Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

David Bartholomew – CEO

Jason Conroy – CFO

Analysts

Chris Laybutt – JPMorgan

Sandra McCullagh – Credit Suisse

Simon Chan – Merrill Lynch

Baden Moore – CLSA

David Leech – UBS

Will Allott – Commonwealth Bank

Nathan Lead – Morgans

Duet Group (OTCPK:DUETF) Q2 2014 Earnings Conference Call August 21, 2014 9:00 PM ET

David Bartholomew

Good morning. My name is David Bartholomew, Chief Executive Officer of Duet Group. For those present in the room, welcome to Duet’s 2014 Results Presentation. I’d also like to extend a warm welcome to those joining us via webcast and teleconference. Before commencing, I’d also like to introduce our Chief Financial Officer, Jason Conroy.

The agenda for today’s presentation is set out on slide 3. I’ll first summarize the highlights of the group’s performance. Jason will then present the group’s financial results. And after that I’ll provide an operational update for each of our businesses and discuss the outlook for the group. Time will be set aside at the end of the presentation for questions.

Slide 4, summarizes our performance highlights for the 2014 financial year. Today’s results highlight the quality of Duet’s portfolio and again reflect the resilient nature of our cash flows.

We’ve established further revenue certainty for the group by re-contracting with DBP Shippers, winning Multinet Gas’ regulatory appeal and securing two long-term take-or-pay gas transportation contracts for DDG.

We’ve also continued to grow our businesses. Our Victorian distribution businesses are investing in their regulated asset bases. These investments will underpin the group’s future revenue base. The construction of DDG’s Wheatstone Ashburton West Pipeline and the Fortescue River Gas Pipeline are well progressed and are on budget.

We continue to seek further development and acquisition opportunities to build on our initial success especially in the Pilbara.

To fund DDG’s accretive development projects we completed two equity placements at very tight discounts, raising a total of AUD200 million. To ensure that our retail investors were able to participate in Duet’s capital raising initiatives, we also completed a security purchase plan raising AUD43 million to support our future rev growth.

On the debt capital management front, we raised and refinanced over AUD1.5 billion of term debt over the year on competitive terms. Today we will pay the final FY14 distribution of AUD0.85 per stapled security bringing the full year cash distribution to AUD0.17 per stapled security. And we’re on track to meet our current year distribution guidance of AUD0.175 representing an annual cash yield of 7.1% based on yesterday’s closing price.

On slide 5, we showed you which stapled security price performance relative to the ASX Utilities Index and to the ASX 200 Index since the start of the 2014 financial year. Duet’s total shareholder return of almost 30% for the financial year outperformed each of these indexes.

I’ll now ask Jason to present our financial results.

Jason Conroy

Thanks David. I’ll start with a snapshot our consolidated results on slide 7. Revenues from ordinary activities were down 5% mostly due to higher unrealized gains on derivatives recognized in the prior year and lower customer contributions in the current year.

After removing derivative gains along with FX and interest income items, adjusted revenues were down only 2%. This was a strong result considering the customer contributions for the year were significantly lower, mostly due to AUD17.5 million reduction in DBP shipment funded projects.

Given that revenue recognized from these projects is mostly a pass-through. It did not materially impact the group’s operating cash flow generation.

Consolidated group EBITDA was in line after normalizing for the group’s amplification and management internalization costs. Similarly, impair excluding significant items was in line with the prior year.

I’ll now move to our proportionate results on slide 8. We continue to actively manage our operating expenses during the year, including a major reduction in head-office costs, driven by our management internalization in December 2012. Group adjusted EBITDA which excludes customer contributions was up 1% on the prior year.

Net external interest expense was 3.7% lower with Multinet Gas resetting its hedge-book at historically low interest rates. As a result, post interest cash flows for the year were up 7% demonstrating a very resilient group operating performance. David will address the performance of each of our businesses in more detail shortly.

Slide 9, summarizes our recent equity capital management performance. Consistent with prior years, cash coverage of our full year distribution was 102%. Group gearing was 73% at the end of the year, primarily due to the equity funding of our Wheatstone and Fortescue Pipeline projects.

Our pro forma corporate working capital balance was AUD89 million at the year end. This along with DRP proceeds in future periods is expected to be mostly applied to fund organic growth opportunities across the group.

Moving now to slide 10. We had another successful year on the debt capital management front. We raised and refinanced over AUD1.5 billion of term debt bank facilities on competitive terms. We are also well advanced in planning the refinancing of two small-term debt maturities for our businesses later this year.

I’ll now hand back to David, who will take you through our operating results and priorities for the remainder of the year.

David Bartholomew

Thank you, Jason. Looking now at the operational performance for each of our business starting with DBP on slide 12. Overall volumes were 8.3% higher than the prior year. Full haul volumes were up 5% and in July we had a record daily quantity on the pipeline of 807 terajoules. This reflects some important dynamics in the WA Gas market.

Over the period, we’ve seen an increase in gas-fired power generation resulting from planned and unplanned outages of the coal-fired electricity generators. In addition, we’ve seen Mondarra build up its gas reserves with shippers using their existing full haul contract to deliver in the storage.

Despite the higher volumes, revenue from gas transportation was down only 0.5% on the year, on the prior year. Given that 80% of DBP’s contracted tariff is take-or-pay, changes in throughput does not result in proportional changes in revenues. In addition, capacity reservation charges were affected by the settlement of the previously announced shipper dispute and suspension of capacity contracted to gripping transport which is now in liquidation. With full effect of these changes since reflected in the results.

The pipeline maintained its strong operating record with system and compressor availability approaching 100%. We completed all scheduled maintenance and managed operating costs in-line with the prior year despite a 34% increase in system used gas costs due to the higher throughput. This was a significant achievement and reflects DBP’s tight focus on operating efficiency.

Moving now to slide 13 and the details, of our new arrangements with full haul shippers, let me start by saying that the new arrangements that we have agreed with our customers is a significant achievement for Duet. Re-contracting has reinforced the long-term partnerships that DBP has established with its customers and which underpin Western Australia’s most important energy infrastructure asset.

The rationale for re-contracting ahead of the 2016 regulatory reset was compelling both for DBP and for our customers. We’ve shared the benefits of current low interest rates and provided tariff certainty for our customers and revenue certainty for DBP.

Less than 15% of DBP’s capacity will now be subject to the ARI’s 2016 Regulatory Tariff Reset. Our participating customers negotiated the 9.5% reduction to their previous tariff effective 1 July 2014 and an initial relinquishment of 58 terajoules a day affirmed full haul contracting capacity.

We’ve also agreed a revised contract for system use gas. In return, we gained greater revenue certainty and deferred most participating shipper’s relinquishment price for 2021. We extended the term of most of the contracts out between 2025 and 2033. We secured annual escalation of the new tariff protecting DBP’s inflation link revenue base.

We retained the 80% take-or-pay tariff structure limiting the sensitivity of DBP’s revenues the variations and throughput. We signed a material new pothole contract with one of DBP’s full haul shippers. And very importantly we reset DBP’s hedge-book the capture the benefit of current load base interest rates.

As a result, the forecast impact of re-contracting on DBP’s current financial year operating cash flow after interest as shown on the table on the right hand side of slide 13 is expected to be less than AUD10 million compared to the 2014 financial year. In light of this, Duet’s board reaffirmed our 2015 financial year distribution guidance on announcement of the re-contracting earlier this month.

Turning to slide 14, DBP development group, which we refer to as DDG has a very successful year. In September, we announced our agreement with Chevron to build, own and operate the 109-kilometer Wheatstone Ashburton West Pipeline. This pipeline will connect Wheatstone’s domestic gas facility to the DB and GP. It’s currently under construction with an estimated cost of AUD95 million.

All required line pipe has been delivered and the pipeline license has been approved by the Department of Mines and Petroleum. As of 15 August, pipeline construction was approximately 65% complete with back-filling, reinstatement of hydrostatic testing well underway to meet the anticipated completion date at the end of the year.

In January, we won our second pipeline development project. In joint venture with Transalta we will build, own and operate the Fortescue River Gas Pipeline. This pipeline will connect the DB and GP with Transalta’s electricity generation plant serving Fortescue Metal Group’s Solomon Hub iron ore mines in the Pilbara. This 270-kilometer pipeline is under construction and expected to cost AUD178 million.

The project has received its pipeline license and all pipeline required to the construction has now been delivered. With construction of the Solomon Hub meter station already completed, the construction team is now focused on laying the pipeline. And the project is due for completion around the end of this year.

Moving now to slide 15. Most importantly for Duet, the pipeline project Chevron and Fortescue metals group, demonstrate our ability to leverage the strategic location of the DB and GP and the world-class operating and pipeline development skills of DBP’s management team.

We remain confident that we would be able to extend the Fortescue River Gas pipeline to other remote iron ore mining operations in the Pilbara over the coming year. We also recently signed a 9-year maintenance contract for the Chevron operated Gorgon onshore pipeline and metering operations. The contract further enhances DDG’s relationship with Chevron.

Turning now to the United Energy on slide 16, pleasingly, UE’s distribution revenue increased by 6.8% on the prior year despite overall volumes being down 2.6% on higher than average winter temperatures. Regulated tariffs increased by 7.9% from January 2013 and by 4.9% from January 2014. The expected 11% tariff increase in 2015 will further enhance United Energy’s forecast revenue and earnings.

We’ve also seen United Energy’s operating costs continue to fall. The transition of United Energy’s operations is now complete and we’re seeing the benefit of our new operating structure.

UE continue to invest in its network with its regulated asset base increasing 8.6% compared to the prior year. This investment is aimed at improving United Energy’s network performance and building capacity from a still growing peak demand. Maximum demand being the highest half hour of network volume in the period was 4.2% higher than the prior year.

Smart meter rollout is nearing completion. 96.2% of UE’s customers had a smart-meter installed at their premises as at the end of June. The focus is now on changing out the final remaining customers over the coming months as we get access to Premises.

Moving on to slide 17, and Multinet. The highlight of Multinet results is the resilience of the businesses post interest cash flow. This was achieved against the backdrop of lower distribution revenues due to the mild Victorian winter and an initial 11.1% cut in regulated tariffs at the start of the current financial year.

These tariff reductions were driven largely by lower base interest rates and debt margins relative to Multinet’s previous regulatory reset in 2008. As is a normal practice, Multinet re-hedged its debt-book just prior to the start of the new regulatory period, capturing the benefit of prevailing low interest rates.

Multinet is also making good progress on its accelerated pipe-works CapEx program. We’re on track to seek regulatory approval in 2015 for an additional CapEx allowance for the last two years of the current regulatory period. If successful, Multinet is expected to be awarded further tariff increases in calendar year ‘16 and ‘17 in addition to those shown in the chart on the bottom left hand side of the slide.

Turning to slide 19 which sets out management’s priorities for the coming year. We’re focused on delivering our financial year 2015 distribution guidance. We will continue to grow the regulated asset base of our Victorian distribution businesses. This will include investing in United Energy’s network to continue to improve network performance in care for growing peak demand and to meet the regulator’s threshold for Multinet Gas’ accelerated pipe-works replacement program.

We will continue our preparations for the regulatory submissions for both United Energy and DBP ahead of their 2016 tariff resets.

And finally, we would deliver each of DDG’s pipeline development projects within budget while continuing to explore new opportunities to invest capital in accretive energy infrastructure opportunities.

And so, to sum up, we’re very satisfied with another, strong financial results. And we look forward in the year ahead to delivering on our distribution guidance and to the opportunities to grow our businesses. That concludes our presentation.

I’d like now to open up the presentation to questions, first call for questions from the audience.

Question-and-Answer Session

Unidentified Analyst

Thanks David. Just on the DBP re-contracting. Of the 15% that didn’t roll out to new contracts, are they exposed on volume there? Do you have volume miss there and if so how much of that 15% do you actually expect to be taken up?

David Bartholomew

We don’t expect there to be any volume variation there. But even if they were to be, that would be picked up in the regulatory forecast. And that would be rolled in and that would be the basis on which the regulatory tariff would be calculated. So we would be robust to any changes in volume, but we don’t expect that to be the case.

Unidentified Analyst

Okay. So there is no really worry that those shippers chose not to re-contract?

David Bartholomew

No.

Unidentified Analyst

Okay. And in terms of the capacity that wasn’t re-contracted (inaudible), what was the mix of that in terms of end users DDG, thus far generation?

David Bartholomew

It was primarily gas-fired electricity generation.

Unidentified Analyst

Okay. Jumping to UE day, you’re not smart meters, you said 96.2% complete at the end of June ‘13, about June ‘14, am I misguiding – in thinking that the target was 100% but December ‘13?

David Bartholomew

That’s correct. The target was amended by the government to June ‘13, 96.2% is effectively complete. We are currently just over 97%. There are some premises that have refused smart meters. We will make repeated attempts to install the government introduced a rebate system. So as long as United Energy has made best endeavors to install the meter, even if that household is refused that have the meter that effectively counts as installed location.

Unidentified Analyst

Okay. So, I mean, have you met best endeavors based on 100%?

David Bartholomew

Yes, for all practical purposes we are completing the rollout.

Unidentified Analyst

Okay, and as there have been any issues with functionality or anything like that?

David Bartholomew

No, all communicating and data was available.

Unidentified Analyst

Just one last one. Does the AMC decision to delay for direct test field as made as, is there any opportunity there or is that fairly mono?

David Bartholomew

We’re still to see the shape of that of course. And we’ll continue to monitor it. For the foreseeable future, there are measures we will continue to learn a return on those meters. And of course there are exit penalties which would apply if meters did become contestable and someone wanted to replace the meters.

Unidentified Analyst

Okay. Thanks.

Chris Laybutt – JPMorgan

Thanks David. Thanks Jason, its Chris Laybutt from JPMorgan here. Just one question on – just looking at page 20 of your MIA, and your proportionate earnings for the year came in at about AUD190 million, which is a bit lower than your cash distributions. I just wonder whether you could sort of give us some guidance on that number for next year and maybe some sort of a sense of what the moving parts are from this year to next year underlying that.

Jason Conroy

Thanks Chris. I can’t give you earnings guidance although we’re trying to do that with DBP re-contracting at least a couple of line items there. I think the – with proportionate earnings.

We made a definitional change at the half year which I’m pretty sure you’re aware about around they’re more conservative with our net interest expense by including amortized borrowing cost in that line, which has increased net interest expense and also using net regulatory charge as a proxy for maintenance CapEx to give us sort of a longer term sustaining proportionate earnings.

I think the key point to make is that the view we’re taking with that earning calculation it’s a medium to long term sort of health check for us rather than a period on period descriptor route of the ability to pay our distribution.

With very long term asset should expect that over time they would be swings and roundabouts on our earnings coverage certainly on a cash basis, you’d expect us to 100% cash cover at AUD0.785 distribution that we’ve guided and market towards. And earnings will be impacted to some extent by the DBP re-contracting which we’ve given some guidance on that.

So, over the short-term you might expect a continuation of earnings coverage to slightly below 100%, I think this period of around just under 90%. But it’s more of a short-term descriptor rather than indicative of our longer term outlook in business.

Chris Laybutt – JPMorgan

So, Jason is this measure a good measure of your cash earnings in the period or not?

Jason Conroy

I think it’s close but it’s not entirely away there because we as I said have been quite conservative by using net rig depreciation. We’re not spending net rig depreciation at the moment given the amount of growth we’ve got in United Energy. So, we’re spending a lot of our CapEx on growth related items particularly with Multinet as well. So I’d say that its close but it’s not perfect, I think cash is the better descriptor of that at the moment.

Chris Laybutt – JPMorgan

Okay. And just one last question on maintenance CapEx, it’s a good point to raise, in terms of the DBP CapEx that you undertook this period I’m just wondering if you would give us a sense for what those activities were given obviously you’ve got the decline in the tariff coming through next year but in terms of what those activities were versus sort of more broadly and should we think of those as maintenance activities or growth activities?

David Bartholomew

Certainly maintenance activities. The largest CapEx items we have are engine over hauls, other than that it’s primarily maintenance reach the compressive stations and we expect that sort of run rate on ongoing basis.

Chris Laybutt – JPMorgan

Pretty good guide. Thanks David.

Unidentified Analyst

Hi David. Section 5.1 of your director’s report, you talk about the LTIs. Probably two issues in there, firstly, can you sort of give a bit more color that you’ve increased the portion of your remuneration to 67% on distribution to shareholders? Can you explain actually how that target is, is it, you get skill you made 100% if you hit 12.5%?

And secondly it’s an unusual approach for a board to provide a dividend number versus a target around cash flow and why is the board focus on dividend versus all the other boards out there which are talking about operating cash flow and some metric along that line?

David Bartholomew

Clearly, security holders, is very focused on dividend it always has been and always will be. And the board was seeking to align our long-term incentives to maintaining that dividend and income stream to security holders that is our primary objective. So, to that extent it’s consistent and with the interest of security holders.

The other part of that is that we have eliminated the Utilities Index as one of the measures. The Utilities Index is dominated by AGL and a small number of businesses that really aren’t competitive without.

Jason Conroy

Benchmark. I did point that out to the board yesterday but didn’t get reply.

Unidentified Analyst

Okay. Just specifically in DBP, second haul, you typically always had some other revenue in that asset beyond customer contributions of about AUD13 million odd. It was not there in the second half and I was wondering what stopped, what’s changed, what is that other revenue?

David Bartholomew

It just represents new produces, new inlet points and new outlet points. And that activity hasn’t been right over the last what over the next 12 to 18 months. In fact the biggest customer contribution to DBP over the next 18 months probably going to be from DDG as DDG now connects into the pipeline.

Unidentified Analyst

The second issue is S&P issued a credit not that great but negative watch. Clearly, there is a view around, that part of view around the appropriate level of leverage in the business and that you’re not necessarily meeting that leverage.

Looking through the presentation there is not a lot of talk about how you seek to address that approach. Can you give us a little bit of color on what you’re thinking to bring that into the metrics which they need to be acceptable?

David Bartholomew

Sure.

Jason Conroy

They put the businesses’ outlook from stable to negative in the firm of the writing that’s quite important. I guess we announced very soon after re-contracting when S&P made that decision not withstanding that Moody’s designed also to affirm their writing at investment grade stable.

We understand their decision towards really around sort of the next couple of years as supposed to the near-term issues with mainly would be on credit watch negative as opposed to negative outlook.

We’re working on the business plan as we said in the announcement to look at why is it continuing to reduce their OpEx and increase other revenue opportunities in (inaudible) to address the underlying operating cash flow which goes to the credit metrics. I think it’s fair to say that we’ve hit almost all of their credit metrics except one which moves it thought it did. And we’re slightly below that metric on a forecast basis but not materially so.

And we’re quite confident of being in a position to address that issue over the next 12 to 18 months either through operating initiatives and to the extent that we can’t get completely on operating initiatives, we may need to inject a modest amount of equity in that business.

As I say it would be modest, well managed within our existing just under AUD90 million corporate working capital. And their ongoing DRP anywhere from AUD40 million to AUD60 million a year subject to participation levels.

So I suppose the reason it’s not mentioned in the presentation is that with that we’re clearly relaxed is not the right word but it’s certainly under control and we got plan to address it.

Unidentified Analyst

Two normal questions on DBP. Firstly, in your results you have, in your results a blend and extend no-cash interest expense in your number, I’ve never seen that one before. I was wondering if you could give us a bit of color on that is that for last year not this year.

Jason Conroy

Yes, we’ve been blending and extending a number of our hedges through the period just taking into account the current low forward rates. We’ve also had some hedges rolling off and we’re just using the opportunity to take some of the other money exposure that we’ve had and crystallize that into future swaps. It hasn’t gone to cash flow in the year but certainly it’s sort of a non-cash item in our assessment over that.

Unidentified Analyst

And you might mention in the presentation of the revised cycle contracts. Can you explain what that actually might mean and does that translate into a more stable, predictable profitability on a go forward basis?

David Bartholomew

We’ll see the cost of system used gas or gas purchases increases over time. I won’t go into the details of the contract we’ve agreed. But we’ve extended the term of contract and we’ve reset the processing path of the gas.

Ultimately it’s a good thing. If we’re using system used gas, because it means throughput is higher and the variable charge generally covers our system used gas cost.

Unidentified Analyst

Just on get your thoughts on get back on market fund. The smart meters, your meter revenue actually dropped in the second half and year, so it seems odd that you got the crescendo of IP spend the crescendo of installing the meters and the revenue is actually dropping. Can you explain what’s occurring there?

David Bartholomew

There is high depreciation in the end of the year because of the IP systems in particular and also the maintenance. So you have high early yield depreciation which gets back into the pricing structure. And that’s just starting to drop off. You’ll see it stabilize in probably 2016 when the meter asset base is rolled into the distribution asset base.

Unidentified Analyst

Okay. Thanks.

David Bartholomew

Are there any more questions from the floor. One more?

Unidentified Analyst

On DDG, can you just talk to the relationship with Chevron, the maintenance contract, what any terms or contributions in that might actually provide? And secondly, you contributed AUD60 million to Multinet this year and AUD48 million to DDG, maybe give an indication of what sort of equity contributions to what assets you might need in ‘15?

David Bartholomew

I’ll ask Jason to take the second question in a minute. The DDG operating contract with Chevron is relatively small it’s not going to make a material financial contribution. What it does is further develop the technical relationship that we have with Chevron. And that we hopefully lead to other opportunities to deploy capital alongside them and to provide infrastructure to their – their new gas projects in the state.

Jason Conroy

In terms of the capital outlook, as we’ve given in the presentation in the waterfall on page 9, we’ve got about another AUD42 million to go in DDG, which would be spent largely by the end of this calendar year. Like it’s pro forma cash position as I said of just under AUD90 million.

I think typically run rate in the past has been putting around AUD40 million a year into United Energy, we’ve probably target around that level in the coming year. And we may put some more into Multinet albeit very small numbers just to fund its continued ramp up in fast works. But other than that there is no significant draw now on our capital.

Sandra McCullagh – Credit Suisse

Sandra McCullagh, Credit Suisse. David, can you just talk through the playing any difference between the rig maximum and what you’re achieving that’s ongoing in UED?

David Bartholomew

Yes, Sandra, the calendar ‘14 tariff increase of 4.9% included about AUD10 million of network performance charges dated back to 2012. The 11% increase in January 15 included about AUD13 million of charges from – sorry the coming 11% increase includes about AUD13 million of charges dated back to calendar ‘13. So, we’ll see that affect is already in the projected tariff increases.

Sandra McCullagh – Credit Suisse

With reference to the current slide, round 59 as the regulatory requirements and you’re at 79. What is that gap and how do you – can you address that just kind of say this constant shipping away AUD10 million to AUD15 million in revenue?

David Bartholomew

It won’t go on for much longer because in 2016 the target will be reset based on recent historical averages. That’s how the system works. So, the penalties we’ve seen over the last couple of years won’t be ongoing.

But what is it, look, firstly it’s very volatile. One storm event or one heat wave that comes just under the threshold for being an excluded event, results in very significant penalties. We make up positive steady, a very little bit each day. And we get penalties every time we have a major storm event.

So, it is mostly to do with weather. Having said that, we have re-prioritized our CapEx program to seek to minimize steady impact and we’ve introduced a new program to focus on crew response times and outage management to minimize time of supply.

Sandra McCullagh – Credit Suisse

And what’s the thinking that the regulator will allow you to reset to something around what you’re achieving now the 79 versus the 59 because that’s a big gap?

David Bartholomew

It’s simple precedent. United Energy’s performance is by any comparison very strong. If anything was suffering because the performance in prior years was very strong and so that’s where the regulators set the benchmark.

David Bartholomew

Any further questions from the floor? All right, then I’ll open it up to questions on the phone please.

Operator

(Operator Instructions). And your first question comes from the line of Simon Chan of Merrill Lynch. Please go ahead.

Simon Chan – Merrill Lynch

Hi guys, I just got two questions. First one, David, you mentioned you’re going to go back to AR to ask for additional CapEx above the previous allowance in 2016 and ‘17. Can you just give me a feel as to the size of that CapEx you’re after?

And secondly, having the time to hit the right decision, but I noticed some operating fees at Multinet drop significantly from AUD49 million to AUD36 million. Is that simply a reflection of the regulatory reset allowance or the other way spend, how much of that is to improve efficiency?

David Bartholomew

Sorry, what was the line item you’re referring to Simon in the second part?

Simon Chan – Merrill Lynch

Multinet external operating fees?

David Bartholomew

Right. So, firstly on the regulatory allowance, we will go back to the regulator. We’re spending our entire CapEx allowance for pipe-works over a three-year period. And we’ll be going back so that the regulatory allowed a certain amount for pipe-works over five years. We’re spending that in three and we’re seeking regulatory approval for another two one-off basically a pro rata basis.

I don’t have the specific number in front of me at the moment. But we’ll certainly get back to you with the regulatory allowance for pipe-works that was provided in the previous regulatory decision.

In that previous regulatory decision, the regulator did pour shadow that he expected us to come back seeking further approval for the remaining expenditure.

David Bartholomew

With respect to Multinet’s operating costs, we have seen reductions in overall operating costs largely as a result of the fact that in the prior period we saw Multinet go through some significant transitions. And incurred costs to brings its operations back in house. Those transitions costs are now behind us and we’re now seeking to further streamline the organization. So, we’re hoping to see cost at Multinet at or slightly below the current level on an ongoing basis.

Simon Chan – Merrill Lynch

Great. Thanks.

David Bartholomew

Thanks Simon.

Operator

(Operator Instructions). Your next question comes from the line of Baden Moore of CLSA. Please go ahead.

Baden Moore – CLSA

Hi David, I just had a question. You mentioned you had some new pothole contracts on DBP. I was wondering if you could give some guidance on size on those contracts and whether the pricing would be in-line with the – what pricing could be compared to?

And then, can you give any guidance on what you expect the second half contribution to be from DDG from the new pot funds?

David Bartholomew

I’ll ask Jason to appeal for second question. Baden, I’m afraid we’re not in a position to provide any specific detail on any specific contract or shipper arrangement. The pothole that we’ve signed is material. It’s the pricing is consistent with current pothole pricing. And it’s incorporated into the cash flow guidance that we provided for FY15.

So, you’ve seen there that on page 15, of the just check that – on the DBP slide with given forecast EBITDA and interest costs for next year. And the impact of that pothole contract is incorporated into that forecast.

Jason Conroy

In terms of DDG, I can reference you to each of the announcements we’ve made on them. And I think entitle between the two projects. We were targeting I think annual distributable cash of around AUD28 million out of the both projects combined on the plan of them starting first revenues from 1 January next year, which I think as we’ve said today we’re on time and on budget to deliver both of those projects. So your run rate for the first half I suppose would be half of that.

Baden Moore – CLSA

Thanks guys.

Operator

Your next question comes from the line of David Leech of UBS. Please go ahead.

David Leech – UBS

Just typically around DDG, there is a slide in this showing what Fortescue talked about at Diggers & Dealers. What are the prospects for any further developments there over the next 12 or 18 months or so?

David Bartholomew

Thanks David, I was hoping someone would ask. Look, Fortescue is clearly got in mind the extension of that pipeline from Solomon to (inaudible). And ultimately up to on-bridge it’s sized the pipeline at 16-inches, which is more than its required to serve the Solomon alone. And we certainly have the intent to work in those discussions to extend further.

The timing of that really will depend on our focus firstly is on delivering the existing pipeline which we have to do by the end of this year. And that is our first project with Fortescue. We want to demonstrate our credentials and our capacity to do that efficiently and bring the project on time and on budget.

And Fortescue is – it’s priorities as you know remain the getting production ramped up at each of its new sites. When we’ve demonstrated the Fortescue that we can deliver and when Fortescue’s priorities allow it we would be in there seeking to agree a further extension of the pot-line.

David Leech – UBS

Thanks. And while I’ve got the phone, I might just ask a question sort of popped into my mind. It’s just on the relationship with stock coming, have you – the stock investment in, do you have – have you had any further thoughts about it or what it might mean or do you think those – do you agree with their ordeals of this kind of a consolidation. In the utility sector, never expect over time?

David Bartholomew

What I take of it is that various observe of the sector and save value where it is. And we welcome on to the register what their intent is, I have no further information about and do I agree with them about industry consolidation while we have seen consolidation over time. We, as have said previously as it now approaches August most or anybody else and if that happens, the board under it’s – continues to disclosure obligations going from the market.

David Leech – UBS

But do you feel any need to go out there and be aggressive yourself?

David Bartholomew

Not in the night, generally but that’s – no, I think our focus is very much on our existing businesses and growing organically the businesses that we have. That’s delivering significant improvements in shareholder value and that’s where our focus remains.

David Leech – UBS

Thanks for that. Cheers.

Operator

Your next question comes from the line of Will Allott of Commonwealth Bank. Please go ahead.

Will Allott – Commonwealth Bank

Thank guys. Just some follow-up ones on DDG, can you mention whether there were any other discussions occurring in the Pilbara with other operators outside of Fortescue? And then just secondly in the government vehicle itself, is there any desire yet to try and gear it up and potentially drift on the thought of credit metrics across the rest of the grid and get 80% of debt in there and then actually get that sort of back ones overall?

David Bartholomew

The answer to the first question is yes. The answer to the second question is clearly the business has capacity being 100% equity funded at the moment. Our decision to equity fund those projects, was taken on the basis of the incremental IRR from a relatively small investment initially.

We thought security holders would better serve by taking the attractive un-geared IRR on a larger equity base. Clearly, if we undertake further projects we would consider the use of debt funding.

Will Allott – Commonwealth Bank

And do you happen to give any more detail to some of that first part as to maybe even just to potential size of deals or what’s actually out there in the Pilbara that you’ve addressed?

David Bartholomew

There is a lot of iron ore out in the Pilbara, lot of salt bush. And look, Will, I’m not in a position to go into details of the discussions we’re having. I’m sufficed to say that we see significant additional prospects for expansion of that pipeline.

Will Allott – Commonwealth Bank

Okay.

Operator

Your next question comes from the line of Nathan Lead of Morgans. Please go ahead.

Nathan Lead – Morgans

Two or three questions. First off, just on United Energy, as you get on to the next reset. You’re looking to change that formal regulation from cross to revenue cap regulation?

David Bartholomew

Nathan, United Energy has consistently outperformed the regulatory volume forecasts. The other distributors have generally at least in this period have underperformed them. I think the regulator is intent on moving to a revenue cap rather than a price cap, we’re happy to proceed on that basis.

What it does is provide greater certainty about our revenue stream and further isolates us from changes in volume on a year-to-year basis. So, we’ll be likely submitting on the basis of the revenue cap as we expect the other distributors to.

Nathan Lead – Morgans

Okay and then on DBP, obviously you’re talking about the hedge-book reset, what sort of rates you’re looking, average sort of rates on that hedge-book?

Jason Conroy

Yes, we’re looking at as S&P, we’re going to side couple of hundred basis points.

Nathan Lead – Morgans

Okay. And finally, just on the power contract, you got the sort of the appendix there, you sort of split up different that our ship is. The coal contract, as far as I remember it’s got years on return on and return off capital component for the last 20 years. When does that revenue – that sort of capital charge revenue starts to decline for real?

David Bartholomew

I’m afraid I can’t go into the details of the accord contract nor any specific shipper arrangements. We’re prohibited from doing so. But the sort of structure that you have described is accurate. That is co-pays a proportion of the capital cost of the business over a 20-year period.

Nathan Lead – Morgans

Yes, thank you.

Operator

(Operator Instructions). It appears there are no further questions at this time.

David Bartholomew

Okay. Thank you very much. As there are no more questions that will conclude our presentation. On behalf of Duet, thank you for your attendance and your continued interest. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Duet Group's (DUETF) CEO David Bartholomew on Q2 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts