Lgi Ltd

ASX:LGI

Q2-2026 Earnings Call

[Sam Wells]

Good morning, everyone, and welcome to today's LGI First Half FY '26 Results Call. My name is Sam Wells from NWR Communications. And joining me from LGI today is CEO, Jarryd Doran; as well as CFO, Dean Wilkinson, on behalf of the Board. Jarryd and Dean will take a few minutes this morning running through the results released to the ASX. Following this, the audience will have an opportunity to ask questions. There will be a choice of 2 options. First, analysts and investors can either raise their hand via Zoom should they wish to ask a verbal question to the management team or you can also submit written questions via the Q&A function at the bottom of your screen. [Operator Instructions]

And thank you, and over to you, Jarryd.

[Jarryd Doran, executive]

Thanks very much, Sam, and thank you for everyone who's joining us this morning. I'll take you straight into our presentation. So appreciating it's Friday, everyone is very busy right now. We'll try and keep it to our highlights and the key points. But I do always like to start off by just reiterating who is LGI and what is it that LGI does.

So for anyone who may be unfamiliar to our story or new to LGI, we are a market leader in the collection and the conversion of biogas, in particular, from landfill sites around Australia and the subsequent conversion of the biogas into a number of commodities. So renewable electricity is one of our primary commodities or our revenue segments.

Carbon Abatement Credits or Australian Carbon Credit Units is our next primary revenue center. And then there's also an operations and maintenance and a services division in our business, so site infrastructure and management. And across our presentation today, we'll talk you through the financial performance of these divisions and also our plans and our strategy going forward.

So straight to the highlights. I'm very pleased with the results that the team has achieved over the first half of FY '26. If I start off by drawing everyone's attention to our EBITDA that we've achieved a 33% increase when you compare this to the same period of time last year. When we come through the detail of the drivers behind it, I think it will become quite clear, but such a sizable step up in our earnings is something that we're extremely proud about, and that directly flows through into an increase in our NPAT as well.

This has put us in a position where the Board has resolved to pay a fully franked dividend of $0.0125 for this half. That's a slight increase compared to the same period last year. And also in the half, we completed our recent capital raise, which started in October and came to conclusion in November, which was excellent to see the support from our existing and our new and expanded shareholder base as well. Now talking into the detail of how we got to the financial numbers.

So if you were to look probably on the far right side, I'm very pleased to say that the team have worked diligently over this period. There has been no lost time injuries through that reporting period, which is fantastic as we've added more people to the team, as the people in the team are working more, and there's simply just a higher level of work and productivity around the business.

That directly shows through our increase in our biogas recovery. So that is an increase of 37% for the 6-month period. Up to 82 million cubic meters of which we've collected and converted through our equipment in the portfolio. That increase in biogas has allowed us to also increase our ACCU creation. So that's up by 19%. And our megawatt hours, our renewable electricity has increased by 41%. So again, really, really strong, very solid increases there from an operations standpoint.

And all the while, if I now take you to the mid-section of this slide, our team has secured more landfill gas contracts. So I'm pleased to talk to 2 new biogas rights arrangements that we've secured in the 6-month period. They're currently working through the Clean Energy Regulator's registration and approval process. And if they're successful, we'll bring them into an operating contract in the coming months.

We've managed to convert a number of sites which we secured and signed 6 to 12 months ago, that have since come online. And those biogas flows have transpired through these numbers, creating ACCUs, and we're seeing the benefit of those numbers come into the second half or sorry, into the first half of this financial year, and you'll largely see the benefit in the second half.

I'm also really pleased to talk about the timing around the Mugga Lane commissioning of our batteries. So the team has done an amazing job down there to get it to this position where we now have dates that have been provided by both the network authority and AEMO around the commissioning of those assets. And we still see a path where we can have them adding value, working through commissioning certainly by the end of this financial year, so end of second FY, which is fantastic because that's consistent with the update we provided to market as recently as the equity raise in October.

We've also made advancements with our Belrose project, and I'll talk to this in more detail, but it's currently working through its final regulatory approval process. Our Nowra project has now moved into that phase where we're advancing our plans and submissions for the various bodies. And again, we're very confident around the overall time frames of this strategic pipeline that we're building out. And it's great to see that as we take you through the slide set today, our step-up of trading capacity will continue to increase to and above the 80-megawatt target that we talked about just in October.

So overall, we're very pleased with these results, and it certainly puts us in a nice strong position as we come into our second half for the financial year. So with that, I'll just take you into some more detail.

Now the slide we have on the screen was new to the market in October and November during our equity raise, and it very much tried to paint a picture of why it is that we are wishing to expand our operating capacity in the electricity market and how it is that we're going to keep growing our business and creating more value. There's no change to that information. And again, you'll see today through both the projects we're providing updates on time frames are all still consistent. So we're quite pleased with that, but that's just more of an important starting point.

It's important to understand as well over the 6-month period that the markets that we trade into and the commodities that we actually create, there have been some interesting movements. And we thought it was very important for everyone to understand the pricing which LGI was able to capture and realize, which we presented there on the right-hand side across our 3 core commodities of electricity, LGCs and ACCUs.

And if I draw your attention to the electricity line, for example, when you combine the generation assets we have in Queensland and New South Wales, the actual price that we have created or the revenue, sorry, we've created from those assets equates to $97 worth of revenue per megawatt that we have exported or traded into the market. Now this has happened while there has been some softening of the wholesale electricity price itself, the average electricity price through that same period was around $77. And the way in which LGI has been able to capture and realize a higher price is through a combination of our DAC system and how we trade the assets in the day or how we optimize the output, how our team engages in hedging into the contract and the forward electricity market right through to the benefit that the Bunya battery has contributed as well and the FCAS revenue flowing into that segment.

Now I think it's important for everyone to be reminded of is that LGI has been observing these changes in the electricity market for so many years. And this is why we first looked to invest both in more generation and in batteries to put us in a position where we can decouple from the average price, achieve a higher price than the averages that are in the market. And I believe we've been able to demonstrate that since the year that we came to the ASX in FY '22, which is what the chart on the left-hand side is showing you. We've used this chart before, and it's a good one to come back out to the market with.

So using FY '22 as our base year, you can see the green line is presenting our earnings, our EBITDA for that full year. The blue line or the teal line is the electricity commodity price and the orange line is the ACCUs in that period. And if you follow the years going to the right on that chart, you'll see that the ACCU price and the electricity price in FY '23 was largely sideways. FY '24, they were both down slightly.

Fast forward to FY '26, electricity prices, in particular, are down quite a bit to that FY '22 point. But our earnings, our EBITDA has actually increased year-on-year as we advance through time. And this is a direct result of all of what I just covered off before from our operating model, our contracting model through to our strategy and our execution of that strategy. So I'm quite pleased to see this chart is just a nice simple way to demonstrate that we are actually delivering and our strategy seems to be quite sound and strong. We'll cover off more on the pricing of LGCs and ACCUs in the financials.

Looking at the contracting footprint chart here, there was a change that we made to this, moving it from a map to a table because we have secured more sites each half each time we talk to market. And I'm pleased to say we now have 2 more sites that are on this chart here. So in particular, we have a contract signed in Mackay, and we have a contract that's been signed in Nudgee with Midwest Council.

Now both of those contracts are conditional on them receiving a successful Clean Energy Regulator accreditation. So that's currently with the regulator at the moment. If successful, LGI will develop a gas collection system at the landfills to produce ACCUs and look at the prospect of other revenue like electricity in the future. But as that stands today, we now have 36 contracted sites across our portfolio, which is fantastic.

Another key item to talk through this morning is the regulatory environment. And it's been a very busy 6-month period coming into December, starting off firstly with the Australian carbon credit units. LGI has been a very big part of the integrity improvements that have been considered and have been worked through by the federal government. And I'm quite pleased that we saw in late November, the federal government passed through the new ACCU method for landfill gas projects.

And it's entirely as LGI was expecting from integrity improvements, upward sloping baselines, consistent baselines on projects. And that's fantastic for LGI because now that we have this new method available in front of us, it gives us the policy comfort and the policy certainty to consider investing in new projects, but also to consider investing in existing and older projects to further increase our ACCU creation.

Now at the end of the day, what does it mean for LGI? Yes, there are some of our legacy older landfill gas projects that create ACCUs that will see a contraction of their ACCU creation, both with the new baseline standardization and the upward sloping baseline coming into effect. But as we have been saying, we've been working very hard to continue to chase the gas from our sites to combat that baseline effect, but also bringing in new sites into our portfolio so that the net effect is that our year-on-year ACCU creation remains steady.

And what we're actually providing the market with today is a comfort factor that we see in FY '27, we should expect to see a modest increase in the ACCU volume relative to the current year. And that is the first year where the ACCU method, a new method will take effect on our portfolio is into FY '27. So that's really at a very high level there on the ACCU front. There is a lot of material that is available for the public to read if you've got the time and -- but it provides us ultimately with comfort to reinvest in existing sites and invest in new sites.

On the -- still on the ACCU space, there's also been an update where the government is now allowing parties which had carbon abatement contracts, so essentially carbon offtake contracts with the federal government, the option to exit some of those in a format where there will be a partial delivery of the contracted volume, so 25% of the contracted volume would still be delivered, but the balance of the undelivered quantity can then be paid out to the federal government as a way of exiting the CAC, the carbon abatement contract.

Now the government has chosen to call this a PEA. It's a Permanent Exit Arrangement. They certainly love their acronyms. Again, there's material that you can find in the market. What does that mean for LGI? Well, ultimately, there is some volume there, a smaller volume of our portfolio that we were otherwise due to sell and transact to the federal government that we will now be able to value at spot price of ACCUs, which is an improvement to what the CAC price was at the time. A very minor improvement, but still worthy of noting in itself.

And the third regulatory space item that's worth just raising to everyone's attention is we now see the government has actually passed through the policy framework for the replacement to the LGCs. So the large-scale generation certificates have done a very good job of helping spur investment in renewables, decarbonize the energy sector. That came into effect in the early 2000s. It has an end date of 2030. Now that the government has put forward this policy framework, we have some pathway, some clarity of what that looks like beyond 2030.

We haven't yet seen any pricing for these REGOs or the new commodity per se, but we'll continue to monitor that, and we'll consider the appropriate time to start engaging in some of those transactions. But across those 3 areas, that's pretty key policy improvements that we now have or policy clarity standpoint, which is great for us to invest in the future. So on to operations.

I talked through earlier about the significant increase in our biogas recovery, and it's quite noticeable when you look at it in the chart form here from half year FY '23 through to now. It goes without saying that obviously, the commissioning of our facility in Eastern Creek is a contributor of this because we now have a 6-month run rate driving through these numbers. But equally, if you were to peel out the Eastern Creek site from its contribution, the increases that our team have achieved from all other existing portfolio sites across the group, I believe, was 8% of an increase year-to-year.

So that's still a very healthy amount of biogas increase being achieved from chasing the gas, which is what we do, it's how we operate. But it's always fantastic when we can bring online new sites like Eastern Creek. And also in this period, we're happy to say that we brought online the flaring facility at Warwick, at Jandowae and also at Lithgow. So that had a contribution into these flow rates also.

Very similar story when we look at our generation or our electricity generation portfolio. So firstly, the team have done an absolutely amazing job in planning and delivering preventative maintenance and reacting, sorry, to unplanned maintenance. And you can see that in the top chart with the team achieving a 98% availability of the plant and equipment to be available to generate and trade in the energy market. And this sits way above our target of 95%. And you can see they've done an amazing job of maintaining that consistency of 97%, 98% now for some years. And that really just means that we're in the best possible position to capture pricing to create value with our assets from the market. So that's fantastic.

Coming down to the volume side, again, you'll see the similar stories to biogas across this whole period of time, there's been incremental increases, but particularly when you look at the first half of this financial year, there has been a step-up there, and that's largely through the commissioning of Eastern Creek and the addition of the 2 units in Canberra contributing across the 6-month period, which is fantastic.

ACCUs. ACCUs have been -- in itself, there is a healthy increase in the ACCU volume. It may not be as noticeable in this particular chart format, but I believe it was a 19% increase in the ACCU volume over the same period. And that's fantastic because we are trying to demonstrate that LGI can not just extract more gas from existing sites, but we can concurrently work on integrating new sites into our portfolio, which you can see here through these increases. And ACCUs will continue to be a core part of our business going forward. It's been core to our history, and it's a great source of funding as we roll through our megawatt capacity build-out as well.

So I'll hand it over to Dean for the financials.

[Dean Wilkinson, executive]

Thanks, Jarryd. Starting off with our profitability and our return. You can see that we've had over a 20% increase in revenue. Now that's off the back of the volume increase that Jarryd's just stepped you through. And all of our commodities, we've either achieved at or above the actual spot market rates. So that's reflected in those revenue numbers. As Jarryd said, that drops down into EBITDA, and there's been a healthy increase of 33% in our EBITDA.

Our depreciation and amortization is up. It's up 43%. What we've done is we've commissioned the Eastern Creek site, the additional couple of units at Canberra as well. And so as they've been commissioned, they've moved into assets in use. And so you'll see that step-up in depreciation as a result. It's very pleasing to see an improvement on what was already a very good number, which is that EBITDA margin was 47%, but now it's over 50%. It's 51%.

Effectively, that's just showing that a lot of that revenue is dropping right the way down into EBITDA, and there is some very good cost control measures that are built into the business to make sure we can achieve that. The EBIT margin also increased. Despite the fact that the depreciation and amortization has gone up, the EBIT margin has also increased. So we're very pleased with that.

Interest expense. There's been a little bit of an increase in interest expense for the period-on-period comparison. We did actually have some borrowings in the book all the way through to October. Once we did the capital raise in October, we paid down the debt facility down to 0. However, there was a good 4-odd months of interest expense built into the numbers here. So we'll see that improve when we look at the whole year numbers when we come back in 6 months.

NPAT is also up. So it's up 28%, and that's given us the opportunity to have a modest increase in the dividend of $0.0125 as opposed to $0.012 as it was last 6 months. Just focusing on the revenue for a second in terms of the actual split of the revenue. You can see that LGCs, I've called them environmental credits here, the LGCs have increased. That's as a result of both the volume increase and some of our hedge pricing that we are still receiving on those LGCs. So a good result for that segment of our portfolio for the 6 months.

Focusing specifically on electricity. So there's been a significant step-up in volume. Jarryd has already talked through that through the commissioning of Canberra and Eastern Creek. And there's also been some great cost control measures, which actually have meant that the increase in the EBITDA margin is actually higher than the increase in the revenue. So that's a great result. There is absolutely a focus on cost control in our Generation segment. It is by far the largest cost area of our business. So we do indeed focus on it.

Looking at the forward electricity prices on the chart on the right, we are still seeing average prices in Queensland a bit over $80 and in the high-90s for New South Wales across the next couple of years, these prices taken from the ASX forwards market. What we're also seeing is the -- this is the last -- sorry, the last 6 months of electricity pricing across 24 hours. So it's 181-odd days of electricity pricing condensed into the one chart, and you'll see Queensland and New South Wales there.

What we're seeing is the duck curve as people have been calling it in terms of the sort of the pronounced increase in price in the morning, but certainly that pronounced increase in price in the afternoon. So as average electricity prices have dropped the duck curve is still there. It's still absolutely a feature of our market, which again plays into the strategy about putting more batteries on our sites.

The Carbon Abatement segment or ACCUs. We've talked -- Jarryd has talked about chasing the gas. Absolutely, we're chasing the gas. We're making sure that we increase the gas available for us to create ACCUs. We do that by chasing existing gas on sites we're already on, plus also plugging in the new sites. We win new sites. We're still going to go through the process of obviously installing the pipe work and actually connecting up flares. And so we're doing both those things has increased the volume of both gas flows and ACCUs.

Looking at the market chart on the right, so that's the last 12 months of ACCU pricing. You can see it's actually very stable. So it's traded in a pretty tight band, just drifting up slightly. We're seeing that market mature a lot more than maybe what it was, say, 2 or 3 years ago. The maturity is the fact that there's a lot more buyers in the market now. And so the market is responding a little bit better to fundamentals rather than market sentiment. So that's actually very encouraging for us in terms of being able to not just sell into the spot market, but also set some prices into the future with forward contracting.

The construction part of our business. Construction is actually a little bit down on what it was this time last year. We have indeed focused on chasing the gas, as I mentioned a minute ago, and actually installing that new pipe work. That's meant we've had a little less time to do construction work. That's fine. We are more than happy to chase the gas and get those volumes up on the gas flows. But it does mean this particular segment is down a little bit on last year.

So the balance sheet. Now the movement in the balance sheet is pretty much dominated by that capital raise that we did back in October, November. There's some key outcomes as a result of that equity raise. First of all, we paid off the debt facility, as I mentioned. So the facility is still there. We still have it. There's still approximately $50 million worth. However, we've actually paid that down to 0. The cash, the cash has significantly stepped up as well, and that cash position includes some term deposits with the surplus cash that we have just for the 6 months. Obviously, equity stepped up when we did that capital raise as well.

Other movements in the balance sheet, you'll see that the environmental -- the ACCU environmental certificates have actually increased period-on-period. I'll talk about that in a minute in terms of cash flow. Property, plant and equipment obviously is increasing as we're building out the portfolio of assets that we're looking to build out. So with the cash flow, both operating cash and cash conversion are down based on this time last year. A couple of reasons for this.

One is that ACCU position I just mentioned. You can see that we're holding more on balance sheet than we were this time last year. So that really reflects the timing of how the forward contracts are actually just maturing and settling and when we're getting the cash for those forward contracts. So as that buildup in the balance sheet has occurred, we're not quite seeing all of that cash flushing through into the cash flow in this particular 6-month period. It really is a timing issue. And as those mature -- forward ACCU contracts mature in the future, we'll see that cash come through.

The other thing is as our profit has grown, there has been an increase in our tax expense. We did pay our tax position for FY '25 or income tax return for FY '25 in the 6 months. We actually then have completed the tax return, and there's a modest tax refund coming back our way. So again, but that's just built into those cash flow numbers.

Just focusing on the CapEx spend for the last 6 months. Now this is an interesting chart because the 3 bars on the left-hand side are full years and the one on the right-hand side is just the last 6 months. And so we've already spent more in the 6 months than we had in 3 years ago. The bulk of it, by far, the bulk of it is construction of our high conviction projects, which are well underway and they're sort of being spent so we can achieve an on-time commissioning date.

The key focus in the last particular 6 months or in the 6 months that we're just talking about is the purchase of the 6 batteries for our Canberra site, so our own CapEx spend for the last 6 months. The other thing to note is the pipe work. I did talk about us chasing the gas and installing new pipe work. So you can see that our pipe work CapEx has also increased. So that will be a feature of our CapEx spend into the future as well.

All right. I hand back to Jarryd now.

[Jarryd Doran, executive]

Thanks, Dean. So I'll talk to strategy and our forward-looking view as well. But it's important for everyone to understand that while we do emphasize how much we see from an opportunity perspective in the energy market, what we're building out in electricity, we're certainly not suggesting that we are neglecting the desire for us to grow our contracted footprint. And so the purpose behind bringing this chart here is to show that over time, how we have grown the sites we have under contract in our operating portfolio.

I talked about the 2 extra sites that we've secured working through the Clean Energy Regulator's approval right now. But that is track record demonstration of how LGI has applied this strategy in the past. It's worked for us, and we'll continue to seek more landfill gas sites that work well for us or complement our portfolio into the future as well.

And really, in the 6-month period, we have 3 projects here that we're quite proud about to talk around the conversion of those from a contract that we won was working through the Clean Energy Regulator's approval process. We obtained that approval, and we were then able to quite quickly mobilize the site, install the gas collection system, deploy a flare, commission it and have it brought to operation. So across those 3 projects there between Warwick, Jandowae and Lithgow down in New South Wales, it's an amazing effort from our team. And again, it's fantastic to see the benefit of that now contributing into the later part of the first half and certainly more fulsome in the second half of this financial year.

Bringing everyone back to the electricity market, though. So Dean had the chart there before of the duck curve and showing you the actual pricing in the market. Now we've used these charts before as a way of helping people understand it's not just the average price and how to think about what is LGI doing and how is it sort of trying to leverage value from that. It is the spread within the day and the intraday separation, what is of highest interest to us. And these charts give you that insight across a period of time both in Queensland and New South Wales. We've affectionately used the state of origin colors here to give you Queensland on the left and New South Wales on the right.

What you're looking at between the colored bar chart in the first instance on both of these charts is the quartiles of the price bands. And so this is to demonstrate the points at which a battery would charge or would take from the market to fill the battery up and the points at which it would discharge. And it's essentially the lower 25th quartile is the point at which our system, our strategy would charge those assets, and it's the upper 75th quartile at which we would be discharging and we'd actually be operating the asset. And if you look at that spread between the upper and the lower band across time, we have then given you a trend line, which is the solid dark blue color on both those charts. And you can see it's trending up.

So even in the most recent 6-month period from July to December, where the average price has come down, and you can see the bands have slid down as well, the overall trend is still increasing, indicating that there is still a separation of price in the day, which is of attractive nature to LGI. And we still see this as high strategic benefit. And hence, why we still have a high conviction to build out more megawatts of flexible generation capacity and couple that with batteries, so we have even more enhanced flexibility in how we trade in the market.

It's really exciting to see the way that these charts are playing out because yes, there is more capacity coming in both from a household level in the household battery scheme supported by the federal government. We're seeing more projects come online, large battery projects into the market as well. But we're not seeing the shape of this curve change, even though we are seeing some of the larger macro themes like average price that is changing.

Do you have anything else to add to that, Dean?

[Dean Wilkinson, executive]

That's well said.

[Jarryd Doran, executive]

And we'll most likely keep bringing this chart back to the market as well because we look at this monthly, sometimes more than monthly. But I think it's quite insightful to consider relative to these changing market conditions. Now how is it we're going to use that information or use that insight? Well, it's the build-out of our portfolio. And so that's what we largely brought to the market when we did our equity raise in October and November was to extend our high conviction development pipeline from 56 megawatts to in excess to 80.

But the projects that we have in that pipeline that took us from where we are today at 21 megawatts to 56 were these 3 projects that I have on the screen in front of you, which is our facility in Canberra with the addition of the batteries. As I said earlier, we are on track for those batteries to be commissioned late in the second half of this financial year, full run rate contribution into FY '27, and that will actually have a 57% increase in our trading capacity as we step up from 21 megawatts to 33 megawatts in our portfolio. So that's really exciting. All the equipment is on site. The team are ready to go. We're just finalizing the commissioning plan with the network and AEMO.

The second project here in our strategic growth pipeline is our facility at Belrose. And this project is quite exciting because it's our first stand-alone battery project. So we have no generation on site. It would be batteries being deployed, batteries charging from the network, discharging back into the network, creating value through FCAS, perhaps even creating value through network support contracts. But it's our first opportunity to demonstrate how we see this particular model playing out in other locations at a smaller scale all across Queensland, New South Wales and even Victoria. South Australia is also interesting as well.

But Belrose is very exciting because it's actually a simpler project than Mugga Lane, where when it is just one type of equipment, just the batteries, the process of network connection, commissioning is much more streamlined and fast tracked than when you have the hybridization projects like Canberra and Nowra. They do take more time because there's more to it. So we're still quite comfortable with the overall time frames of Belrose in that we see works on site being completed through the later part of this year in a position where commissioning can start very late in the calendar year of this calendar year. So really contributing into the second half of FY '27. And that will result in a step-up of our portfolio capacity from 33 megawatts to 45 megawatts.

And then lastly, on the Nowra renewable hybrid. So this is a really cool project, yet again, an example of where we've struck a long-term gas rights contract with the council. We've made significant increases in the biogas that we're recovering. That has resulted in us reassessing the best way to use the biogas and that is why we're now saying a 3-megawatt generation site with 8 megawatts, 16 megawatt hours of batteries is the optimal combination of equipment. This project is now advancing through the preparation of the development application and the various network and the regulatory approvals.

Our expectation is that we should be in a position to be commencing our construction of the site as the Belrose project construction is nearing end. And therefore, we see Nowra being in a position where it contributes late into FY '27 second half, which again is consistent with what we told the market in October and November for our equity raise. But these 3 projects will be very critical to that step-up in our capacity, and it's very exciting for us to really start to deepen our value creation from our assets into the energy market.

And that means going forward, we are comfortable to reaffirm our guidance for this financial year in that we still expect to see our full year EBITDA increase by 25% to 30% in comparison to FY '25. And this is subject to market dynamics, the timing and operational matters that are outside of the company's control. And it's also just worth highlighting, too, that there is a seasonality with our earnings.

If you look back through our halves for the last few years, you would generally note that the first half is not half of the full year. In fact, we quite often see the second half is quite strong for LGI from a range of factors being activity in the electricity market, some of the buying activity and the liable parties from a safeguard mechanism coming in and acquiring credits for their offsets through to how our team does an amazing job to bring online projects and bring online more capacity as the year is coming into a close. So we're still very comfortable with our guidance, and it looks like a very exciting few months in front of us as well.

And with that, we're happy to open it to questions.

[Sam Wells]

Thank you very much, Jarryd, and thank you, Dean. [Operator Instructions] Two pre-submitted questions. Firstly, just on policy and the regulatory environment, which you've touched upon. Can you just elaborate on the impact of new ACCU methodology and Permanent Exit Arrangements on LGI's future ACCU creation and anticipated [indiscernible].

[Jarryd Doran, executive]

I'll talk to you on a volume perspective, and I can let Dean talk to the cash flow position. But essentially, overall, what we're trying to simplify this message as is the year-to-year change for LGI will see us still create a modest increase in volume from current year into next year, and we still see a pathway in the following years after as well. If you really get into the detail of it and if someone was to look at individual projects and how they've performed, and you can see this through the Clean Energy Regulator's register, you can see the ACCU creation volume.

If you were to analyze this, say, in 2 years' time compared to the years prior, there may be projects within our portfolio where the overall creation volume does come down as a direct effect of an increase in the standard baseline and the upward sloping baseline. But given that we have been supportive of these integrity measures with the government, with the broader industry as well, we've strategically tried to buffer our exposure to that by chasing the gas, increasing abatement from the broader portfolio and bringing in the new sites. So my goal from this process was that the effect would not result in us having a contraction, and we still seem to be on track to achieve that from year-to-year.

[Dean Wilkinson, executive]

Yes. And from a cash flow perspective, clearly having more ACCUs, even if it is a modest increase, gives us the opportunity to either sell them in the spot market or more likely, we'll probably sell them in the futures or forwards market. Same with the Permanent Exit Arrangement. With the Permanent Exit Arrangement, we're currently -- they're currently in our portfolio at the current contract price with the federal government. In all cases, that price is below the current spot price.

So when and if those ACCUs no longer need to be subject to that existing contract arrangement, we'll be able to sell them for a higher price either in the contract spot market or in the futures market as well. So both the regulatory certainty around the methodology and the Permanent Exit Arrangement will result in slightly increased cash flows from our ACCU portfolio.

[Sam Wells]

And just on gross margin, can you just elaborate on the 90-odd basis point gross margin improvement to 76%? And is this sustainable amid potential volatility in electricity LGC and ACCU prices?

[Dean Wilkinson, executive]

Look, the short answer is yes, it is sustainable. So as we've mentioned, we are positioning -- LGI is positioning ourselves to take advantage of the volatility in the pricing. So average pricing coming down is not necessarily going to impact that margin position too much. The sort of the business model of LGI, where one of our largest cost items is actually the royalty we pay back to our landfill owners being a percentage of our revenue is also a protection of that margin in terms of -- if there was to be a decrease in our revenue, there's actually a decrease in one of our largest cost items as well. So that margin is well protected in terms of both the business model and also the business strategy around trying to chase the pricing in the duck curve.

[Sam Wells]

Great. And we'll switch to some live questions. First live question from Jared at Morgans.

[Jared Gelsomino, analyst]

Congratulations on a really solid operational result. Just a couple from me, if I can. Maybe just if you could just build us the path to EBITDA. I mean, Jarryd, you touched on the seasonally stronger second half. But could you maybe just understand the composition of getting that $12.5 million to $13 million of EBITDA to hit guidance? I mean I'm just understanding what arms of business will contribute to that and maybe how much Mugga Lane will contribute to that, assuming it goes according to plan?

[Dean Wilkinson, executive]

Yes, yes, I can cover that off. Look, there's a couple of pathways there. So first of all, those 3 sites that we switched on were switched on. In fact, I think one was as late as November. I think Lithgow was in November in terms of the ACCU. So we are expecting another a full 6-month run rate from those 3 sites. They're actually flying quite well. One or 2 of those sites are flying a little bit more than we expected, which is great. So we'll get some good ACCUs from those sites. We're in the process right now building out some pipe work on some other sites that we won the contracts for. So we will see an increase in those ACCUs in the second half.

[Jarryd Doran, executive]

This would be the Midwest -- sorry, Central Coast sites and trying to see if it's possible to, pending the approval from the Clean Energy Regulator, bring in or fast track those new contract wins as well into our second half from an ACCU creation perspective.

[Dean Wilkinson, executive]

And from a Mugga Lane battery perspective, in my forecasting, I've really only got that built right into the back end in June, a little bit in May. So there is a contribution, but it's not as significant as you might imagine in terms of Mugga Lane assisting us achieve those EBITDA outcomes. And the EBITDA outcomes are also built on a knowledge and understanding of our contract -- electricity contract positioned for the next 6 months as well.

[Jared Gelsomino, analyst]

Great. That's clear. And maybe just on the LGC guys, if I can. I mean, just the revenue expectations in the second half because obviously, we're still achieving really high price there and that's [ significant ] and that pricing is obviously coming off quite sharply in the year ahead. So just trying to understand maybe the hedge position, what you can sort of speak to within that revenue stream?

[Dean Wilkinson, executive]

Yes. Look, what I can speak to is I'm happy to say that, that hedge position is going to be there for at least the next 6 months. So we'll be there until the end of the FY -- yes.

[Jarryd Doran, executive]

And Jared, beyond that, certainly, with the commissioning of the batteries in Canberra, the price uplift that we achieve of the energy, the FCAS that comes through or the other revenue sources that those assets allow us to access will very much offset the view of how the commodity price of LGCs has drifted down as our hedging position starts to wind out into the new financial year.

[Jared Gelsomino, analyst]

Yes. Okay. That's clear. And sorry, maybe just one final one, just while we're on hedging and pricing, just maybe broadly on electricity pricing, obviously, seeing some weakness within wholesale electricity prices. I was just interested in that hedge position. I know you look at it closely, Dean, but just how do we sort of think about that into the second half, just given maybe pricing was a little bit softer than we would have thought for this result?

[Dean Wilkinson, executive]

Yes. So the hedge position is still in play for the 6 months we're currently in, so for the 6 months. So it is hedged very similar to as it was in the first half. So we're still looking at about 75%. The one subtle change will be in the period of April to June when we're actually switching on and going through the commissioning of the batteries at Mugga Lane, the hedge position in New South Wales is a little bit less than it would have been otherwise. But that's sort of by design because we want to expose those gen sets to the price anyway and the batteries to the price to the spot price. So we're pretty comfortable with the hedge position across the next 6 months.

[Jarryd Doran, executive]

And a little bit more color too of keeping on the first half. We entered into the financial year with a position and a percentage of hedging across our generation assets in the different regions. As we were monitoring and observing the pricing, which did surprise us as to how low it was relative to prior periods, but we actually altered our hedging program. And it's that level of active monitoring and reaction and response to it, which has enabled part of -- partly how we got to the price point we got for the half. So it's not just a set and forget. And there can sometimes be value in considering exiting out of hedges, again, because of market factors changing. So it is an area that we actively look at quite frequently.

[Sam Wells]

Next question coming from Tim Elder at Ords.

[Tim Elder, analyst]

First one, just on some strong biogas growth that we saw this half. You're talking about how a lot of that is kind of related to Eastern Creek. Just interested if we should be baking into our forecast a significant increase in kind of ACCU generation as well in coming halves?

[Jarryd Doran, executive]

Good question, Tim. So probably worth me first just unpacking that biogas increase number. If you were to take Eastern Creek out of the mixture and just look at the portfolio of sites LGI had and had this time last year, the increase that we achieved was still 19%, wasn't it?

[Dean Wilkinson, executive]

I'm going to say 8%.

[Jarryd Doran, executive]

8% -- sorry, my apologies. So 8%. Now that's our direct reflection of how we chase gas and how we actively expand collection systems. That number is generally a better representation of how to think about like a more sustained forward year-on-year increase. And historically, we would tell people that what we aim for is at a minimum, a 5% increase of biogas. It is achievable that we land on 10%, sometimes even higher from just the year-on-year increases.

But certainly, over this period, a contributor of why it lifted up even higher again was just the sheer fact of Mugga Lane's operation flowing through those flows. Now Mugga Lane does not actually create carbon -- Eastern Creek, sorry. Thank you. Eastern Creek doesn't create carbon credits, Mugga Lane does. And so I would caution you on using the total volume of biogas that we've reported as a proxy of ACCU creation. It's not a tight correlation in that sense.

[Tim Elder, analyst]

That's really useful. And then just in terms of Mugga Lane, maybe you can just talk through like you say you've got the dates from AEMO, like how much testing will be required post those dates coming through?

[Jarryd Doran, executive]

Yes, that is a really good question, genuinely because this is a new process for LGI given the size and scale of the project and the AEMO interaction. So really, it can play out in 2 ways, all going well if the equipment performs as per the modeling and all of the simulated operational outputs, commissioning can be quite quick. I'm talking a couple of weeks. We are required to operate the equipment, demonstrate it's operated as per the modeling, have it validated and then you get clearance to move to the next phase of your testing. So all going well, that could be started and finished within a couple of weeks.

Where projects can get bogged down or slowed down in the space is if the equipment does not perform in line with the expectations because then you have to go back, work with your modeling team, work with your engineering advisers to understand why what's going on, make changes and go back through e-mail. Now again, Dean and the team have been very conservative here in saying, well, it's on site, we have these dates. The financial contribution is really pushed to the very back of the financial year. So we've done this intentionally because it is new for us.

But if there is any advantage that we can get by starting it early and finishing it early, that will be fantastic. That will flow through to a greater benefit into our numbers and only mean that our guidance band is firmed up even higher through the range. But if there were unexpected delays or challenges with the project, we've considered that in our guidance here, and that is why we have a range. And we would say that if there were no value from the Mugga Lane batteries in the year, we're still within guidance, and we're still comfortable with our numbers.

[Tim Elder, analyst]

That's useful. And then just one more question, if I may. Just on like you talked about your kind of broader portfolio of 25 megawatts of projects incremental to those nearer-term ones. I haven't seen too much commentary about those projects advancing in this most recent half. So just wondering if you can give us any color on that.

[Jarryd Doran, executive]

So that's the new projects we brought to the market, Tim, from October specifically.

[Tim Elder, analyst]

That's right, yes.

[Jarryd Doran, executive]

Yes. And that's intentional here because when we came to market, we were laying out a broader strategy of not specifically just landfill gas fuel generation assets, but it was stand-alone batteries, new sites, new locations. So I am pleased to say that on that particular activity front, we have secured some land options, some land agreements that has put us in a position where we're able to explore and put a bit more cost to discover the network capacity and the planning considerations.

But as we always do with our material, we feel it's appropriate to talk about the specifics when it's a bit more mature on a project-by-project basis. So from the completion of the equity raise, October, November, debt's been paid down, resourcing has been allocated into this space, and I'm pleased with the result of a couple of these sites having land agreements in place. And that will evolve over the next 6-month period where we would hope to see 1 or 2 of those projects mature to a point where there might be something we can talk to the market about.

[Dean Wilkinson, executive]

Yes. And Tim, just to add to that, some of the CapEx I talked to, some of that CapEx is in relation to those projects, those 6 projects. So yes, there is progress being made on them, but nothing that we're coming to the market within the 6-month period.

[Sam Wells]

Next question comes from James Bullen of Canaccord.

[James Bullen, analyst]

Just a quick question around capital management and gearing. Just wondering how we should think about gearing moving forward and the level of gearing that you're comfortable with, with this business?

[Dean Wilkinson, executive]

Yes. Good question, actually. So gearing is 0 at the minute. So -- but as we move through building out the projects, yes, we will then start tapping into the debt facility again. Where we're comfortable, look, there's sort of no hard and fast number. We do have a debt covenant that sits within the debt facility of 2.5x EBITDA. So that is actually -- that is a number that actually is -- that the market is aware of. And so yes, it won't be above 2.5x EBITDA while that debt covenant is in place. So that might give you a bit of a guidance.

I guess we would be a bit uncomfortable if we start getting close to that covenant. So we're probably not going to get too close to the 2.5x. But yes, that's -- it's a good question, but it's probably 18 months, almost 24 months away before we start getting to those sorts of levels of debt.

[James Bullen, analyst]

Understood. And just around the revenue that you assume when you're putting together the economic model for batteries, I do notice that FCAS has come off quite sharply. How much do you assume when you -- for a battery that you get from electricity arbitrage versus FCAS revenue?

[Dean Wilkinson, executive]

Yes. By far, the bulk of it is from the arbitrage. Yes. Look, yes, we've noticed that the FCAS market drop off a little bit. The other thing with FCAS is it can be quite patchy. Like some months, it will be a few thousand dollars and the next month will be a few tens of thousand dollars, so with our existing batteries. So we sort of see that in the market. So yes, we put a small amount in our modeling for FCAS, but no, by far, the bulk of it, 90% or more of the revenue is coming from the arbitrage.

[Jarryd Doran, executive]

And the forward view is very conservative in-house in that we do expect to see saturation of that market. And so it's not a revenue source which builds year-on-year. It diminishes.

[Dean Wilkinson, executive]

I actually have that declining in my modeling in future years.

[Sam Wells]

The next question is from Ritesh Varma at Bell Potter. In relation to Bunya achieving 44% above average AEMO pricing, that is lower than previously announced, I think, circa 70%. Do you think this is around the uplift you will achieve going forward?

[Jarryd Doran, executive]

Really good question. I mean it's worth understanding that, that result was when the -- as we have said already, overall average prices come down. We're still seeing attractive price spread. I would probably frame it as this is at a lower end level of overall electricity market activity than what we've observed historically looking back for quite some time.

So I wouldn't -- I would be mighty surprised if that has suddenly become the new norm because at the end of the day, the macro factors in the electricity space are an increase in electricity consumption from a household level, from a business level, from an economy-wide perspective, depending on what view you take on data center rollout and data center growth, the fact that we have an increasing demand for electricity, while renewables and variable renewables are coming into the market only likely plays into more price spread and more intraday spread. Hence, we're so attractive to batteries.

So coming back to the point of the question, yes, the 44% is lower than our long-term average that we've seen from Bunya with the price uplift. But you can see that on a numbers basis, it still generates a very good return. And that, I would say, is at the lower end of what it's likely to be.

[Dean Wilkinson, executive]

Yes, I'd agree with those comments.

[Sam Wells]

And just a final question for today. Could you just please elaborate on how LGI will ensure it remains competitive in future tenders, particularly versus other players in the market like LMS and others?

[Jarryd Doran, executive]

Yes. This is a constant. For all of our years of existence, I think it would go without saying that we don't just assume we're going to win every contract. But equally, we're not out trying to win every contract. It's about understanding what is right for LGI, the right use of our capital, the right way to grow the business. And so we use every tender interaction as a feedback loop to try and understand, do we offer too much? Do we offer too little? How do we need to remain agile and sharp. And that's a constant.

And I would hope that you've seen over the years where there's been periods that we haven't won as many tenders and maybe there are contracts that we weren't as keen to win. And then there have been others where we've fought harder and we've secured it with a highly competitive process. So not every landfill is equal and not every landfill or contract is worth us attempting to chase it and win it.

[Sam Wells]

Great. Thank you. That's it for questions today. Should you have any follow-up questions, please feel free to send them through to either Dean or myself, and we'll endeavor to get back to you. And maybe with that, I'll just pass it back to you, Jarryd, for any closing comments.

[Jarryd Doran, executive]

Thank you very much, Sam, and thanks for everyone's time this morning. Again, I can't express enough just how pleased I am at the team's performance and what they've achieved for this period of the year. And it's again, it's a whole team effort across the business. It certainly puts us in a very strong position coming into the second half. And then with the advancements we've made on our strategic project build-out between the batteries in Canberra, the Belrose battery project and the Nowra renewable project, it's looking like a very exciting couple of years in front for LGI and the markets, the conditions that we trade our products into only continue to be very conducive to our strategy. So it's looking great for the years ahead as well. But thank you very much for your time.

[Sam Wells]

Thank you very much for joining today's LGI first half '26 results call. Thank you, and enjoy the rest of your day. Goodbye.