years to complete. In this further process, the AER would determine an access arrangement, including reference price, tariffs and a value for the regulated asset base. What this means in reality is that if the asset is determined to be subject to heavy regulation, we are around 3 to 4 years away from knowing what impact that would have on APA’s financial returns, if any, for that asset. Our firm view is that the current arrangements with our customers work well. We haven’t had a single customer, a single customer seek recourse against APA under the current arbitration process. Over the past 4 years, APA has invested around $700 million to expand the East Coast Grid to ensure capacity is available when customers and communities need it. We’ve done that at our own risk, bring supply to market ahead of demand. And we’ve funded these investments, while continuing to provide excellent service for our customers. As such, we believe that the returns that we currently generate from the South West Queensland pipeline are fair and reasonable, and that the clear benefits of the current form of regulation outweigh any that might flow from a change to the regime. Over the longer term, if the AER does determine the asset should be subject to reference price regulation, it’s important to understand that our existing bilateral contracts with customers will remain on foot. Any access arrangement doesn’t impact existing contracts, and we will still have the ability to negotiate bilateral contracts with our customers. A change to the regulation will, however, almost certainly add complexity and delays to decision-making at a time when new investment is needed to enhance system capacity, reliability and security of supply. In effect, the decision to make future investments will need to be negotiated with the AER, working through their review processes before we can make any commitment about moving forward with the investments. Now while we don’t need to make any decisions right now about further investments that may be required to increase capacity in the East Coast Grid, rest assured we will continue to make our investment decisions on the basis of the creation and protection of value for our securityholders. So to recap on this point. We are entering into a process with the AER where they will consider whether the South West Queensland Pipeline should be subject to a reference price regulation. The AER won’t be making that decision until the end of this year. If and only if they decide to move the South West Queensland Pipeline to reference price regulation, we would move into further consultation process that would likely take another 2 to 3 years to complete. Now with those market dynamics in mind, let me highlight some of the latest ISP forecasts around the energy transition, which further underscores the need to ensure we have a stable policy environment that encourages investment. The graph on Slide 35 is AEMO’s latest estimate of how coal will be taken out of our energy systems. And the key takeaway is that it’s happening faster than we expected, but our energy systems will quickly become unstable if we can’t offset the removal of coal with a rapid introduction of firmed renewables and electricity transmission. The graph on Slide 36 highlights the size of the challenge. By 2050, we are going to need 7x as much grid-scale variable renewable energy; 10,000 kilometers of new electricity transmission infrastructure; and 4x as much firming capacity, including 13 gigawatts of new gas generation. What that means is AEMO is forecasting gas demand for firming capacity to more than double by 2050 as coal exits the system and more renewable energy comes online. This is a massive task and we just don’t have time to waste. We need policy that supports and indeed encourages the rollout of firm renewables and electricity transmission. Now this dynamic will present many challenges for the energy industry. Equally, it will present many opportunities for those businesses that have the capability to work with customers and communities to make the transition a reality; and that’s APA’s goal. Slide 37 presents a timely case study on the critical role gas plays in our energy system. Tuesday last week, the severe heat wave in Victoria brought electricity transmission lines down and tripped some of the state’s coal-fired power generators. As you know, this left over 500,000 homes in Victoria without power at a time when it’s most needed. Given the time it takes to bring the coal-fired power generators back online, the impact often isn’t hours long, it’s days long. Renewable power generation continued but wasn’t enough to carry the load and was ineffective when the sun went down. Hydropower stepped up, but we all know we have limited available supply of this unique power source in Victoria. Last Tuesday, it was gas that stepped up. It’s gas that always steps up. It was gas-fired power generation that switched on immediately and ensured more homes weren’t left without power. By our high-level estimates, if we didn’t have sufficiently available gas in Victoria last Tuesday, we could have seen well over 1 million homes without power. Gas kept our communities going, enabled people to have warm showers and to cook food for their families. Slide 38 reinforces that this firming role is just one of the critical roles that gas plays in our energy mix. It’s also critical to Australian industry, industries that make building products and fertilizers, those very industries that build our homes and places of work and put food on our table, those very industries that don’t have any viable alternative solution to gas. Now don’t get me wrong: At APA, we are at the forefront of bringing new energy solutions to market. We are supporting the decarbonization of our energy system, where coal and diesel need to be removed first by developing solar and wind farms for our customers. We are supporting renewables by building the electricity transmission lines we need to connect the renewables to customers and communities. And we’re exploring emerging technologies such as hydrogen and carbon capture and storage. The fact remains gas is and will continue to be essential if we’re to have a successful energy transition and if we’re going to continue to have a viable Australian manufacturing sector. It’s the cleanest and most cost-effective long duration firming solution that complement the renewables and it’s vital to industry. So with that, let’s wrap up on Slide 40, a reminder of today’s three key takeaways. One, we’ve delivered a solid financial and operational performance in the first half with outcomes in line with our expectations. Two, we are demonstrating our capability at acquiring assets and creating value. The recent Pilbara and Basslink acquisitions both remain on track with their business cases, and we remain confident about their growth outlook. And third, the outlook for APA remains strong. With that, I’ll now open it up to Q&A.

Operator: [Operator Instructions] The first question comes from Rob Koh at MS.

Rob Koh: Good morning. Thanks for the very comprehensive presentation. I kind of wanted to ask some questions about Wallumbilla Gladstone half-on-half performance and average contract tenor, but I guess I’ll probably have to ask a question about the regulatory review for South West Queensland Pipeline, I guess, a lot of ranges of outcomes and a very clear time line that you’ve set out there. Is one alternative that we should be contemplating that the recovered capital method initial capital base of about $2 billion is in the frame? And I guess, also with the AER making this decision, how does the change to the national energy objective to incorporate climate change factor into that decision?

Adam Watson: Thanks, Rob. Thanks, yes. I’d also love to talk about Wallumbilla, but I’m not surprised you want to talk about regulation, so look unfortunately, it’s quite unclear in terms of how the measurement of the [indiscernible] is going to play out. These are new rules for the AER. And I continue to stress they’re just applying the rules that were granted to them under the new gas laws from March last year, so they need to work through that with us. We are going to be working collaboratively with them on that. There is clearly a range of valuations that we can all come up with, with assets. I think what’s important to note is when you look at the asset from a fair value perspective and noting that we paid fair value. And obviously, if you took into account things like replacement value, we think that the returns that we generate from this asset are fair and reasonable. Under the current regulation, all of our data is available to our customers. We don’t provide customer names, obviously, and nor should we because of confidentiality, but any customer, anyone can look on the building boards and get details about our pricing at any point in time. It’s completely transparent. There’s an arbitration process if customers are unhappy with our pricing arrangements. And again I’ll just stress we have not had a single customer go through or seek to go through an arbitration process with us since these rules were in place, which has been for a very long period of time. And you can see the returns through our regulatory accounts. You can see the returns that we generate from this asset, which we again think are fair and reasonable, so we’ve got to be careful that we don’t say that there’s nothing to see here. We are going to let them go through the process and we want to work well with them, but the process is going to be long if we get — if the AER does determine that they want to take it to the second stage — or the next stage. And then from that perspective, we think that the returns that we generate currently are fair and reasonable. As you pointed out about — I guess there’s a lot of contradictions going on, which is really hard to fathom. The — if you look at last Tuesday and if you look at the market dynamics, the role of gas is, on a daily basis, more and more becoming a service based supply arrangement. Our assets are very much service based. Customers are needing flexibility. When you think about the 13 gigawatts of firming required to support the transition of coal coming out of the system, you’re going to need more flexibility, not less. So again, regulation typically works for homogenous type products and services. Our pipelines in South West Queensland Pipeline isn’t. And then when you go to things like climate transition and emissions reduction, obviously we play a role supporting the economy’s reduction of emissions through the retirement of coal. The decisions that we make about our own emissions reductions, we’re going to have to look at it through this lens as we will have to look at all of our investments on the East Coast. We’ve got time. We don’t have to make a decision on any additional East Coast Grid expenditure or investment, hopefully, until we find out about this initial assessment from the AER, but yes, it’s going to be pretty hard to make decisions about providing investments for products which are meant to provide flexibility when the — if the outcome was to do the exact opposite.

Operator: The next question comes from Nik Burns at Jarden Australia.

Nik Burns: Hi, everyone, and thanks for taking my question. It looks like the recently acquired Pilbara assets are on track to contribute earnings in line with the estimates you set back in August last year. One of the concerns at the time was the relatively short weighted average contract life of 7 years, and you gave a reason why that was the case back then. My question is, I guess, since taking ownership of these assets in November last year, have you had an opportunity to engage with customers of the two power stations? Are there any material contracts that are up for renewal in the near-term? And just whether if there’s any conversations underway to renew or extend those contracts? Thank you.

Adam Watson: Yes. Look, thanks for the question, Nik. Yes, we have spent a lot of time there. I’ve actually got Darren Rogers (NYSE:ROG) in the room with me, who runs that part of our business with — for us. And Darren and the team have spent an enormous amount of time with our customers transitioning over, remembering that they were customers of ours already, principally because of our GGP assets and because of our other services that we provide to some of those customers around Australia, so we’ve had a lot of engagement. I’ve personally had a lot of engagement. We were in Perth a couple of weeks ago and talking with customers there — the contracting profile we went through at the Investor Day. And again I think it’s about a 7-year average life, so yes, there will be assets that come up for recontracting over the next couple of years, but nothing that is of a concern to us. I think ultimately what we’re going to look at with those markets is that they are — if you look at the decarbonization journey that our customers are on in that region. And you can take the big mining companies but also think about some of the other mid-tier mining customers that are trying to decarbonize there as well. There’s a growing need for firming capacity, so — and basically that plays well into our gas-fired power generators. And they’re all trying to come off diesel and replace it with renewable power generation, so when you look at some of those PPAs we’ve got, you’ve really got to ask the question: “What’s the next best viable alternative in a time when they’re trying to grow their generation base, not decline it?” So again we’ve got to do what we do well and provide good service and reliability and safety. And those sorts of things are everything to our customers up in those regions, and that’s how we’re going to get measured. And that — those sorts of initiatives — and I know we’ve got a lot of APA people on the call here and we talk about it all the time, but doing things, our things, reliably and safely; and living our behaviors and living our customers’ behaviors, they’re the big things that will go a long way to be able to help us with those recontracting arrangements.

Operator: The next question comes from Dale Koenders at Barrenjoey. Please go ahead.

Dale Koenders: Good morning, all. I guess I’d like to follow-on from — hi, good morning. I would like to follow-on from Rob Koh; and just in terms of the outlook for a few dividends given this increased uncertainty around regulatory risk on the earnings, if this changes your view at all or if it changes your view on the growth CapEx pipeline of $4.8 billion. Does some of that slow? Does it come under risk?

Adam Watson: Yes, thanks for the question. I always have to caveat this, every CEO does, that distributions in the future are a matter for the Board to consider, full stop. Next paragraph: I’m very confident that this doesn’t change our outlook. It’s a long way to go before we know what the outcome of this would look like. Again we remain confident that we will get to the right solution here. There’s a lot of data points, which I won’t labor on and which affirm that the returns that we generate here are fair and reasonable. They look at things. The AER will be looking at things like market power. Typically you only see — in fact, we don’t know anywhere in the world where regulation goalposts have been changed mid-game, so other than through M&A or through market failure, which doesn’t apply here, we’ve never seen this sort of thing happen before. So again, we’ll work collaboratively with the AER, let them go through their process. I think the — where you look at where our growth is coming from, you look at it through a few different pillars. Obviously, remote grid power generation is a really strong focus for us, $25 billion plus market opportunity. Again, Alinta, we are really pleased with the work that we’re doing in the North West, so we are going to put our heads down and really focus on growing that part of the business. If you look at electricity transmission lines, again, all of this renewable power generation that needs to come to market needs to be connected with electricity. And we’ve got core competencies and capabilities there; and really, really pleased with the work that we’re doing with EDF (EPA:EDF) on building our capability there. Beetaloo, we’re very strong on Beetaloo and it’s required the best theme [ph]. Again, we think about the role of the regulator and use their words, which is to ensure fair and reasonable outcomes and pricing for consumers. More supply we can bring to market, the better it will be from a pricing perspective for Australian consumers, so we are getting behind Beetaloo. And then future fuels, we are working with lots of customers on hydrogen and carbon capture and storage, so the takeaway is we’ve got an enormous amount of opportunities before us. We are going to keep chasing it. It’s probably just the East Coast Grid is the one that we’re going to have to pause on and be considered there but again nothing that we need to make a decision on just yet, and we’ve got time on our side.

Operator: The next question is from Reinhardt van der Walt at Bank of America. Please go ahead.

Reinhardt van der Walt: Good morning, Adam and Garrick. Just — thank you. Just going back again on the AER process, I mean you seem to characterize the heavy regulation quite negatively from a reinvestment risk point of view, but I mean, isn’t there an argument to be made here that, if you go on to a RAB, it at least gives you a bit more certainty around recovering your cost of capital so you’re probably transferring away some of the stranded asset risk? Is that maybe one way we can think about this?

Adam Watson: Look, you can, but I think you’ve got to look at it through a couple of lenses. One is — and if you take a holistic view or take an energy industry view, as the transition plays out, we are going to need more flex and be really responsive. When we look at the process that we went through over the last couple of years on the East Coast Grid stages 1 and 2, we had to be really nimble there looking at the market dynamics and trying to bring product ahead of market, but doing it quickly enough that you’re addressing market constraints but not so quick that you’ve got assets there that are waiting to ramp up. So we did that. And the East Coast Grid expansion, so far, are going really well. The challenge with a regulated model, as you know, you can only — you can look at electricity transmission or distribution as an example. To get approval to make those investments will typically take — it’d be a minimum 2, probably 5, years to make, so 2 to 5 years passes. The gold part — the whole world has changed and moved on and you’ve missed your opportunity, so that’s the first one; is that from a market dynamic perspective, it can create a real issue for the energy system. And I’m sure people like AEMO will have something to say about that in due course. The other thing you’ve got to remember too with this — without wanting to get too technical, but this is a reference price tariff, so our customers will still be able to contract with us on bilateral contractual arrangements. Basically they would get to choose whether they would want to use a reference price or whether they would want to undertake a contracted arrangement, so it’s not like some of the assets that you’d be familiar with where you guarantee the — a regulated return for every 5 year reset. And it’s locked and loaded for 100% of the asset. This is one where we provide a lot of service, so it’s a little more complex.

Operator: Next question is from Ian Myles at Macquarie.

Ian Myles: I will change it up and not ask about AER. Can you maybe just talk about Diamantina, please, and Dugald River? Because you’ve turned on Dugald River and collectively the two assets actually now are less than before. And I’m sure that’s not what it should be doing long-term, but just trying to get a bit of color on that.

Garrick Rollason: Yes, thanks, Ian, for the question and so I’ll answer it in two parts; firstly, for Diamantina, on the revenue side. And as we talked through in the presentation, we did see higher — particularly higher revenue in 1H ’23 for Diamantina off the back of a specific customer utilization or requirements increasing as they had a plant offline during that period. So one of the issues is, is revenue normalizing back to, I suppose, base levels. The second one, a [indiscernible] on our maintenance or our stay in business capital expenditure through the course of FY ’24 is on the Diamantina Power Station. And that has had some flow on impact to the operating costs within that, so there’s, I suppose, a twofold impact. One is the period-on-period revenue. And the second is the within-period operating costs at Diamantina as well, notwithstanding that, going forward, there will be obviously an expectation that we get revenue from the solar farm as well as the power station.

Operator: The next question is from Tom Allen at UBS.

Adam Watson: Hey, Tom.

Tom Allen: Hi. Good morning, Adam, Garrick and the Board team. I’m going to follow the discussion just on the regulatory risks, unfortunately, but we understand there are some material contract renewals coming up on the South West Queensland Pipeline over the next 2 years. So has APA seen any form of recontracting pressure from those shippers just given the regulatory process being initiated?

Adam Watson: Well, the regulatory process being initiated was only announced, given to us last night, but the laws have been obviously around since 2023, so — or since March 2023, so I guess they could have tried to read into that like anyone could have, but look. The short answer is recontracting over the last year has been — on all of our assets, including South West Queensland Pipeline has been good. We are seeing a lot more shape. Obviously, the market generally has stabilized a lot more, so there’s more visibility for our customers. Pricing is a lot more reasonable, so we’ve seen it quite positive. We do have a number of contracts coming up over the next few years, but yes, I think we will just have to wait and see. I think, Tom, it really comes down to the service levels that our customers want, so if you’re after just a vanilla product — which there will be some customers who just want a plain vanilla product, let’s see what they do. But if you’re somebody who wants security of supply — you want service, you want to be able to shape your loads, a lot of our customers trade product, yes, I think they’ll be trying to work with us to get the right solutions.

Operator: The next question is from Gordon Ramsay at RBC Capital Markets.

Adam Watson: Hi, Gordon.

Gordon Ramsay: Thank you very much. Garrick, I’m going to direct you to Slide 30, where you were talking about costs and CapEx. And clearly the messaging there is that FY ’24 is looking like a peak year for a number of your costs and spend. And I guess where I’m coming from is we’ve seen continuous EBITDA margin erosion in APA over the years. And it’s now 73.2% for the half, against 75% year-on-year. Can we look forward to margins recovering once these costs start to kind of track more in-line or below the growth in revenue? Or is there an asset play here where the Pilbara assets, I think it was said earlier and it might have been Adam, have lower margins than the pipeline assets, so maybe we should be looking at lower margins long-term? I’m just wondering when this trend will stop.

Garrick Rollason: Okay. Thanks, Gordon, and good question. I suppose there’s a number of things, specific things, or a couple of specific things that impacted margin in 1H ’24 which we’ve touched on. So some of those were asset revenue related. So [indiscernible] warmer winter, that’s obviously a timing issue as we recovered in future tariffs. And then we talked about higher revenue at Roma to Brisbane and Diamantina in 1H ’23. From a EBITDA margin perspective, the other thing to note, firstly, is we are investing in our Electricity Transmission business development team. And you’ll see that come through in the Electricity Transmission business segment EBITDA, so that does have an impact on the EBITDA margin. And as you said, there’s also been a period-on-period increase in our corporate costs, which again impacts EBITDA margin. As we look forward, what we said through the presentation is we are seeing stabilization of the costs. We’ve gone through a significant period of building up the capabilities within our team. And that’s — continues to occur through the course of FY ’24, but as we look forward into FY ’25, that will stabilize. And then margin improvement will be driven by revenue improvement, particularly around potential variable revenue outcomes.

Operator: The next question comes from Nathan Lead at Morgans.

Nathan Lead: Thanks very much for your presentation. I just wanted to thank you very much for reinstating EBITDA guidance, and my question is very much on that. Well, obviously we know what the first half is at the moment. And there’s a range there for the EBITDA guidance for the full year. If we’d take into account the fact that the Alinta assets are going to add another $60 million of EBITDA into the second half, it — at least at the bottom end of that guidance range, it implies a — I suppose, like a 5% underlying decline in earnings in the business for the second half, so can you just sort of talk us through where the variability is in the earnings into the second half?

Garrick Rollason: Yes. So maybe I will talk to the approach to earnings guidance because I think that will give you, provide the answer to the broader question. So when we look at the earnings guidance, we obviously have regard to performance of the assets in the first half, but we also look forward to the expectation around performance in the second half. And we also look at the risks and opportunities on an asset-by-asset basis. Seasonality within earnings does exist across the business, although it’s relatively marginal, but when we look at the earnings guidance range we’ve provided, then we’re very comfortable that, based on the risks and opportunities and the expectations for the 6 months ahead then, we’ll land within that range.

Operator: Next question comes from Dale Koenders at Barrenjoey.

Dale Koenders: Hi, I’m back in. I just thought I’d ask another question while I could, Slide 23, where you’ve gone through the outlook for growth, which is really [indiscernible] in EBITDA as well. One of the buckets that’s may be missing from the slide would be earnings growth from organic growth CapEx, particularly given there’s been a lot of CapEx historically into WORM, ECG expansion, NGI, et cetera. You did call out that you do expect some growth from, I think, ECG and NGI going forward. I’m just wondering if you can provide a little bit more color as to where this next sort of step up from organic growth is coming through; any magnitudes that you can kind of indicate towards and [indiscernible] I guess, for Kurri Kurri.

Adam Watson: Yes. I — there’s a — I guess there’s a couple of assets coming online. So one is NGI. And as you know, that ramp up is slower than, I think most people expected, so we’ve made that pretty clear, that that’s going to be “a 3 to 4-year ramp-up.” And like all of these things, they sort of ramp up reasonably slowly. And it’s not until you get to the tail that you see that ramp up fairly quickly as people are racing around, trying to get their products back online, but that is a little bit slower. And we still think that, that will take some time to play out through ’25. The East Coast Grid has come on. It’s a fairly small investment, but it’s come online well. I think we’ve said already that — and we said at Investor Day — I think Darren spoke to it, that the capacity on the East Coast Grid — orders have been very good, but you’ve got to remember that a lot of those assets are fairly — it’s capacity based contracts, so you don’t get a lot of variable revenue upside on those assets. And then Western Outer Ring Main or WORM, as you said, in Victoria: We are just in the middle of commissioning that at the moment, so — but again it’s not a big asset. So we’ll see contributions from those flow through in ’25. You’ll get the annualization impact of the Alinta Pilbara business. And then obviously we’ll start then going through the next phase with Kurri Kurri. I think everyone knows that the customer there is aiming to get that power generator going by the end of this calendar year, so that should start flowing through as well.

Garrick Rollason: And perhaps the only one that I’d also add is Port Hedland Power Station, the solar farm and battery will come online as well. So that was obviously part of the Pilbara Energy acquisition so once again just supporting the business case of — that we acquired those assets based on.

Adam Watson: Yes.

Operator: The next question comes from Rob Koh at MS.

Rob Koh: Good morning. I’m back again. Thanks for all the answers. I guess you mentioned you’ve got your team with you, so I thought I’d ask an open question to maybe give, I mean, the other team a chance. You’ve got a new-ish head of operations. You’ve got a hardworking sustainability team. You’ve also got a head of strategy who was sick at the Investor Day, so it’d be good to hear from any of these excellent people. Maybe the direction of my question is with the foundational investment that the company has been making over the last few years, could you maybe just give us some thoughts on value creation from those investments or any ideas that are coming through, please?

Adam Watson: Yes. And look, I don’t have everyone here. And unfortunately, Ross, who had COVID at Investor Day has just had about 8 pins put in his ankle yesterday with surgery, so I — timing isn’t great for Ross. But look, I think, if you take a step back and look at the investments that we’ve made in the organization — and it’s all generational. It’s the company has done a brilliant job at creating value since inception. And it was sort of an agent stage capability based that was in place until recently that suited the [indiscernible] that the company was in. As we go to our strategy, where we see much deeper opportunity in areas like renewable power generation or [indiscernible] firming, electricity transmission, we’ve obviously had to build our capability in those areas. Electricity transmission is a classic example, where we built that almost from the ground-up. We did it fairly quickly. We’ve got great capability that we’ve developed internally. We are partnered with EDF, but until you’ve got a project — and we’re working through that at the moment. And we still see that very — we look very optimistically at our capability and our ability to be able to win in that space, but all of that cost is sort of going through the bottom line at the moment, so you’ve just got to wear that until you land a project. Then you go to some of the foundational areas like our ERP. Our existing system was outdated, was highly manual. It was frustrating for our people and we’ve had to get that right. You move it to cloud based. You do all those things that go through the P&L, goes up in headlights these days; and in areas like cybersecurity and areas like the security of critical infrastructure legislation that quite appropriately has ensured that we’ve got very strong physical personnel and cyber based security supporting our operations. We had a pretty small sustainability and corporate affairs team. And obviously, with climate transition plans, reconciliation action plans, government and corporate affairs, we’ve had to build that capability, so it has been quite an investment. We were very open and honest about it and — from the start. We’ve been very transparent about where we’re spending that money and the capability. And to answer your question really bluntly and shortly, also simply, I should say, is yes. We absolutely see a strong return on that investment because you can’t win the projects that we need to win with our customers, you can’t face up to one of the big mining customers without having all those foundations in place. You can’t get the right people in the organization if they don’t have the right technology platforms to do their job well, so — and our job, as Garrick said before, is — we’ve made that investment. We’ve got [indiscernible] to go. They’re going well, but there is a point in time where you’ve got to say, “Let’s reset.” It’s generational, again. And we’ve got to really focus and continue to focus on giving back to our shareholders. I’m not saying that we haven’t been, but we’ve spoken about that internally.

Operator: The next question comes from Tom Allen at UBS.

Tom Allen: Thanks for another question, folks. Just on the balance sheet. With FFO to net debt at 9.9%, recognizing APA is facing a significant step up in refinancing and growth CapEx in the pipeline, I hear that the company is committed to BBB, but just to manage the risk associated with rating agencies are changing their minimum leverage requirements, what will be your target leverage range going forward?

Garrick Rollason: Thanks, Tom, and a good question. And I think it’s something we touched on certainly in a bit of detail in the November Investor Day. Certainly as we — the focus of the business is on growth. And that does mean that we need to utilize our balance sheet as efficiently as possible to deliver that growth. That means that our FFO debt has come down, and we anticipate it coming down in the near-term as well. And that’s consistent with our discussions, our engagement and certainly what the credit rating agencies are saying as well. We are comfortable we’ve obviously got high liquidity on the balance sheet at the moment. We are comfortable that we’ve got the capacity and the ability to refinance any near-term maturities, and we’ve also got the liquidity and more importantly the options available across our balance sheet to manage what is a significant future growth capital expenditure pipeline.

Operator: Our next question is from Nathan Lead at Morgans.

Nathan Lead: Yes, thanks for giving another question. I just wanted to draw you to Note 10 of the accounts, where it talks about the consolidation of the GGP. Am I reading this right, that that’s effectively you take the $1,482 million, divide it through by your 88%, that’s getting you to the asset value that you’re coming up with for the GGP. And we can sort of compare that to trailing EBITDA, getting to like a 9x EBITDA multiple? That’s the first part of the question. And then second, with the consolidation onto the balance sheet, does that change the tax profile for APA and [indiscernible] step up the cost base of that asset and get bigger tax shield?

Garrick Rollason: Okay. So from a [indiscernible] we need to recognize that this is an accounting approach to valuation, so rather than an external valuation of the asset in itself, and it’s required from an accounting purpose and there’s quite defined approaches how you have your purchase price allocation as part of this. So at — when we acquired the 11.8%, we were required then to revalue the remaining 88.2%. And that is — that had effectively two stages to the process. One was a revaluation at 100%; and then a deduction of the carrying value. So effectively, in round terms, the revaluation was about 1.5. The carrying value was about 450 million, and that’s how you get to the $1.05 million adjustment in the — that comes through the P&L. So the highlight then: rather than reading too much in terms of [indiscernible] valuation, I’d take this as a fair value of that assessment based on accounting principles or accounting requirements and a requirement that we put that through the P&L.

Operator: The next question is from Nik Burns at Jarden Australia.

Nik Burns: Hi. Yes, thanks. Just back on growth investments, your growth CapEx pipeline on Slide 18, you showed greater than $1.1 billion of growth CapEx in FY ’25, ’26. Can I ask, how much of that is for committed or approved projects as of now versus projects that have yet to be sanctioned? Any color you can provide on that will be greatly appreciated. Thank you.

Adam Watson: Yes. So I guess, Garrick, you can probably go through some of the detail on some of the bigger projects. So some of them are definitely [indiscernible] definitely committed, but the way we come up with the $1.8 is we look at the high probability of a number of projects that we are working through. You’ll recall we spoke about it at Investor Day. We — I think we’ve got 11 projects that are in early works agreements, so we probability weight those as well. And then we included in that some of the — I think it was a couple of hundred million dollars worth of projects under construction, being the Port Hedland BESS and solar that Garrick spoke to before, but is there more color you can provide there, Garrick?

Garrick Rollason: Yes. So I think we have — when we look at our liquidity ratio, obviously one of the determinants there is our committed capital expenditure when we take that in consideration. So we look at near-term committed capital in terms on how we fund that. It’s about $1.1 billion, but specifically, for the remainder of the year, the focus continues to be on Kurri Kurri lateral is probably the expenditure in the second half of FY ’24. So that’s the — that’s about — I think the expenditure over the course of that project is about $450 million.

Operator: The last question is from Ian Myles at Macquarie.

Ian Myles: Hi, guys. Just a quick one. We’ve seen the commodity prices sort of fall, like lithium, nickel, and we are seeing the likes of BHP talking about mothballing Nickel West and the equivalent. Just sort of wondering how is that sort of playing out into your businesses, particularly for some of that West Coast Grid opportunity set?

Adam Watson: Yes. Thanks, Ian. Look, we’ve got — I won’t name names, but we’ve got one customer, for example, that we’ve been working with on a project, but commodity prices have caused them to effectively pause what they’re looking at there. So it does have some impact for those projects that are coming online. That’s not to say that it’s done and dusted forever. It’s just that, as you’d expect them to do, they will sit and reconsider. We — and again I’m not going to talk about any specific customer, but as we continue to see it, it’s — it all remains quite positive in that regard. I think the key takeaway for us — and we spoke about this at the executive the other day, but given the diversity of our business, we are actually reasonably well shielded from those sorts of things. There’s not a year or reporting period where we don’t have an issue that pops up in our results, but they get shielded by the fact that, that rolls off. And then next year, you’ve got something that comes up, but in the overall scheme of things, they’re all fairly minor, so the way we look at that and maybe the broader answer to that question is we are not concerned by that. And certainly we take into account things like commodity risk, mine life, all of those sorts of things as we are working to build new assets for our customers in those sorts of regions.

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

Adam Watson: Again thank you, everyone. I know it’s a really busy day. Hopefully, we were succinct enough to go through that. Look, again really just three key takeaways: a solid financial and operational performance for the half, in line with our expectations. And I think we are demonstrating we are really pleased with how the Alinta transaction has gone and it’s been integrated. And I’d like to really thank our teams for the hard work that they’ve done on that. And then finally, just the outlook, we remain very positive. So again we look forward to speaking with you over the coming few days as we round out the investor engagement.

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