APA Group (APA) Earnings Call Transcript & Summary

Thank you, [ Kade ], and good morning, everyone, and thank you for joining today's call. I want to start by acknowledging the traditional custodians of country throughout Australia and pay my respect to their elders, past, present and emerging. And I'm joined today by our CFO, Adam Watson, in APA Sydney office, and we are on the land of the Gadigal people of the Eora Nation. Before I dive into our results, I want to start by acknowledging the enormous and ongoing contribution of our people. And as we mark the end of what's now the second year of the COVID pandemic, our people around Australia have demonstrated an unwavering commitment to delivering for our customers in the face of the challenges that we've all seen, border closures, isolation requirements and travel restrictions. We simply would not have been able to achieve what we have during the past 2 years. And indeed, in the first half of financial year '22 without the resource on its resilience and commitment of our people. And for that, we're truly grateful. They are what make APA a leading Australian energy infrastructure business. Next slide, please. At APA, we connect Australians with responsible energy solutions that we create value for all of our stakeholders, including our customers, the communities in which we operate, our people and our security holders. In fact, over the past 5 years, we have paid $2.8 billion in distributions, that's $2.8 billion to our security holders. And at the same time, we've continued to invest in and grow the underlying business for the benefit of our customers and our communities in which we operate. And in this financial year '22, we continue our long track record of growth in distributions to security holders while we continue also to maintain investment discipline and a competitive cost of capital. I'll now turn to our safety performance for the half year. And I'm very pleased to say we have achieved a 32% reduction. That's nearly a 1/3 reduction in our total recordable injury frequency rate or tripper. And in fact, in January, our operations and maintenance team and those are the teams. Those folks operate and maintain our transmission our power and midstream assets. They celebrated 12 months with no lost time injury, which I think is affordable and also 6 months without a recordable injury. And that is for both APA employees and contractors. And I think you'd all agree that this is a tremendous effort. Now while these inroads on safety are welcome, safety must and will remain an area of relentless focus for us. And we know, of course, that we have more work to do, especially as it relates to our contractor workforce. And we've again delivered high reliability operational performance for our customers, with 99.9% of our customers' gas transmission nominations being delivered. And what that means is that almost 100% of the time our customers get exactly what they asked for. And that's consistent with our focus -- our customer focus and our focus on our customer promise. I particularly want to call out one exceptional example in Western Australia recently, which experienced a record heat wave. In fact, temperature is exceeding 51 degrees. And these heat wave conditions, coupled with very high demand from our customers in the resources sector, put enormous stress on the operational performance of our Goldfields Pipeline, which runs from North to South to Western Australia, serving those regions. But it was extremely pleasing that our Goldfields Gas pipeline maintained reliability throughout this period, continuing to deliver energy for our customers, predominantly mining customers and it's a testament to the combined hard work of the high-performing APA team. Next slide, please. Now this strong operational performance, which I just talked to underpin yet another extremely solid financial performance. And we continue, at the same time, to make strong progress on the execution of our strategy, laying the foundations for future growth. In our half year results today, pleasingly, reflects growth across all segments of the business, with particularly strong performance from our Victorian Transmission System and also the Diamantina Power Station. Our revenue is up 4.3%. Underlying EBITDA is up 4.5%, and our free cash flow is up 22.6%. And our distribution growth reflects strong cash conversion, the benefits of our March 2021 debt refinancing activities, it's a little under 12 months ago as well as a positive outlook for the business. Our distribution of $0.25 per security is a 4.2% increase on the same period last year and our financial year '22 distribution guidance of $0.53 per security is maintained, and that's a 3.9% increase on financial year '21. Our results also benefited from tariff escalation with almost all of APA's revenues linked to either Australian or U.S. inflation rates. The recent increase and forecast of higher inflation rates will continue to support APA's future revenue growth. Next slide, please. And I'll now touch on the strong progress we've made in the execution of our strategy. And to that end, our existing portfolio and organic growth pipeline, continues to give us confidence about our capacity for growth. And I'll give you some examples. We're responding to the changing energy needs of our customers with our Western Australian microgrid, which is close to full operation. And this is APA's first microgrid investment, and we'll see our customer reduce their operations emissions through a combination of solar battery storage and gas generation. We're also continuing to expand our energy portfolio, and you would have seen our recent announcements to invest in the Mica Creek Solar Farm in [ Mount Isa ]. We continue to work on the proposed Kurri Kurri Lateral Pipeline in the Hunter, and that's become all more important with the recent news of Origin's Eraring Power Station close have been brought forward 7 years. We're actively engaged in 2 major hydrogen feasibility studies, 1 green and 1 blue, and they have the potential to unlock future energy technologies. And in an Australia first, we're also proposing to test Victoria's high-pressure gas transmission system to safely blend hydrogen. This is part of our Victorian transition system, access arrangements, emissions to the Australian Energy Regulator or AR. And this, together with all the other aspects of that access arrangement submission was tested through extensive stakeholder engagement over the course of the past 12 months. And as we execute our strategy, which clearly we're very focused on, we all -- of course, will maintain a disciplined approach to the way we invest and a commitment to keeping our balance sheet strong. I'll now turn to our core portfolio. We all know that around the globe, there's a fundamental rebalancing of the energy mix underway, and it's accelerating. And in Australia, we are right on the forefront of this change. And you can see from the chart the significant role that coal currently plays in our energy mix makes up nearly 65% or 2/3 of the generation mix in the National Electricity Market. That's an enormous contribution to our energy mix from a fuel source we know is being rapidly withdrawn. Indeed, I've already mentioned Origin's plans to close the nation's largest coal plant, which is responsible for 20% of the electricity in New South Wales and provides 7% of the NIM capacity, and this will be closed or forecast to close 7 years earlier than previously forecast. As the energy transition gathers pace, we are extremely confident in the critical role that gas will play. Gas is substantially lower in emissions than coal, and we're confident it will grow its share of the energy mix, complementing renewables as coal comes out of the system. And on that topic, we saw in the January letter from Larry Fink to where he also noted that gas is essential to ensuring the continuity of affordable energy supply. And plain fact is that with coal coming out renewables just aren't capable of doing all of the heavy lifting and won't be capable of providing the grid stability that Australia needs. And while we are supportive of the role that batteries will play in our energy mix -- and in fact, we are investigating battery opportunities ourselves. Gas generation is the perfect and natural companion to variable renewable energy for providing undermine peaking power and long-duration firming. And the next slide is a real-world example of the crucial role gas does and will continue to play. Now the experience in South Australia provides a useful case study, and I'm going to spend a little bit of time on this because it's really important. And it should be noted that the South Australian situation in South Australia is where we have a state that is not -- has not been a heavy user of coal-fired generation to begin with. The transition there is years ahead of other markets. And you can see firsthand the critical role played by gas as coal has been withdrawn from the system. And over on the chart, you'll see that gas has stepped in to provide 35% of South Australia's energy today, or electricity today. In fact, investment in gas generation was required in South Australia in 2019 to further firm renewables and support for reliability, and that will be the case in other markets as the energy transition gathers more pace. Now it's not just the APA house view. The draft 2022 AEMO Integrated System Plan or ISP, which as you know has released before Christmas back us up and it noted that by 2050 in the step change scenario that without coal, the NIM will require 9 gigawatts of gas-fired generation in total [indiscernible]. This coal is withdrawn elsewhere across the NIM at ever increasing rates and including in states that have a far heavier reliance on coal today, and then the South Australian example, our Eastern states like Victoria, New South Wales and Queensland, we should expect that gas will have a similar trajectory, but on a much bigger scale. And indeed, we've seen this in New South Wales ready with the development of the Hunter Power Station, the Kurri Kurri and now with the Eraring forecast to close in 2025, we should expect gas to step up yet again. There's no doubt that the energy transition presents enormous opportunity for Australia and for APA. But as a nation, we do need to ensure we keep the balance, and we do need to continue to invest in the old to ensure that we keep the lights on as we transition to the new energy systems of the future. And we only need to look at the experience in Europe for a real-world demonstration of what happens when ambition gets ahead of reality on the ground. That's why we continue to invest in gas and gas infrastructure with the absolute confidence that this essential role of gas will continue well into the foreseeable future. And moving gas around our East Coast group to maximize every ounce of capacity that's required to support gas demand and electricity generation will be front of mind as we expand our East Coast Grid by 25% linking Queensland with Southern markets. I'm now going to turn to our organic growth pipeline. Consistent with our vision to be world-class in energy solutions, our organic growth pipeline is responding to the needs of our customers. Our East Coast gas grid expansion is underway as is our Northern Goldfields interconnect pipeline. And as I talked earlier, we are working exclusively with Snowy Hydro to develop the pipeline and the storage for the Hunter power station. At the same time, as I mentioned earlier, our first hybrid energy microgrid investment at the word mine site is expected to be operational by the end of this financial year. You would be aware that we have recently announced the 2-stage development of our Mica Creek Solar Farm[indiscernible] . And our investments at Mica Creek are in direct response to the enthusiasm of our customers in the region for integrated energy solutions that can meet both their energy needs and also reduce their operational emissions. And it's important to note that gas continues to play an important role in that. There was continued strong interest from our customers, APA investigating a potential third stage expansion, which we'll update you on in due course. And our vision for the region is for a world-leading hybrid energy grid. And as part of that, it's our exploration to support the further increase in renewable energy. Importantly, our aspiration can be delivered without government subsidies and without imposing what's an effective tax on Queens in energy users, which is in stark contrast to the CopperString 2.0 proposal which is currently subject of a consultation regulatory impact statement or CRIs. And we're pleased to be able to continue to provide our customers with energy solutions that support and diversify the Northwest Minerals province with affordable and renewable electricity. Next slide, please. Now consistent with our strategy, we're also pursuing growth through disciplined M&A and the potential acquisition of Basslink is consistent with our strategy to expand our electricity transmission footprint and invest in renewable energy sources. The successful acquisition of 100% of the bank debt in Basslink, which we announced just earlier this week, we're very pleased about it and provides with the opportunity now to work with the receivers and managers to put Basslink on a sustainable footing going forward. And it further demonstrates our commitment to supporting this critical energy infrastructure so that it can continue to deliver reliable interconnected electricity between Tasmania and Victoria and into the national electricity market. And if we are successful in acquiring that thing, we will work with hydrogen many of the customers, the state of Tasmania, the Australian energy regulator and other key stakeholders to convert Basslink be a regulated asset. And with that in mind, I'll now get a snapshot of the key role we see ourselves playing in the energy transition here in Australia. We are committed to the energy transition and a low-carbon future. Importantly, existing gas infrastructure is not just essential for powering the nation today, it will also be essential to the delivery of cleaning -- that delivery of clean molecules into the future, such as b[indiscernible] gas and hydrogen, which are likely to be critical additions to our future energy mix. And in this regard, we are making good progress on our pipeline program initiatives. And our first hydrogen project is targeted at enabling the conversion of the section of the Parmelia Gas Pipeline in Western Australia to be Australia's first 100% hydrogen-ready transmission pipeline. And importantly, in that regard, Phase II is now underway with lab testing of the pipeline materials in gases hydrogen conditions. As I said earlier, we've also a proposal under consideration to develop what's effectively going to be Australia's first blueprint for hydrogen blending in Victoria, which if approved would test the Victorian transmission system, which is the excess of 2,000 kilometers of high-pressure transmission pipeline for the safe transportation of hydrogen. And this -- as part of that, we would leverage the well-advanced work, which, as I mentioned earlier, is already underway on the Parmelia Gas Pipeline. As well as the green hydrogen feasibility project in Central Queensland, in Western Australia, we are actively supporting a feasibility study to identify opportunities to commercialize and distribute low-cost blue hydrogen. You'll be aware of our ambition for net-zero operations emissions by 2050 and our commitment for interim targets, and those were aligned with the Paris Agreement. And I'm pleased to say that work is well underway, and we look forward to updating you in due course as we finalize what is some important work. Importantly, we have also made strong progress on our sustainability road map. And during this financial year, we've prioritized a number of issues that we believe can be built into strength. And some of these steps include embedding the management of Scope 1 and 2 emissions into our strategy, commencing our necessary climate program. We've joined the UN Global Compact, and I personally joined the CEO Climate Coalition. Now I've committed APA to taking action on climate change to support the Paris Agreement commitments. We've also accelerated and evolved a number of other initiatives, including introducing a set of employee entitlements that embrace a new generation of family friendly workplace policies. And I hope to say it's been well received our employees. And that's -- it's focused on boosting primary parental leave benefits to be among some of the best in the country. And so with that, I'll now hand over to our CFO, Adam Watson. Thank you.

Thank you, Rob, and good morning, everyone. So to echo Rob, we're very pleased with our financial results for the half, which builds on the positive momentum we saw towards the back end of FY '21. At the macro level, our revenue was 4% higher than last year. EBITDA was 4.5% higher and our cash flow was up 23%. All of our segments delivered EBITDA growth, our distributions are 4% higher and we continue to have a very strong balance sheet. Our results reflect our strong operating model. We have solid foundations, such as our inflation link revenues, which delivers stronger earnings in rising inflationary environment. Our strong cash flow conversion is another foundation, which allows us to appropriately balance our desire to internally fund our investments and concurrently reward our investors with healthy distribution. We govern to manage these foundations through our capital strategy, which continues to serve as a critical tool to create value for you, our security holders. So let's kick off our analysis with a summary of our revenue growth on Slide 17. On the basis, we largely generate revenue by selling capacity. Our key drivers of revenue growth continue to be tariff escalation and contributions from new assets. And the latter is why our organic development pipeline is so important. So starting with tariff escalation, I'll remind you that almost all of our revenues are inflationary. Our Wallumbilla Gladstone Pipeline, or the WGP, is linked to U.S. inflation and reset each January based on the prior November rate. For the calendar 2022 year, we will see our WGP revenues escalate by approximately 7.5%. Again, that's for the calendar year 2022. Our other assets typically escalate revenues based on either quarterly, biannual or annual Australian CPI adjustments. This had a positive impact on our first half results, and we would expect this trend to continue through the second half and into FY '23. We delivered good growth from our energy infrastructure operations during the half. And like Rob said, the 2 standouts for the Victorian transmission system, which benefited from its variable revenue model and we had strong customer demand at the Diamantina Power Station. Furthermore, our operational performance at Orbost flows through our Victorian results continue to show incremental improvement. Our asset management activities were also strong during the half across all states, driven largely by a number of asset relocations and a number of refurbishment project. Recontracting has been topical in the last couple of reporting periods, and we continue to remind our investors that we are a business with many contracts that cover many different types of services. Contracts can be long or short in duration, depending on the service being provided and recontracting is a part of our day-to-day operation. What enables APA to deliver stable earnings each year is the diversification of our business. We operate across different markets and different customer segments. We provide a range of services across the range of assets. We have a range of revenue models. And this means we are well placed to withstand market volatility good or bad, to deliver consistently solid results throughout our investors. Moving on to our costs on Slide 18. I'd like to firstly acknowledge the operations and maintenance and the procurement teams, in particular, who continue to drive operational efficiency improvements. You can see that despite the rising inflation, we have kept our operating costs flat during the period. Importantly, this was done without compromise to our safe and reliable operations, which was impressive. You can see that we increased our spend on strategic growth projects, which was largely a result of our bidding costs associated with the proposed acquisition of [indiscernible] and a proportion of our costs associated with the acquisition of our interest investments. Our corporate costs reflect the intentional investment we are making to strengthen our capability. This is crucial to ensure we are well positioned to pursue our growth opportunities and ultimately, create sustainable long-term value for you, our investors. The growth you can see here reflects the program of work that began last year. They are in a large part, the annualization of costs associated with our investment in areas such as sustainability and community and business development. Evidence of the financial returns we generate from these investments can be seen with our $1.4 billion organic development pipeline, which continues to grow and can only come from an ongoing investment in areas such as business development. We've seen insurance premiums again being higher during the period, and you can see the higher cost of regulatory compliance also coming through our cost base. We are enhancing our investment in critical areas such as physical and cybersecurity, and we are investing to enhance our systems and processes to become more efficient and more scalable. These investments improve the way we get things done at APA and go a large way in making us an employer of choice. Our ongoing investment in systems, processes and again, importantly, our people, will ensure we have the capability to capitalize on the significant growth opportunities before us. We'll continue to invest in our business because it creates long-term value. To touch briefly on the supply chain issues being faced by many organizations, I'm pleased to say that we have been well protected thus far. Again, a call out to our operations and procurement teams who have been well equipped to deal with such issues by maintaining a solid inventory of spares and having arrangements in place with key suppliers to ensure we can continue to reliably service our customers. That said, we monitor the situation closely especially for our development projects that will continue to rely not only the delivery of products and services to construct our new infrastructure assets, but also a mobile workforce. We remain cautious about our ability to mobilize our team in certain states to deliver these critical assets, given the dependency on government policy about the mobility of Australia's workforce. Nonetheless, though, we are pleased with, for example, the recent West Australian Western Australian government announcement that it will be opening at borders, which is very important to ensure that we have a workforce on the ground to deliver the projects we have underway in that space. Turning to Slide 19, and our solid earnings growth in recent capital management initiatives have been instrumental in delivering strong free cash flow growth during the period. The liability management exercise executed in March last year has delivered tax savings and more importantly, sustainable interest cost savings. We said the transaction will be value accretive, and we said it would be free cash accretive, and you can see this being delivered in our results today. The lower tax payments are also as a reminder, owing to the federal government's accelerated depreciation allowance for capital projects, which continued through to June 2023. We -- we've had a benefit to working capital during the period, owing in part to a number of noncash items that have flowed through both the P&L and the balance sheet. And as such, we didn't incorporate these cash flows into our assessment of the interim distribution. And we had lower same business CapEx during the period, which last year was unusually high, again because of the overhaul work at Diamantina. Looking forward, you can see that we continue to make strong progress with our organic growth pipeline. As seen on Slide 20, it has grown against since FY '21 and now stands at $1.4 billion. This now includes the Mica Creek Solar Farm, and we remain confident about our long-term pipeline of activities across a range of energy sectors, including gas, electricity and renewables. We would expect this to continue to grow as the retirement of coal from our energy system accelerates. Importantly, our organic growth pipeline is an indicator of the healthy earnings growth we can deliver over the longer term. We referenced our capital strategy on Slide 21. I said earlier that our capital strategy is fundamental in supporting our resilient business operations and to facilitate growth. We continue to strive to deliver value for our security holders and use our capital strategy as a tool to achieve this. And again, our liability management exercise undertaken in 2021 is an example of this in action. Moving now to Slide 22, where we address inflation, which has clearly become very topical of late. The purpose of this slide is to remind our audience about the favorable exposure we have to a rising rate environment. Almost all of our revenues are inflation linked. Our biggest cost, interest is currently fully hedged. We don't have any material refinancing due until 2025 and with an average debt maturity of 7 years, we are well protected from potential future interest rate prices. Now typical of a capital-intensive infrastructure business, we also generate high margins. That means that when we couple our tariff estimating revenues with a favorable interest rate exposure and high margins, we would expect to see a significant amount of the benefit to our revenues as a result of inflation flowing through the cash flows, which can be then reinvested in the business or passed on to you, our investors by way of distributions. Moving to Slide 23, and we know that a strong balance sheet is essential to support growth and to protect the financial interest of our investors. Our balance sheet puts APA in a very strong position to execute our strategy. Our liquidity remains healthy at $1.8 billion, and we sit comfortably within our ratings and with significant headroom available for us to support the funding of growth projects and/or to potentially consider other capital management initiatives. We remain highly confident in our ability to deploy capital to pursue growth that will enhance security holder value over the longer term, and we will continue to remain disciplined in that regard. Equally, we are updating our constitution to facilitate buyback which we may choose to implement if we believe they would deliver superior security holder value. Given our substantial credit metric headroom, our choice to use the capacity in our balance sheet to fund growth or to fund buybacks is not mutually exclusive. They can be done together. Ultimately, we are ensuring we are best positioned to have the flexibility to deploy our capital to initiatives that create value. Now to our outlook on Slide 24. Firstly, we remain confident about the long cash generation of the business. This is evidenced by our $0.53 per security distribution guidance for FY '22, which represents a 4% increase on last year. I'll remind you again that APA has almost all of its revenues inflation linked. Our exposure to rising cost is minimized by a higher margin, which means we've seen most of our revenue gains flowing through to cash flow. And our drawn debt is currently all fixed with no material refinancing due until 2025. I'd just like to touch briefly on our WGP, our Wallumbilla Gladstone Pipeline hedging arrangements. When we acquired WGP in 2015, we hedged our exposure by establishing a series of U.S.-denominated debt facilities to create a natural hedge as well as entering into a series of forward exchange contracts. These contracts expire in March 2022, we have just entered into new contracts, which will expire in 2025. These new contracts will ensure we minimize any effect impact on our reported earnings and cash flows. There is, however, a difference in the FX rate between the natural hedge that was originally established for the upcoming period and the new exchange contracts that have just been put in place, which will result in our annualized revenues in Australian dollar terms being approximately $36 million lower than when compared to the old position. Importantly, this has only an accounting impact on EBITDA, and it will not impact our free cash nor our distributions. I just need to underline that. It will not impact our free cash nor our distribution. And you can find more detail about this in our directors' report. We will also continue to invest in systems and process enhancements to ensure we are more efficient and scalable and importantly, to make APA an even more attractive place to work. So to make a few concluding comments. Our results reflect our strong operating model, including our inflation link revenues. Our cash flow conversion allows us to internally fund our investments and reward our security holders with healthy distribution. Our capital strategy continues to serve as a critical tool to create value for our investors and we will ensure our investments continue to create long-term value. We remain confident about FY '22, and we remain confident about the years ahead. Thank you for your time, and I'll now hand it back to Rob for his closing remarks.

Thanks, Adam. And as Adam said, I'll make some concluding comments. We've, once again, delivered a solid performance in this first half of financial year '22. And it's a result which, as you can understand, we are very pleased with. We continue to create value for our stakeholders, including our customers, communities and our security holders. And as the energy transition accelerates, I am absolutely confident that we have the right strategy, the right capabilities, and the balance sheet strength to deliver on our vision, which, as you know, is to be world-class in energy solutions. Our organic growth pipeline is pleasingly grown by some 40% in the last 12 months. And our strategic investment in vesting, which we announced earlier this week, will see us expand our electricity transmission footprint, paving the way for further investments in this asset class. There are enormous opportunities in front of us to participate in the delivery of electricity transmission, particularly in New South Wales as renewable energy zones, and we are determined to play a role. At the same time, the rapid retirement of coal will place even greater demand on gas as a vital transition fuel, giving us absolute confidence in the role of gas for many, many years come. We're also investing in the energy solutions of tomorrow and determined to see the full potential of our Pathfinder innovation initiatives come to life, delivering the responsible energy solutions that will be vital to Australia's future and key to our net-zero ambitions. Just as we have over the past 20 years, we will continue to grow and evolve our business to ensure APA remains an energy infrastructure leader, and that's consistent with the brand which we relaunched last year, APA standing always powering ahead. On that note, APA is a great business, strong foundations and a significant opportunity in front of us as the energy markets transition over the coming decades. And I want to thank you for your attendance today, and we'll now move to questions.

The first question comes from Tom Allen from UBS.

I was hoping, first, if you could please provide some color on the underlying contracting outlook for the base business. Just with East Coast gas prices expected to rise strongly over the next few years and imported LNG is looking very expensive. So are you seeing stronger demand for contracting gas transportation to bring Northern Australian gas out into Victoria and New South Wales.

Good day, Tom, and thank you. Look, the short answer to your question is yes. But maybe you could elaborate a little bit more. If we look at what's happened during the half and in fact, the last 12 months, we've seen a lot of interest from customers seeking services to move gas out. And that is further confirmed with comments from the ACC, I think, last week pointing to the shortfalls in the South. We initiated our expansion of our East Coast gas grid a little over 12 months ago of that order. And with a 25% increase in capacity from North to South. That project is well underway, and we're seeing strong demand. As you know, the pipeline system between Queensland and Victoria is fully contracted and all the discussions we are having currently with customers in relation to that new capacity. So short answer was, yes, the longer answer is also yes.

That's good. That's helpful. And just following the theme of the week around the impact of accelerated closure of coal-fired generation. Can you describe how your customers might contract for an increasing reliance on gas power generation going forward. So arguably, the total volume of gas demand might decline over time. But if your customers need the option to put gas into generation on any given day, they be needing to lock in the same capacity on your pipes going forward? Or are you offering new higher-priced tariffs that offer greater volume flexibility going forward?

Tom, the services that we've offered our customers in the past, I think it will be a similar source of services into the future. They need the ability to get gas close to where their power station is located and the need they need storage close to the power station. We contract -- and effectively, the capacity in the pipeline can be used either as you know, either as transportational storage. I would expect to see that the sort of services we offer on the go forward will be structured similarly, which reflects the need for customers to have the ability to refill and the ability to have gas on hand to meet the peaking pounds of power stations. So the -- you're right that -- over time, we might see with the role that peaking power stations will play, sporting variable renewable energy will not be a consistent flow from a day-to-day hour to hour. But when it is needed, that capacity will be needed to[indiscernible] firm up the energy needs.

If I can just sneak one last question. Just hoping you can help us understand the long-term strategic value for Basslink. So recognizing the asset technical limits have been deviated a couple of times and perhaps it hasn't met the needs of hydro, gas. Can you help us understand what the future suite of services might look like that will provide the service at Hydro Tasmania needs. And then also maybe just a comment on the long-term need for that asset if Marinus Link were developed.

Yes, it's Tom. Well, look, first of all, that investment in acquiring the deficit with that asset is a step towards ownership of the assets, which is consistent with our strategy to invest in electricity transmission infrastructure. So this is a stepping stone to more capability and more investment in that space. As to the next steps, clearly, having acquired the debt, we'll be engaging with the receivers and managers with the state of Tasmania with the customer Hydro Tasmania to Tasmania to work through what the commercial arrangements will look forward. So look to on an ongoing basis. And clearly, we'll be very much focused on the needs of what our customer -- what the customer will need, that's Hydro Tasmania. And that's a critical piece of infrastructure. It's the main connection between the State of Tasmania and the Mainland and obviously, whilst directionally, you've got more -- you've got hydro and wind generation going from the states, Tasmania to the Mainland equally also support provider, security of supply in times of hydro and wind[indiscernible] . As to the question, what is the long term, we see the tremendous opportunity working with the state and federal government for the -- to deliver their vision around the Marinus Link. There's also a significant investment required in the battery of the nation and associated wind. So I think sticking with the subsea cable and the transmission of the Marinus Link, there will be synergies associated with operating a parallel piece of infrastructure, coordinating outages. There's a lot of information that has been learned over the years around the subsea and how that operates. So I think there's tremendous opportunity for us to position itself to support the state and federal government delivering on their vision.

Your next question comes from Rob Koh from Morgan Stanley.

Congratulations on the result. Can I ask just a further question on Basslink. Do you -- are you able to give us a sense of where the DOSC, the DOSC value of that asset is perhaps in relation to the debt that you might buy?

Thanks, Robin. Firstly, thank you for your comments. So we're very pleased with the results. It's a solid result for the back of strong performance then again, we'll say executing on our growth initiatives. It's not a number we've talked about publicly. And clearly, that's one of the processes that we'll be going through is the next step. Obviously, we need to seek to acquire the asset first and work with the receivers and managers to do that. Then we'll be engaging with all stakeholders including the AR in the determination of the regulated asset base on a go-forward basis. And as you know, there's a number of different methodologies, not just the DOSC associated with that. Yes. I know I haven't answered your question specifically, but it's a piece of work that is obviously quite detailed and that we'll be engaging with all the right parties to work through.

Yes, yes. No, that's -- totally respect that. Okay. Perhaps a question for Mr. Watson, if I can. Thank you for the extra color on the FX hedging. You promised that you'd update us on that. And in the notes to the financial accounts, it mentions that there's about $130 million of noncash FX loss. And so yes, I totally get it in noncash, we're not that worried. But just will that be coming out through the underlying EBITDA line over 22% to 25%? That's I guess part 1 of the question. And part 2 of the question is could we be looking for more U.S. dollar revenue in the company in the coming years?

Thank you, Rob. So answer to your first question is that is our intention. We would like to put those noncash FX impacts below the line. So you'll know that there's the mark-to-market that we have on one of our wind farms things like SaaS costs, which historically have been capitalized -- weren't overly material in this half, but we'll be making further investments over the next couple of years in our systems to ensure that they're more scalable. So those costs would have ordinarily gone and sat on the balance sheet so we put them below the line. And this is another one because it relates to the hedging transactions to the past and effectively an amortization to write off the old hedging relationship. That is certainly our intention. Our intention is to make sure that the results that we present as an underlying number are as clean and representative of the operations of the business rather than the accounting things that we have to deal with on a periodic basis. So we'll be transparent. Rob, we'll call it out, but that is our intent is to put it below the line. I think the answer to your second question is more so in the cash flows from WGP. I don't think you're asking if we're going to try and write new contracts in U.S. It's more for us the WGP contract in. Look, this is a story which is not the similar to the rest of our business in Australia as well as that we're going to be beneficiaries of a rising inflationary environment. And in particular, which is based on a series of U.S. inflation indexes is going to do quite well in this calendar year in calendar year '22. As I mentioned, a 7.5% increase in that escalator. The thing to remind people though is that we've just come off a period of 2 or 3 years with very flat growth in our business because inflation was low. So we're not crowing about this. Yes, it's a good operating model for us to exposed to. And again, we're going to be beneficiaries of what we're all expecting to be a little bit more of the norm moving forward. But that's the point is that we take risk as an infrastructure owner and operator and developer. A lot of capital that gets put into the balance sheet, a lot of capital that gets put into these projects. And from a customer perspective, we take risk on that and we take the positives, we take the negatives. And over the life of the asset, you expect for that to sort of average out to a good return for us and a good product and a good outcome for our customers.

Yes. Okay. Cool. Yes, what I actually meant was like are you still looking at U.S. investments?

You mean strategically with. I'll hand it over to Rob.

Probably got an answer to another question that you didn't answer...

But just good answer that. I'm happy with that.

You can take the one off your list now. Well, look, if your question was our folks in the U.S., look, I think the short answer is Rob, as you know, we remain very focused on that market being an attractive market. The energy transition is underway. There as it is here in Australia, as it is elsewhere. Significant investment required to support that transition. And as you know, we've communicated that our focus in the U.S. has shifted to also include electricity infrastructure, and that's been the focus of the team on the ground is doing -- is extending their look into those sorts of assets. And well, I think we've said this time and time again, and little bit I'll repeat it because it's important. We will remain very disciplined in the way we think about any opportunity we'll remain cautious as we think about what those opportunities look like, but we are optimistic about what the future looks like in the U.S. when we have something to talk about, then we will bring it to our investors because on the basis that is value accretive.

Your next question comes from Ian Myles from Macquarie Equities.

A couple of quick questions. Southwest Queensland pipeline. I think IPO contract was diminishing. You actually performed really well there. I was just sort of wondering what's driven that specific performance in the pipes.

Yes, it's Rob here. I think that might be a question we can take on one-on-one. I think we don't have detail there. But obviously, what we do see from time to time is different services for customers as their needs change, and that's a sort of more generic answer, but we'll be sure to give you a more specific answer.

Orbost, what actually happens after May '22 when it stands to finishes?

Thanks, Ian. I'll take that question. Look, the -- first of all, I think what I would say is we are very pleased with the recent performance at the Orbost plans, and that's been the work of a very focused piece of work working with our operations teams, our technical teams, together with their external experts and also with our customer, Cooper Energy. So we're pleased with the format the plan is now. We're continuing to focus on -- continuing to improve that performance. And alongside all of that, we have ongoing conversations with our customer, Cooper Energy, around what those long-term arrangements will look like. And when we've got something to talk about, then we will do if we jointly communicating that.

Okay. A couple of others. On the Kurri Kurri plant, the lateral which you're building, does that have capability of actually doing double the volume or are you staying to hit physical constraints on the supply pipeline, which Jamena owns so you wanted to double the size of the plant? Could you actually manage that?

Ian, that's just in general terms, what we're doing with that lateral, and that's the work and the design was all done prior to this last week's announcement. And some thinking about some media commentary around potentially increasing the capacity of that plant. But because of the size of the supply coming out of the Jemena asset, we've obviously been very focused on making sure that the lateral as it gets close to the power station has then turns into effectively a large storage capacity to meet the needs of that power station as to whether or not that will -- that storage capacity will be revisited in the context of the more recent developments. We'd love to come back to you on that. I think that will now be some -- be part of any discussions between our commercial team and Snowy Hydro.

Okay. And 1 final question. Hydrogen, you talked about it going into the DTS and considering. As far as I was aware hydro has a lower energy density at the same pressure as the current pipeline. I guess, how does this system -- or how do you envisage the system of work if you're effectively delivering lower energy or carbon molecules to your customers?

Look, as you know, there's a lot of work to do not just here in Australia pipelines but globally on understanding the answer to those questions. But very simply, the way we deal with the expectation, whether it's the Victorian system or any other system is that the way you deal with any potential safety risks around the transportation of hydrogen is you lower the pressure or you change the way you operate with recycling and pressuring up and pressuring down. Your comment around lower energy value, what that translates into meaning for the same volume, you move less energy. That is true. But I think all of that work is work that will be done and will be the subject of that study that we're doing. But more importantly, I think we've got more than 2,000 kilometers of pipeline that connect up Victoria to customers, whether they're industrial, commercial, residential, there's talk of blending it into the distribution system and that would make absolute sense that we think about how we can blend hydrogen safely into the transmission system as well.

Your next question comes from Jack Trevyenger from Barrenjoey.

Just a quick one for me. Can you talk around how you think about organic and inorganic growth opportunities relative to potential capital returns for excess balance sheet capacity given the ESG backdrop and outlook for increasing interest rates.

Thanks, John, and thank you for your question. Look, we're always very focused on creating value and whether that value is through growth, which could be a function of organic or inorganic or through balance sheet management, capital management, and a number of things that we're always looking to do in that regard. We're always going to be focused on what -- in particular, what our customers are needing on our network, whether it's further expansion in gas services or expansion of our renewable energy services, which, as you saw just prior to Christmas, we announced the development of the Mica Creek Solar Farm but I think what we didn't maybe talk about, and we should have be the fact that, that didn't come about just because we can build and own an operator inside a farm because we can integrate the flexibility in the way we operate the pipeline, the way we operate the power station to support firm renewable energy in that region. Short answer is, to your question, we'll always weigh up the organic and the inorganic -- sorry, the inorganic and the organic opportunities that are in front of us. I think that's probably all I can say on this looking to Adam, whether you want to add anything to that answer.

I think the only thing I'll add, Rob, is that we're in a position where we can do both. So again, I'll just underline what I said, which was our capacity to do to fund growth or to fund something like a buyback that is not mutually exclusive. We've got a really, really strong balance sheet, got a lot of capacity on the balance sheet. And when we look at growth, we're always going to be looking at it through the lens of creating value for our security holders. If we can do that through growth, then that's great. if we've got a bit of excess capacity, and we want to return some of that to our security holders, we can do that and the whole point of us flagging what we've done, which is to get our constitution right to be able to do it is to really just make sure we've got the flexibility to be able to do what we think is best at the right and most appropriate time to create value for our maturity holders.

Your next question comes from Peter Wilson from Credit Suisse.

Just a question on the Northern Gold Fields Interconnect. I recall that it wasn't going to enter into new contracts as set on the rest. Is there any update on kind of new contracts with customers? Or do we have to wait until that one's operational before you can start to sign new customer contracts?

Peter, it's Rob here. Thanks for the question. Look, we're obviously very excited about the Northern Gold Fields Interconnect project. is an innovative project as we now create that additional capacity on the Goldfields pipeline whilst also connecting and other supply sources and it's obviously a more cost-effective way of delivering that capacity. Before I get to the answer to your question, the timing of the project, we had -- has slipped largely due to the -- well the first date of operations of that interconnector has moved into, and I think, first quarter -- end of first quarter next calendar year, and that's really off the back of delays in getting the necessary approvals, and we're just about to go button the actual construction activity. Why that's important is we've actually got a whole bunch of contracts all lined up ready to execute about 25% of the capacity. And once we've been waiting for that certainty around first date of services. And so our team will now move to concluding those arrangements. And the other thing I'd say is that the list of opportunities that we saw in that market, and we know that market well. The list of opportunities we saw when we hit the go button and the financial investment decision to proceed is now greater than it was at that point in time. So the market opportunity is not only remain -- we remain confident because it's actually grown from our point of view, and that's why I said at the outset is an exciting project for us.

Great. And then, Rob, I guess I'd like to know what message you think we should take at the VTS proposal. And specifically, what I'm talking about is while you've paid a pretty positive picture on the outlook for gas demand and sales presentation, the VTS draft proposal has an accelerated depreciation profile and the new 30-year cap on asset lives, which in your proposal, you argue is more consistent with the risk associated with net zero. So I guess I was just wondering what -- what should we extrapolate from that VTS proposal to the rest of your business in terms of that 30-year asset life cap, the need for accelerated depreciation, et cetera.

Yes. Good. Thank you for raising the question. It's a complex area and the list of issues that have to sort of navigate through on the Victorian transmission access arrangement has been significant. But on the one hand, we've got government in Victoria. We've got customers and we've got AEMO, all looking for us to invest now to support security of supply over the coming decades and decades. On the other hand, I've got the Victorian gas substitution road map, which is saying that's targeting the movement to -- away from gas to electricity. And off the back of that, that led us to conclude through a lot of stakeholder engagement that it probably makes sense and is prudent to think about accelerated depreciation now so that we can manage the generational cost of that. So that it's not left if it were to happen, that's not let for people and customers later down the line. But then the other complication, of course, is that we see significant opportunity, not just in the role of gas going forward, but also to be able to transport hydrogen. And that's why we've included an IS arrangement the study and Blueprint to do that. So it's a complex area. And the important thing is we think that it's prudent to start thinking about accelerated depreciation, once there's more clarity around either the transition to hydrogen or the longevity of gas in the system and that acceleration can either -- can be slowed down if that was necessary. Now how this relates -- the other part of your question, how does it relate to other assets? Well, that's a particular case example where we have a government with a consumption paper house on gas substitution. Clearly, our view is that, as you would expect, that you take a peak winter day in Victoria, there's twice as much energy going through the gas system as there through the electricity system. And so then you see the 65% or more of electricity in Victoria comes from coal. So the obvious starting place to decarbonize is taking coal out of your system. And you don't want to be doing that at the same time as you're taking gas out of your system. I think we -- as I said in my comments earlier, we've seen that happening in Europe. They've recognized their mistakes and where ambition has gotten ahead of reality and the change in tack and you would have seen the European taxonomy, recognizing the importance of gas as part of generation. Look, I know it's a long answer to your question that the fact is it is uncertainty, and that's why we try to juggle both the accelerated depreciation side of things as well as focusing on the hydrogen, the ability of the pipelines to carry hydrogen into the future.

Thank you. This does conclude the question-and-answer session for today's conference. I'll now hand back to Mr. Wheals for closing remarks.

Well, thank you very much, everybody, for your attendance today. As I said, in our commentary today, we're very pleased with what is a very solid result. Strong performance from the business, good delivery against our strategic objectives. And we really are confident around the role of gas and the role of our gas infrastructure into the future, but equally really focused on the role that we can play in the energy transition, of which there is abundant opportunity. So thank you for listening in. Thank you for your questions, and we look forward to catching up with you over the course of the coming weeks.