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Executives

Mick McCormack - CEO and Managing Director

Peter Fredericson - CFO

Analysts

Simon Chan - Merrill Lynch

Ian Myles - Macquarie Equities

Chris Laybutt - JP Morgan

John Hirjee - Deutsche Bank

Paul Mason - RBC Capital Markets

Paul Johnston - RBC Capital Markets

Peter Wilson - Credit Suisse

Nathan Lead - Morgans

APA Group Stapled Security (OTCPK:APAJF) Q4 2014 Earnings Conference Call August 19, 2014 8:00 AM ET

Mick McCormack

Good morning and welcome to APA's 2014 Financial Results and Presentation. I'm Mick McCormack, APA's Managing Director and CEO. APA’s Chief Financial Officer Peter Fredericson is sitting with me here in our Sydney office. And we'll be presenting our financial results in detail.

I also have some of my executive team here to assist in answering any questions, in particular Ross Gersbach, our Chief Executive, Strategy and Development.

As usual, this morning I'll go through some of the strategic and operational highlights for the year. Peter will then cover the financial results in more detail. Then I'll close with the outlook for the business, before concluding with an update on our guidance for the 2015 financial year. We'll then move on to questions.

It has been a significant year for APA. Throughout this period our primary focus has been on growth that leverages APA’s core skills in gas transmission and distribution and deliver appropriate commercial returns. History has shown that APA has been successful in every acquisition we’ve made, despite the criticism. We’ve never written down an asset. We’ve never cut our distribution. We’ve never issued wholly dilutive equity to repair at balance sheet, now have the long term infrastructure own I can say that.

Our recent acquisitions, the South West Queensland Pipeline and Pilbara Pipeline System, continues to outperform our expectations and the decision to sell out shareholding in Envestra, subsequent to the year-end, means we’ve even better placed to invest in a range of growth opportunities going forward. Just as we’re disciplined about decisions to invest, we’re also prepared to sell assets where the terms are right. Occasionally, it does make sense to sell, like with Envestra, where CKI was offering a price well in excess of our valuation of the asset and indeed a post-GFC Australian regulatory regulated asset. But APA will retain the existing O&M arrangements over the long-term.

Our focus on growth has seen us put together what is Australia’s leading gas infrastructure network. Right across Australia, if you want to transport or store gas, there is a very good chance that you need to speak with us. With evolving supply and demand dynamics, specifically on the East coast, that puts APA in a unique position. So, we are playing apart in the industry transformation. We’ve already seeing the East coast agreed enhancing our ability to offer more flexibility in services to customers. We’re talking with some more and more about the range of services we can offer. There is no question that this will continue to lead to further development of our infrastructure network in coming years.

Our operational developments and engineering skills are unsurpassed and expanding, enabling us to innovate and deliver new solutions to customers. In the last little while, we’ve added some surface skills at Mondarra and the expertise needed to invest in gas-fired power generator at Diamantina. When I look around the business, we really do have the all the elements necessary to continue innovating and creating value in these interesting times.

As we turn to the numbers, I am pleased to say that APA produced another solid performance in 2014. It was particularly pleasing to see a strong contribution from recently acquired assets and development projects. Before I go on, you will note that we have again provided normalized and statutory numbers. That because our 2014 results include a significant item related to a one-off positive tax adjustment. And you will recall that at last year’s results they also include significant items that were mostly related to the HDF acquisition. The normalized numbers are the more relevant measure of our operating performance, so I will take you through the headline numbers now, before Peter goes into a bit more detail later, providing inside into the results on a continuing business basis.

Our EBITDA increased 13% to $747 million and net profit after-tax increased 40% to $200 million. The increase is largely driven by full year’s contribution from the South West Queensland Pipeline and Pilbara System. We also had benefited from an increased contribution from the Mondarra Gas Storage Facility, which was commissioned in July 2013, the strong performance in investment segment and increased customer contributions in Asset Management. As we mentioned at the last half, increases were partially offset by our earnings from the Victorian Gas Transmission System caused by new access arrangement and the lack of contribution from the Moomba Adelaide Pipeline System, which we sold in May 2013.

The business also continues to generate strong stable cash flows with normalized operating cash flow 2% higher at $440 Million. Operating cash flow per security was down 6% to about $0.52 due to the increased average APA securities on issue during the year, which again was a result of the HDF acquisition. We’ve also confirmed the guidance we gave in June relating to the final distribution. We are paying $18.75, which brings total distributions for the year to $36.25, a 2.18% increase on last year. And of course, we continue to fully fund distributions out of operating cash flows.

We have a broad range of growth capital projects right across the national portfolio. Several that we have been working on for some time and a number that we have only announced recently, totaling around $1 billion in capital expenditure. I expect further opportunities for growth capital project as we look to leverage our existing portfolio of assets and work with our customers to deliver tailored solutions. Organic investments create the most value for our investors and support our goal to continue driving EBITDA and operating cash flow. During the year, we spent $383 million in growth project expenditure. This supported pipeline capacity expansions in Western Australia, Victoria and New South Wales, and additional compression facilities in Moomba and Wallumbilla.

Also, just the last month, we announced we would be building a new transmission pipeline to service the Eastern Goldfields mining region in Western Australia at an estimated capital cost of $140 million. The development is underwritten by two long-term gas transportation agreements, and we expect to complete construction and time to start delivering services for January 2016.

The 50% owned at Diamantina Power Station in Mount Isa is nearing completion. This 242 megawatt power station is in the final stages of commissioning, and the adjacent 60 megawatt of Leichardt Power Station has been fully operational since July this year. Looking forward, over the medium term, I expect we will continue to spend between $300 million and $400 million each year as we continue to expand our portfolio and capitalize on growth opportunities.

Turning to the East coast grid, I spoke about the grid quite extensively at the half year and it’s of such importance to our business that you can expect this to continuing. As the East coast market for gas evolve, the grid is central to APA’s ability to meet customer requirements. It’s an interconnected network of gas pipeline, spanning more than 7,000 kilometers across five states and territories. The grid delivered a transformational step change in the services we offer our customers. It effectively seeds all our transmission infrastructure in Eastern Australia operate as one system, facilitating improved service capabilities and the flexibility for customers across all the major gas basins and demand centers in the region.

The financial contribution of the grid is evident in our results, and we’ve also announced key contracts that leverage the benefits of the grid. Last year, we announced three new agreements to transport and store gas from Victoria into New South Wales. In June, this year we announced a new additional agreement with an existing customer for flexible gas transportation services from the grid, particularly the Moomba Sydney pipeline. This wouldn’t have been possible two years ago, and there is still a way to go to deliver on the full potential of the grid.

The LNG export industry in Queensland is driving a change in gas demand and supply demand mix in Eastern Australia. And we are seeing the shifting dynamics reflected in new contracts. Customers see the benefits of the grid and we are working together to tailor services and solutions according to their needs.

We are physically expanding the grid with pipeline looping and installation compressors. We are also enhancing the operation of the grid to maximize service options and capability of the grid. It’s a gradual process, but we already have configured some pipelines to operate as one and are progressively installing bi-directional capability across our pipeline as required. It’s these internal smarts that optimize the services we provide our customers and the utilization of our infrastructure.

Moving across the country, now to Western Australia where we also had a very busy year. We have been talking about the strategic value of the Mondarra gas storage facility for while now in terms of the security of supply it offers to Western Australian gas users. We completed the expansion project last July, and this year’s result includes almost a full year contribution. It has been operating as expected, supplying services to our foundation customer synergy. And pleasingly, we have a number of additional customers accessing storage services. I am sure that with the market dynamics facing Perth and Western Australia, its significance in the region will only increase.

We continue to expand and extend our pipeline infrastructure for our customers in the mining regions, all underpinned by long-term supply agreements. Our Goldfields Gas Pipeline continues to be an important asset and we made good progress with the $150 million expansion. That project will increase capacity on the pipeline of almost 30% to match the long-term agreements we have with Rio Tinto and the Mount Newman joint venture. The expanded capacity started to become available during the year, and we expect it to ramp up to full capacity over the next 12 months.

Just last months, you would have seen our announcement about the construction of a new transmission pipeline that will service the Eastern Goldfields region. The capital cost for the project will be around $140 million. And it is exciting to see our infrastructure footprint expanding around the country. And that’s true for our Western Australian infrastructure network as a whole. We are fortunate to have assets close to some promising new potential gas sources, whether the gas is ultimately used to supply domestic market or for export, we’re well placed.

The safety of our people is an ongoing focus for us at APA, and none of us take that lightly. This was an important year for our health and safety initiatives, after conducting a Company-wide health and safety survey 2013. We launched a three year strategic improvement plan to improve our understanding of hazards in our business and to indentify and implement the right responses to mitigate the risk faced by our people. We implemented 12 of the 17 initiatives set out in the plan this year, contributing to a significant improvement in our lost time injury frequency rate. The LTIFR for APA employees was 0.7 in FY14, down from 2.1 last year, and the lowest APA has recorded to-date. And indeed that is industry well best practice levels.

I’m pleased with the progress we’ve made and we are committed to continuing the implementation of the plan to assure the safety of our people. Over the last year, we’ve continued to focus on improving the operation and maintenance of our assets and investments. It’s a quantitative and qualitative focus. We are looking at the systems and our processes, adopting new technology and global best practice to generate further efficiency and reliability in the way we do things. Given the extent of our portfolio and the asset we operate, over $12 billion, even small improvements, would generate value to customers and investors alike.

With that I’ll now hand over to Peter, to go through the financial highlights.

Peter Fredericson

Thanks, Mick and good morning, everybody. As Mick’s pointed out, the result is another strong one for the business. And particularly strong given it’s based on business as usual output. We continue to see growth being delivered from assets acquired as well as assets that are being commissioned during the year as a result of expansions that are being underwritten by new long-term contracts with our customers or as part of access arrangements that are in place.

Growth in EBITDA of around 17% on a continuing business basis has been driven by a full year contribution from the Epic assets acquired in December 2012, commissioning the Mondarra Gas Storage Facility, Goldfields Gas Pipeline expansion commissioning, increased investment returns and a higher than average contribution from customer contributions for the year. These are somewhat offset by reduction in revenues as a result of new access arrangement that came into force on 1 July, 2013 on the Victorian Transmission System and some reduction in revenue on one or two other gas transportation assets across the portfolio.

All-in-all, the theme of diversification of the asset portfolio and APA not relying on anyone asset, state or part of the economy for its underlying earnings or growth, continues to stand the business in good stead. The East coast grid, not only showed its strength with the siding of a number of new multi-pipeline contracts, but that confirm for us that the strategy of bringing it together was indeed the right one.

The normalized result is calculated to give investors a sense of how APA performed during the year, in respect of businesses, expected to provide APA’s core operational assets going forward. In that regard, the statutory results from 2013 exclude for 2014 comparative purposes, the significant items reported as a result of the acquisition of Hastings Diversified Utilities Fund in December 2012.

I will comment separately on a continuing business results that exclude the MAPS assets that was sold in May 2013. Normalized 2014 earnings exclude the 144 million of benefit that arose from an arrangement with the ATO in respect of tax depreciation values on a number of assets acquired in 2006. That benefit was a once off non-cash tax benefit that increases the tax losses available to APA going forward, but it is recorded through the P&L and is required by accounting standards.

All-in-all, increases in depreciation year-on-year, are driven by a full year of depreciation of the Epic acquired assets as oppose to nine months in the previous corresponding period. The new assets and expansions commissioned primarily the Mondarra Gas Storage Facility and the Goldfields Gas Pipeline expansions and depreciation of new assets, such as APA Grid customer management system discussed previously and now fully operational in managing the East coast grid and all of APA’s assets across Australia.

Interest increased by around 8% as a gain the debt included from the acquisition of the Epic assets was included for the full year rather than just nine months in the previous corresponding period. The growth experienced in Queensland was clearly expected as we include 12 months of operations from the South West Queensland pipeline in this financial year as opposed to nine months in the last. However, we achieve increases in contracted maximum daily quantities of these on the Berwyndale to Wallumbilla pipeline and some increase throughput on the Roma to Brisbane pipeline as well. We expect the Moomba and Wallumbilla compression projects to each commission during fiscal 2015, delivering yet further growth for APA out of Queensland in this coming year.

New South Wales as expected was a little soft in FY 2014 with new [Colkian] as available services from March 2014, offsetting some reduced maximum daily quantities and as available services not re-contracted from June 2014. The MSP, the Moomba to Sydney Pipeline remains the main link in the East coast grid chain and we continue to sell services such as the four new services already announced during the financial year but see any capacity becoming available on the MSP as integral to grid services going forward.

The Victorian Transmission System saw a reduction of around 10 million in revenues, driven by a new access arrangement that kicked in on the 1st July 2013, and reduced base load due to warmer temperatures offset only slightly by continuing exports through [Colkian]. With the new base revenue set from the completion of the first year under the most recent access arrangement, we expect Victoria to be in a state of flat to some lower level growth mode over the next year or so, depending on demand for exporting gas out of Victoria and to northern states.

Western Australian starred for the year with an extra three months from the Pilbara Pipeline System. But more particularly with the commissioning of the Mondarra Gas Storage facility, which, as signalled, has delivered us in the order of $30 million of new revenues for the year. We expect further growth in 2015 with the full commissioning and ramping up of the Goldfields Gas Pipeline expansions, for both the Mount Newman joint venture and Rio Tinto.

Asset management has benefited from a larger than usual level of customer contributions. As previously noted, we generally expect around $10 million to $12 million of work, or such work, annually and indeed, we delivered around $8 million of that work and -- $8 million to $10 million of that work in 2013, but this year the number was closer to $23 million.

Add to this the increased asset management fees for improved performance of Envestra, and the business again showed that it is integral to the diversified nature of APA. Energy investments primarily benefited from the increase and profitability in Envestra over the year. Although, we also experienced increased investment returns year-on-year from each of EII, GDI and SEA Gas. Clearly, APA’s fiscal year 2015 results will not include equity accounted investment returns from Envestra. Towards the end of this presentation, I will outline in some depth APA’s EBITDA guidance for 2015, including what can be expected as a result of our sale on 7th of August of the 33% stake in Envestra. Guidance at this early stage will give Envestra a clear understanding of how our results we made up on a continuing business basis in 2015, both from a statutory and a normalized business basis.

We began using this slide last year to give investors a sense of where growth comes from in the business. Again, of a base of $641 million of normalized EBITDA from continuing businesses in FY13 -- FY 2013, that EBITDA of the businesses, excluding the contribution that we achieved from MAPS during the period of time that we did own it, we’ve achieved the growth of 16.5% year-on-year; 13.6% from energy infrastructure, 34% from asset management and 33% from investments.

I’ve already spoken a little about each of the states, but here you will see the benefit to APA of having added the Southwest Queensland Pipeline to the portfolio in December 2012.

We continue to expect further growth in Queensland in FY15. As a result of the further ramping up of the initial Southwest Queensland Pipeline contracts, but also, as we see both the Wallumbilla and Moomba compression projects come online. We continue to watch with interest developments in Queensland around the LNG export projects, many of which will deliver gas east along the APA assets. Notwithstanding the significant take or pay nature of our revenues, as an organization, we remain dependent on our customers actually delivering and taking the gas, to and from, our pipelines as per those contracts. We do believe that the guidance that we are currently able to give for FY 2015 does include contingency for any delays and use of our newly commissioned assets over the next year.

The story with New South Wales remains one of some of our customers still talking of a gas crisis, but others contracting for more capacity going forward. In the past nine months, APA has signed four new contracts that are effectively grid based contracts for deliveries using new and current capacity from periods ranging from January 2014 through to seven years and beyond from that date, whilst taking into account associated options. We continue to talk to a number of customers about further grid and pipeline specific related services, that all include use of the integral Moomba to Sydney Pipeline. Again, our guidance for FY15 is fully informed by our knowledge of what is expected on any individual pipeline on the east coast grid in particular.

In Victoria, as I noted earlier, the new access arrangement from July 2013 has set the new baseline of revenue for the VTS going forward. We continue to sell other services to customers and the contracts, just mentioned, each relate to the export of gas north from Victoria. Again, our guidance for FY15 is fully informed by a clear understanding of what to expect on the Victorian Transmission System with very little volatility in our result either caused by warmer or colder temperatures around the winter months.

Western Australia and Northern territory once again made a significant contribution to APA’s year-on-year growth. We expect that post the final commissioning of the two expansion projects on the Goldfields Gas Pipeline, revenues will ramp up in FY 2015 with greater use of that capacity. Further, we retained capacity in the Mondarra Gas Storage Facility that we are able to sale to customers on a spot basis, whilst having the initial investment underwritten by the original 28 contracts that were signed in 2011, and came into operation in July 2013.

We now have a further six customers using services at Mondarra, and considering other more flexible products from that facility. Mondarra continues to provide APA’s customer considerable optionality and certainty in what can become an uncertain market very quickly. The overriding story with WA, though, is the continuing prospects for growth. With the signing of agreements under which we will effectively extend the capacity and capability of the Goldfields Gas Pipeline with the building of the new Eastern Goldfields Pipeline, we continue to show that APA can deliver to our customers significant base cost reduction by delivering gas over long distances to replace highly expensive fossil fuels with their attendant transportation and onsite storage costs. We continue to talk to other customers about more opportunities in this area.

Asset management had a stellar year with customer contributions of around $23 million, which is clearly above the long range average revenue we’re used to, but also demonstrates the continuing nature of such income in the asset management business. Again, a significant level of the income in asset management is from the operation of the Envestra business, which APA retains under a long-term operations and management contract that runs to 2027, notwithstanding the sale on August the 7th of our 33.05% stake in Envestra. As you would expect, with Envestra announcing a net profit of a 153 million on 14th of August, APA’s results include around $50 million of equity accounted profits, based on our 33% shareholding that was held throughout the financial year to 30th June, 2014.

On a continuing business basis in 2015, APA’s guidance will account for removing this. But nevertheless, we will retain our asset management fees from Envestra, as well as continue to deliver across the remainder of the business, and of course reducing interest expense as a result of banking some $780 million towards the end of this month.

Distributions for the year totaled $36.25 per security, which is an increase of 2.1% over the $35.05 per security paid in FY 2013. And again, demonstrates APA’s discipline in maintaining appropriate levels of cash in the business to support our ongoing growth. The payout ratio of 68.9% remains at the upper end of APA’s 60% to 70% range. But again, is in line with advice to the market over the last three years that we will maintain distributions at levels that allow us to continue to fund the significant growth we see in the business annually with appropriate levels of operating cash flows, debt and equity.

Operating cash flow per security is 6%, down year-on-year, primarily as a result of the high number of securities on issue over the full year as compared with FY 2013. Growth focused capital expenditure is either fully underwritten by new long-term gas transportation agreements with highly credit worthy counterparties or approved in access arrangements, and continues to drive APA’s organic growth prospects over the longer term. Again, in the financial year under review, we have spent around 400 million. And again, as Mick noted earlier, we continue to see between 300 million and 400 million of underwritten growth CapEx available to us over the next two to three years. Already, at this early stage in the FY2015 year, we have in excess of $300 million in growth CapEx committed for the financial year.

FY14 again saw CapEx committed around the country with the completion of Mondarra and the Goldfields expansions in the West and significant expenditure on the South West Queensland Pipeline completion projects in the East. Investments in 2014 represent our commitment to the DPS project, or the Diamantina Power Station project, which we put our equity, effectively our equity in June 2014. And FY13, the 330 million represented the cash outlaid in completion of the HDF acquisition.

Gearing at 13th of June it is at 64.2% more in line with our longer term target of 65% to 68% than what we saw immediately post the sale of MAPS in fiscal year 2013. With this level of debt to debt plus equity an approximately AUD780 million of funds to come from the sale of our Envestra shareholding. We’re comfortable that we can fund APA’s continuing AUD400 million plus of annual CapEx commitments without having to raise equity.

As a result, we’ve not issued any further securities since closing the HDF acquisition in December 2012 and the distribution reinvestment plan therefore currently remains suspended. During the year, we continued to refinancing the same maturing debt facilities as appropriate pushing four bilateral bank facilities out from five years to December 2018 and entry into a new syndicated debt facility of a two, three and five years at very competitive pricing relative to where we’ve had funded over the last few years. We also repaid AUD80 million odd worth of maturing U.S. private placement notes in September 2013 using local bank facilities available to us at that time. We continue to be very well supported in local shorter-term bank markets and when necessary, we feel that longer-term debt capital markets programs continue to give us access to funding at attractive rates even when swapped back into Aussie dollars.

We remain committed to our BBB/Baa2 investment rate credit ratings. These writings are a strong -- and a strong well-managed balance sheet and what give us the ability to consider transactions such as the Envestra acquisition that we had initially proposed around this time of last year. Our current funding flexibility available funding lines and markets and the AUD780 million of cash from the sale of Envestra plus our ability to raise equity if and when needs to be means that we can participate in transactions that add value through growth to APA win and if those transactions come to market. We believe this flexibility and approach adds value to APA and delivers us an ability to be competitive in asset acquisitions via value can be achieved for APA security holders.

As noted earlier, we did want to give you a more detailed look at our EBITDA guidance for FY 2015. As already mentioned, the AUD747 million of EBITDA includes some AUD50 million of equity accounted earnings from our 33% stake in Envestra that will not be repeated in FY 2015 nor indeed beyond that as a result of us having accepted the cash offer for Envestra on August the 7th. This means the comparative continuing business EBITDA from FY 2014 on which to base our growth expectations for FY 2015 is AUD697 million, adding 6% to 9% of growth for FY 2015 from organic growth, commissioning the projects underway and alike has given us normalized EBITDA guidance of 740 million to 760 million for FY 2015.

As previously disclosed, we expect to book a taxable gain on the sale of the Envestra shareholding of around AUD430 million giving statutory EBITDA guidance that is including significant items, a 1.17 billion to 1.19 billion for the year to 30th of June 2015. As you might expect, the profit on sale will significantly change our tax-paying profile whereas previously we have noted with the that we expected to be our cash tax payer in around fiscal year 2018 and particularly after the adjustments that created that AUD144 million credit to tax expense this year.

APA will now utilize all available tax and unbooked capital losses in 2015. We therefore expect to pay a level of cash equivalent to a less than 1% of net profit before tax on FY 2015 profits.

That tax will be paid at the time of lodgement of our FY 2015 tax return in January 2016 and will be available to distribute as franking credits with distributions paid from that date going forward.

With that I’ll say thank you and pass it back to Mick.

Mick McCormack

Thanks Peter. Before turning to guidance on next financial year, let’s take a quick look at how we are going to keep generating growth and returns. What it all comes down to is the strong foundation of APA’s asset portfolio, our expertise skills and knowledge together with a strong balance sheet. We have consistently demonstrated that we’re able to identify the right opportunities and successfully execute on them, and there is no reason to stop that anytime soon.

Moving to the next year, and first, there is a lot of organic growth we can leverage from our existing infrastructure. I’ve spoken about our focus on providing flexibility to customers through increased capabilities including storage capacity and billion-directional flow. These capabilities underpin the many of the Brownfield and the Greenfield development initiatives that we’re currently working on or discussing with customers.

This includes the feasibility study into the possible connection of our northern territory assets to the east coast grid. There was a clear logic to the link; it would strengthen our position as a one-stop shop and improve our ability to offer customers increased flexibility and access to gas. Based on the support we have already seen from producers, customers and the government, I am confident the link would stimulate investment in gas exploration and production in the territory.

We’re also on the lookout for acquisition and investment opportunities. There has been a lot of written and said about the pipelines that may become available for sale relating to the LNG developments in Queensland and I am on record as saying that we will always consider acquisitions as long as they are on our strategy and offer a reasonable return. That will continue to be our mantra going forward.

APA is in a very strong position; first, we have a balance sheet that has been strengthened by proactive capital management and the proceeds from the sale of our investors’ stake. But it is very important to appreciate that we are not relying on acquisitions for growth. We will only put capital to use when we see a compelling opportunity and there is no need for APA to grow just for growth’s sake.

So looking ahead to the FY ‘15, APA continues to be focused on a few core areas; first, we will continue to execute expansion projects around the country. In Eastern Australia, we will continue to find ways to develop our east coast grid as we evolve with gas market dynamics. We’re also moving ahead with the feasibility study to connect our assets in the northern territory to the east coast grid. And turning to the forecast numbers, and as Peter has covered earlier, we expect to grow normalized EBITDA by between 6% to 9% to between AUD740 million and AUD760 million on a continuing business basis, including significant items that’s likely to translate to a statutory number between AUD1.17 billion and AUD1.19 billion for the year.

We expect the net interest cost to fall within a range of AUD315 million to AUD325 million. Looking at the distribution, and we have set the same goal that we successfully achieved this year to pay distributions I believe equal to the previous financial year which this year will remain at least AUD0.3625.

So to close things up, I just want to say that it is pleasing again to be able to talk about another year of steady growth for APA. Our consistent strategy execution continues to deliver returns for our investors and I am very much looking forward to another year of opportunities and the growth.

Thank you. We will now move to questions. May I ask that analysts ask their questions first? Time has been set aside to talk with journalists after the presentation. So questions.

Question-and-Answer Session

Operator

Thank you. The first question comes from Simon Chan of Merrill Lynch. Go ahead please.

Simon Chan - Merrill Lynch

My questions relate to energy infrastructure Queensland. I noticed your EBITDA margin for FY ‘14 came in about a bit over 78% versus 75% last year. Just wanting to get a feel for how sustainable is this? And if it is sustainable, can we expect an upward trajectory next year, given SWQPs in ramp up and there's a fair degree of fixed cost leverage?

Mick McCormack

You jumped straight into the detail. I’ll pass the football to Peter.

Peter Fredericson

I’d say Simon where it’s come from obviously and we spoke about this I think at the half year is the fact that we’ve been able to integrate Southwest Queensland Pipeline into the portfolio and into Queensland particular very easily with what we would consider to be a better cost base than was there in the past. We really don’t comment much on increases in margin across our business. We will continue to see the sorts of margins you’re seeing there, because we’re adding more capacity over time and we generally add capacity at relatively competitive costs attaching to that. So, we would see it as a base, where it goes is another point.

Simon Chan - Merrill Lynch

Fair enough and just my final one. You stay in business CapEx of 45 million, is that the rate going forward now? I mean it's probably the half of that in the past, but shall we expect 45 million to be the benchmark?

Peter Fredericson

I think what we said when we acquired HDF was that we were looking to see it go from that up to AUD20 million back in those days to something more in the range of AUD30 million to AUD40 million. We do spend -- we have been spending a lot of money in the last couple of years on systems, the customer management system, the thing we call internally APA grid is just an example of that. We’re now working on the enterprise asset management system that’s a significant piece of updated software. So the answer is we expect it to be closer to AUD40 million, so it’s been that AUD30 million to AUD40 million last couple of years with HDF ownership and we expect it to be there.

Operator

Thank you. The next question comes from Ian Myles of Macquarie. Go ahead please.

Ian Myles - Macquarie Equities

A couple of things, just in terms of the South West Queensland and the projects for compression. Given the LNG delays, what flex do the customers have in deferring their revenue payments yield start-up for those contracts?

Mick McCormack

I think that’s a good point, good question. There has been a little talk about customer lies around those LNG projects, but respecting commercial confidentialities and all that goes with that, I’d probably answer the question best by repeating I think the words that Peter used, the guidance that we put out or are putting out there today fully reflects our expectation or you want to call it some contingency around what any delay on those projects might mean to the business.

Ian Myles - Macquarie Equities

Okay. You talked about upgrading the Moomba to Sydney into a sort of bi-directional. Is that supported by a customer contract or are you starting to do a little bit more work speculatively where you're seeing the market going and then selling that grid capacity subsequent to those events?

Mick McCormack

Look, it’s a combination, it’s supported by customers and the market dynamics. And also it’s pleasing to be able to talk about that now because going back a couple of years, we talked about what the strategic benefits of the Hastings transaction was going to do for APA and it was a pretty difficult task to try and articulate then what we saw the opportunities that we believe would be there and we are seeing those now. And I will expand on my observation, I am speaking from my office in Sydney, there has been all manner of talk about gas prices doubling, quadrupling, tripling five times, ten times whatever the number is you want to stick at, but I am also seeing these gas price around Wallumbilla are AUD2 right now. So, that’s the dynamics that we face and that in answering your question, that’s the real strength the grid having it bi-directional means at a very short notice, we can shuffle gas around the grid across the couple of states to the benefit of the customers.

Ian Myles - Macquarie Equities

Okay. And one final question. On the tax timing, you sort of talked about only 1% of FY ‘15 tax being paid in ‘16. Does it go back up to more of a normal level or is that going to be an ongoing gap between tax expense and tax paid for the group?

Peter Fredericson

Ian, the answer to that is that it does sort of stay quite low going forward. And we sort of talked about it before, we still expect it to take until FY ‘18, FY ‘19 before you are up at levels of 10% of what’s called net profit before tax on an accounting basis. So, we’ll pay -- I am not sure I said 1% actually for -- I thought I said something around 7, but maybe I did.

Ian Myles - Macquarie Equities

I’m sorry, I misheard then.

Peter Fredericson

But that’s okay, I think that we used to talk about 1% back in even last year. We thought when we first were going to move towards a tax paying position, we thought then it was originally 1%. And it looks like I did say 1% and I apologize for that. It’s about 7% in January 2016 of our net profit before tax for the fiscal year ‘15.

Ian Myles - Macquarie Equities

And is that before or after Envestra?

Peter Fredericson

It’s excluding the Envestra.

Operator

Thank you. The next question comes from Chris Laybutt of JP Morgan. Go ahead please.

Chris Laybutt - JP Morgan

Just a quick question perhaps on Slide 23, you've added an additional blue line there which connects the Northern Territory into Moomba. Just wondering if you could give us some background on the genesis and I apologies if I missed that on the call, and just how the sort of connection of Northern Territory to New South Wales is tracking more generally. Have you got any further down the track in terms of that feasibility study?

Mike McCormack

Thanks, Chris. And with respect to the blue lines, they really are just, right now, just dotted blue lines. We could have put half a dozen more there. It’s just reflecting that when we announced this six months ago, the feasibility study, it's really about us doing the necessary work, if you like, to match up what is potential and prospective gas production to where the market wants to take it. And going back six months, the northern line there is simply the shorter so to speak, so it's the cheapest line. And Moomba has a lot of appeal to many stakeholders, but it's more expensive obviously and then the middle line is somewhere in the middle. It's about the -- so yes, don't read anything into those lines, I am really saying that right now we're continuing to undertake our feasibility studies. Yes, we're well into that and we've had good response from the market generally, including government, so we'll continue to pound the pavement so to speak.

Chris Laybutt - JP Morgan

Thanks, Mick. And I guess just one follow-up which is, I am not sure how much you will be able to say because of confidentiality, but is there any comments you could make on Queensland asset sales and maybe then around potential timing of the process or any details you can give?

Mick McCormick

Are we talking Queensland asset sales in respect of LNG’s pipelines?

Chris Laybutt - JP Morgan

LNG’s pipelines and BG’s pipeline which is sort of rumored to be the sale at the moment in the papers?

Mick McCormack

No, we don’t tend to comment specifically on any particular business development opportunity that we are pursuing, but I’m on record and I’ll say it again today that if anyone has a pipeline anywhere in Australia that may or may not be for sale, you’ll find APA knocking on the door.

Operator

Thank you. The next question comes from John Hirjee from Deutsche Bank, go ahead please.

John Hirjee - Deutsche Bank

Mick, on that vein, I'm more interested in the medium-term outlook and obviously New South Wales is looking at putting up its poles and wires. Given your exit out of Envestra, what's your thinking along that? I know it's early days and we don't know the structure yet, but what's your thinking on those type of assets for APA?

Mick McCormack

Yes John, it’s a question we’ve been asked a bit recently. Whilst it might be appealing, right now, it’s not front and center for us. We’d like to continue doing the things that got us here. which is focusing on gas transmission, gas distribution. Yes I do acknowledge that poles and wires given our balance sheet, given that the regulators and et cetera, et cetera, given every man, his dog and their mother-in-law is knocking on our doors wanting to do some with us. It’s not really front and center that might change, but it’s not really something that you’d like to see APA pursue. We might have a look at things that circumstances may change, but really it’s not something that we’re looking at pursuing. What we are pursuing is really the -- it’s nothing else, it’s a AUD300 million to AUD400 million of organic growth CapEx is exclusive to APA, that ought to kick the business along with 5% or at least 5% top line growth for the next couple of years. And in the meanwhile, we’ll look at any other opportunity that comes up.

John Hirjee - Deutsche Bank

A question to Peter if I may. Peter on slide 20, you're talking about your debt maturity profile, and it appears nothing matures in FY ‘15. How are the debt markets looking from your perspective, and are you likely to bring forward any of the potential maturities of the debts coming through given potential interest rates in the U.S. may go up and those sort of elements that are currently in debt markets?

Peter Fredericson

There’s a couple of questions here. I’ll start by saying, you’re right John, there is nothing in FY ‘15 for this. We’ve got a U.S. private places more U.S. private placements note that’s due in September of 2015, so we’ll deal with that relatively easy given our current balance sheet. We’ve certainly had significant support locally in the context of two, three and five-year money and it continues to be a preponderance of well-priced money available to us in this market. We haven’t seen right now the need to go, the AUD1.25 billion that we did in June, we didn’t see a need to go offshore to get that money just to trying keep the balance right really. And so right now, whilst it might be nice to be issuing 700 odd million or billion dollars worth of debt in the euro market or the sterling market or the U.S. dollar market, we honestly don’t think that there is a need to and we’ve not been in the habit of going on and getting a bucket load of money before we needed it. That money we’ve got in 2012, we knew we had Envestra to deal -- sorry, HDF to deal with. And so we’re only a couple of months ahead of the settlement of the settlement of debt transaction before we got that money. So, we’re really not pushing ourselves to do that, John.

Operator

Thank you, the next question comes from Paul Mason of RBC Capital Markets. Go ahead please.

Paul Mason - RBC Capital Markets

Hi guys, just three questions. The first two are just on the guidance, just some particulars. So with your net interest cost guidance of 315 million to 325 million, could you give us an outline of what you're assuming in relation to all the investor proceeds? Is that factoring into that cash sitting on your balance sheet for whole year or largely…

Peter Fredericson

The cash is still on the balance sheet, the cash will be used to pay down debt that we have. Immediately it comes in the door in fact I think we’ll have dealt with -- we won’t have buckets loads of cash sitting around, I’m sure we may have headroom sitting there, but that money will be used very quickly after we receive it on the 28th or 29th of August depending on when it gets paid. And so the assumption being is that it’s used along with operating cash flow throughout the year to fund the AUD300 million to AUD400 million worth of CapEx that we’ve in front of us and you’ll see there that we’ve already got back commitment, we know we have a commitment for a minimum of 300 million of growth CapEx. We’ve got about 30-40 of stay in business and there is bits and pieces on the edges. So, we’ll just continue to use the facilities the way we have always and again one of the reasons why we didn’t go and lock in a whole bucket load of longer term debt when we did the $1.25 billion refinancing because we knew that we would have 780 coming to us at the end of August and we could pay down local debt.

Paul Mason - RBC Capital Markets

Just the next point on the guidance, so with the Envestra dividend that you guys received in July, is that part of the significant item, EBITDA guidance or is that already been accounted for in profits this year effectively through the recognition of profit from Envestra?

Mick McCormack

No, because it doesn’t come into the profit calculation, it’s certainly part of cash flow. And we don’t give operating cash flow guidance but it honestly doesn’t come into the calculation at all because our EBITDA is accounting for equity profits from Envestra and there is none in that 740 to 760 for the year primarily because we don’t expect to give any visibility on Envestra’s earnings for the coming financial year. And given the CKI now own 92% of it, we just don’t expect to see anything. So, our $430 million calculation is based on our book value at the end of 30 of June, 2014 and that’s where we were at.

Paul Mason - RBC Capital Markets

And just one other question on the Eastern Goldfields Pipeline project, just in relation to the main Goldfields trunk line, is there any additional revenues on that or is this new contract effectively kind of pushing out an existing contract on the Goldfields Pipeline?

Mick McCormack

The question goes to what the real strength of APA’s assets are over there? Yes, on the one hand we are building, spending 140 million to build pipeline of 292 kilometers or thereabout. But on the other, we are selling a delivery service that starts at Karratha and ends at the end of the pipeline, so 1,500 to 1,600 kilometers away. So, yes, the answer to your question is yes.

Paul Mason - RBC Capital Markets

Yes, there's additional Goldfields trunk line revenue?

Mick McCormack

Yes, and we’ll earn some revenue on the main Goldfields Pipeline as well.

Paul Mason - RBC Capital Markets

Okay, great. That’s all from me. Thanks a lot.

Operator

Thank you. The next question comes from Paul Johnston from RBC. Go ahead please.

Paul Johnston - RBC Capital Markets

Thank you, Paul stole a few of my questions, but just on the BG or a potential acquisition on the LNG side. I just wanted to see whether you could comment, Mick or Peter, on how you might approach that from a consortium point of view or a structuring point of view? Do you think you would potentially go it alone or is this really going to be part of a consortium? Would you contemplate an EDI or that type of vehicle in your sort of pursuit of an asset like this?

Peter Fredericson

I won’t comment on any potential pipeline around LNG projects that I’ve seen that might be for sale in the papers recently. What I will comment on that anything that APA does whether that’s big or small involving organic growth CapEx or involving standalone project, we’ll approach that on the basis that we’ll keep our balance sheet in good order. Ipso facto maintaining our investment grade ratings and then put some smarts into it and see what we can do in respect of achieving whatever is we’re pursuing.

Paul Johnston - RBC Capital Markets

Okay, that's fine. Just on that balance sheet note Pete you made those comments before which were great. But I just wanted to understand how you might view the balance sheet, say under the scenario that a BG acquisition doesn't occur. And I guess where I was leaning there is that with the Envestra proceeds in the door and in the context of your CapEx, if we assume that CapEx moving forward is geared broadly in line with your overall gearing then sort of 750 million odd or 700 million sort of funds for nearly five years of equity CapEx if I can put it like that. And so I would have thought that puts you in a very strong funding position but so the specific question is under what scenario would you contemplate a capital management, be it a buyback or something else, given the strength of the balance sheet at this point in time?

Peter Fredericson

I think Paul, one of the things that we've said to investors for a long time now is that we continue to talk to our Board on a monthly basis about a significant number of opportunities that are out there and not all of them are $5 million opportunities. You have seen the Eastern Goldfields Pipeline come in the door at a $140 million and we have talked to even today about the fact that we continue to talk to other customers about stuff that’s happening. It’s not a static market out there and we have got a group of guys who are continually bringing to either through transmission or through our sort of strategy and development group and opportunities that might fit our strategy. And from our perspective, the reason why we have not contemplated discussing a capital management program today with our Board is because we have got $300 odd million of committed CapEx for this year and that rolls into next year another 50 or 60 whatever the number is.

But not only that, we continue to talk to our Board about a number of different projects that could be on the boards tomorrow. And our $300 million to $400 million, we're pretty conformable with two or three years but it wouldn't surprise us if it was more than that in any given year because of something that pops up that makes sense for us. So, we'll continue to look at the balance sheet on an ongoing basis and we'll keep it the way it is or keep it how it needs to be for what we think may happen to the business.

Mick McCormack

And if I can add to that, Paul, the question then lands itself into what’s happening with distribution. We have always been a very prudent and dare I say a conservative business, we don’t put guidance out there that we don’t fully expect to meet. Very proud of the fact that we never cut our distribution, so yes, we do have some money that has come in the door and as Pete has articulated it’s plenty for us to apply that money too and talking about distribution. When we acquired the Hastings business we said that it will take a good couple of years to have the full impact of that business in the cash sense come in to APA’s business and equally the dynamics of the South East market, it’s interesting time that we have in. So, for us we put guidance out there that we know that we have got a very good chance of meeting and it’s keeping the fire power, it’s keeping the money in the bank until we are very certain that we can up those distributions more substantially. And we continue to be a growth business if that wasn’t the case we would be a different conversation today with both the funds coming from Envestra and possibly distribution guidance.

Paul Johnston - RBC Capital Markets

Great, that's fabulous. Just one more on Goldfields, I actually thought those expansions would have nearly, the current ones underway with Rio and Mount Newman, I thought they might make a full contribution in FY15. Could you give a feel for the timing of that and would it be a six month contribution in FY15 or nine months? Can you I guess be a bit more precise on that if you can please.

Mick McCormack

Not with information I have got in front of me at the moment mate, so I am sorry but certainly we are getting revenue through the year from them and as we pointed out before the 740 to 760 fully takes that into account.

Operator

Thank you. The next question comes from Peter Wilson of Credit Suisse. Go ahead please.

Peter Wilson - Credit Suisse

Thank you. My first question Peter is just in regards to the contingencies for a delay in the South West Queensland Pipeline throughput. Can you just expand on that? And is there any optionality in regards to the commencement of these services or is it purely just a throughput and at what date did that really become an issue?

Mick McCormack

It’s Mick here, what I can say, yes, there is some optionality and that’s obviously the customers’ option. Now, I can’t say what it’s about but repeating what Peter and I have said earlier, what we expect to happen has been taken up in that guidance.

Peter Wilson - Credit Suisse

Okay sure. Just switching tact, so you said today that you've signed four new grid services agreements that utilize the MSP. Do these services replace volumes that you would otherwise expected in previous years to have been flying from Moomba or are they completely incremental services. And what's the revenue trade off with those?

Peter Fredericson

It’s a bit of both. It’s difficult to answer, I am not trying to be evasive because all of a sudden when you compared Moomba to Sydney a couple of years ago, there is only one-way traffic, it was Moomba to Sydney now the traffic flows both way. And just looking at the EBITDA numbers for New South Wales, I will go as far as to say, yes, it’s getting to be a trade off all up.

Peter Wilson - Credit Suisse

And how big is the trade off, so for every dollar of income that you lose for volumes flying Moomba to Sydney, how much of that do you actually make up for volume to exported from Victoria ballpark?

Peter Fredericson

It’s a bit hard to say, I’m just looking at the EBITDA numbers as I said for New South Vales, they wasn’t really much changed year-on-year, so I think the starting assumption might be that it’s pretty much the same. But again difficult to compare apples and apples because you either go with the revenue from Moomba to Sydney was just Moomba to Sydney now if we’re talking gas from Victoria to Queensland, the revenues across three pipelines but yes, by the working assumption that’s what we’re endeavoring to do, is to cover any Moomba to Sydney reduction in revenue.

Peter Wilson - Credit Suisse

Okay great, and just lastly. Diamantina you mentioned that it's likely to be completed in the next half. I'm interested in how much success you've had in controlling costs given that Forge couldn't and whether there's been any changes to your forecast CapEx for that project?

Mick McCormack

Look, where we’re at with that project is that we expect that to commission within the next half or the first half of the FY15. We’ve run our models internally in the context of our contributions, AGL’s contributions I think from both organizations perspectives. It still meets our investment hurdles in respect of the project and we’re pretty comfortable with that. So, that’s as much as we going to say we are getting on with it. And I think our customers up there, they are taking electricity as we speak when the plant is not available or not taken out for commissioning work and we’re pretty comfortable with it really.

Peter Wilson - Credit Suisse

Okay and the CapEx guidance you've given some of that Queensland figure includes Diamantina spend does it or?

Mick McCormack

No, nothing.

Operator

Thank you. The next question comes from Nathan Lead of Morgans. Go ahead please.

Nathan Lead - Morgans

Just a quick question, just on your LTIs, obviously it's an EBITDA to FE ratio, can you just give us what the definition is of the FE and what you guys are targeting underneath that ratio?

Mick McCormack

We’re talking fund employed or we’re talking, did I hear you say LTI, lost time injury?

Nathan Lead - Morgans

No, that’s in your incentive plan.

Mick McCormack

I’m getting excited about safety. So, still trying to catch up, so long term incentive?

Nathan Lead - Morgans

Yes, underneath your long-term incentive plan, you have an EBITDA to funds employed metric. So, how are you defining the funds employed and what is the target that's been set underneath that metric by the Board?

Mick McCormack

I don’t know it Peter, do you know how the funds employed?

Peter Fredericson

I will tell you what Nathan, I’m not even going to try and go into the definition of funds employed here. It’s total assets less a bit of stuff that make sense for it to be less. And as to targets, we didn’t achieve it put in that way.

Mick McCormack

Without being flippant, Peter said it’s, without a bit of stuff and that’s Board’s discretion, they put in stuff, they take it out to make sure there’s a comparison on an apples and apples basis year-on-year but we didn’t achieve full odds on it. But I guess that just reflects that where our focus is on operating the business versus looking at much we have made out of LTI.

Nathan Lead - Morgans

And in terms of just, I supposed just thinking about distributions going forward given that guidance is just basically looking at least what you have paid out in FY14. Can you sort of talk about just how high you feel comfortable taking that distribution payout ratio?

Peter Fredericson

Look, historically it’s always been 60% to 70% and that we get back to day one that just we’ve always set ourselves up as your stock standard industrial style business. You pay too much in distribution or dividend more than your own as was the case in leading up the financial crisis, you put yourself in to strife. That’s been one of the strength of APA that’s the reason we’re talking with you today. And whilst I am around that continue to be the case and when I say 60% to 70% we are comfortable with that. It’s sort of top end of that right now, so that’s where it’s likely to stay.

Nathan Lead - Morgans

Okay. And just a final question, Mick, the O&M agreement with Envestra, could you give some sort of description on what the sort of termination payment structure might be if Chong Kong actually chose to terminate?

Mick McCormack

Couldn’t tell you, I doubt where there is one, that’s cool business to us, until you mentioned it I haven’t even heard the word termination nor have I even heard the word sale. So, you would have to call business tour, so we’ll continuing doing what we’re doing, earning a 3% margin and applying the best distribution asset operation management, maintenance skills in the country to those assets.

Nathan Lead - Morgans

Does Chong Kong have the option to internalize the O&M?

Mick McCormack

No, we’ve got an arrangement that goes out to 2027.

Peter Fredericson

And Nathan that arrangement does not include rights to terminate.

Nathan Lead - Morgans

Okay, thanks Peter.

Operator

Thank you. There are no further questions at this time Mr. McCormack.

Mick McCormack

Right, last thing I'll say, that's it for the questions. Thank you very much for the interest and I will go off script for one minute. Chris Kotsaris is leaving APA, so for those on the call, those here, Chris has had a very big impact on our Investor Relations effort over about seven years now. Peter and I have certainly much appreciated her abilities and particularly her enthusiasm, her help over those years and we both will miss her. I will miss her enthusiasm and dedication and whatever Chris does I am sure in the future, she will do it with the same degree of dedication and enthusiasm. So this will be the last time that you will see the three of us on the ride. But I am sure it won’t be the last time that you cross path with Chris. So, hats off to you Chris. Thank you very much. With that we will look forward to seeing you in-person over the next few weeks and elaborating in a bit more detail as to any questions you might have. Thank you very much.

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