APA Group says customers to pay if pipeline regulated

Angela Macdonald-SmithSenior resources writer

Aug 28, 2024 – 4.41pm

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Imposing heavier price regulation on a key gas pipeline in south-west Queensland will push up energy bills for households and industry, and worsen the risk of shortages, APA Group chief executive Adam Watson warns.

The Australian Energy Regulator’s review of regulation for the South West Queensland pipeline, announced in February, has already forced APA to pause about $200 million of investment planned for the third phase of expansion of its east coast gas grid, said Mr Watson.

APA boss Adam Watson said the group is balancing the dividend payout with the need to retain cash for growth investment. Rhett Wyman

He said a decision to subject the pipeline to full price regulation – which he said was unwarranted – would stymie plans to further expand the network on the east coast and make the market dependent on imported LNG.

The AER is due to issue a draft decision on the review in September before a final decision is made in November.

“It’s clear that under heavy regulation, the cost to consumers from delayed investment in capacity will likely outweigh any public benefits,” said Mr Watson said, after the country’s biggest transporter of gas posted a 9.7 per cent increase in underlying earnings for the full year, in line with guidance.

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Underlying earnings before interest, tax, depreciation and amortisation, the benchmark profit measure used by the market, came in at $1.893 billion. While this was within the guidance range of between $1.87 billion and $1.91 billion, it was below market consensus.

Statutory net income more than trebled to $998 million, buoyed by a reassessment of an interest in a pipeline. Net profit before one-off items fell 58.5 per cent in the year ended June 30 to $119 million, benefiting from an expansion of its east coast gas pipeline network and an early contribution from recently acquired Pilbara Energy.

Mr Watson described the result as “solid”, with revenue, earnings and distributions all rising.

Still, Sydney-based APA disappointed some investors with a smaller-than-forecast increase in the payout to shareholders for this coming year, as the gas pipeline owner seeks to balance the need to find its growth projects while retaining its investment-grade credit rating.

It pointed to a payout for the 2025 financial year of 57¢ per security, which, while in line with consensus, was below Jarden’s forecast of 57.5¢. APA said that underlying EBITDA should increase to between $1.96 billion and $2.02 billion this coming year, a range that also fell slightly shy of consensus.

“We believe the dividend growth will be muted going forward due to APA’s high growth capex expectations over the near-medium term, and ongoing technology transformation costs,” said RBC Capital Markets analyst Gordon Ramsay.

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A balancing act

Shares in APA were down 1.3 per cent at $7.835 in early afternoon trading on Wednesday.

The payout for this coming year will rise from 56¢ for the 2024 financial year. APA had already declared a final dividend of 29.5¢ a security for 2023-24.

“We are trying to get the balance right between paying out healthy dividends and also trying to ensure we retain enough cash to be able to support and internally fund our organic growth pipeline,” Mr Watson said.

Should the AER decide to impose the South West Queensland pipeline to full price regulation, some $100 million of EBITDA may be at risk, according to one estimate.

But Mr Watson said none of the public submissions to the AER suggested APA was exercising market power and noted pricing on the line for customers was fully transparent.

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“There is no market failure: of all the public submissions made to the AER none of them suggested there should be a change to the current regime,” he said.

Mr Watson said full regulation would slow investment decisions in gas transmission on the east coast, increasing the need for the market to turn to imported LNG.

He referred to analysis by consulting firm Frontier Economics that found that gas prices for industrial customers could as much as double should LNG imports set the domestic price for gas all year round.

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