AE Portfolio Conservative Holding APA Group (ASX: APA, OTC: APAJF)–a charter member and one of our “Eight Income Wonders from Down Under”–is the largest transporter of natural gas across Australia, with an unrivalled footprint. This owner-operator of pipelines, storage facilities and a wind farm pushes about half of Australia’s annual gas use through its infrastructure.

On May 1, 2012, The Wall Street Journal’s Deal Journal Australia blog reported that the Australian unit of Petroliam Nasional Berhad, better known as Petronas and Malaysia’s state-owned energy company, sold its 17.3 percent stake in the company. Petronas’ 111.3 million shares made it APA’s biggest shareholder.

The sale went off at about AUD4.85 per, a 6.4 percent discount to APA’s closing price on the Australian Securities Exchange (ASX) the day before the deal was made public.

In a statement posted to the company website May 2 APA Group Managing Director Mick McCormack said, “Petronas has been a strong supporter of APA’s business since listing, and we are grateful for their involvement over the last 12 years. Petronas has advised that its decision to sell follows a rationalisation of its investment portfolio.”

APA’s statement also noted “that the securities have been successfully placed with a broad spread of domestic and international institutional investors.”

Petronas, which hasn’t commented on the sale of its APA stake, has been unloading minority stakes in non-core assets over the past year, including a 9 percent block of UK-focused gas supplier Centrica and 15 percent of oil and gas producer Cairn India. Petronas is said to be eyeing potential moves on Canadian oil sands assets and is looking to free up cash. The APA sale generated AUD539.8 million.

This divestment changes nothing with regard to our fundamental view of APA, which remains Australia’s biggest pipeline operator, with lines in every state Down Under that help it deliver about 50 percent of the country’s natural gas demand. It’s a reliable cash flow generator and dividend grower.

All Petronas has done is create a nice opportunity for new investors to lock in a 7 percent yield on a high-quality business with solid long-term prospects for growth that will support as well a rising payout.

APA is ideally positioned to benefit from a concerted effort to switch to cleaner-burning fuels for domestic consumption, a transition that will accelerate with Australia’s carbon tax taking effect Jul. 1, 2012. Results for the six months ended Dec. 31, 2011, underscored its relative strength, and a modest 3 percent dividend increase confirms management’s conservative approach to building wealth over time.

The company reported that earnings before interest, taxation and depreciation (EBITDA), not accounting for significant items, grew 13.9 percent to AUD289 million during the first half of fiscal 2012. EBITDA growth was driven largely by pipeline expansion and the addition of new assets, including capacity sales flowing from completion of the Young Wagga looping project, ownership of the Amadeus Gas Pipeline, which was previously leased by APA, and the Emu Downs wind farm business in Western Australia.

Operating cash flow decreased by 7.5 percent, or AUD12.7 million, to AUD157.7 million. This was due solely to the receipt of a contracted monthly payment of in excess of AUD25 million on Jan. 3, 2012, rather the due date of Dec. 31, 2011. This has impacted a number of key ratios, including operating cash flow per share, which has decreased, and the distribution payout ratio, which has increased. These negative movements are purely matters of timing in the context of APA’s day-to-day operations.

APA entered into AUD1.9 billion of new two-, three-, four- and five-year debt facilities during the period. These facilities were used to refinance debt and support APA’s growth projects going forward.

The board of directors declared an interim distribution of AUD0.17 per share, an increase of 3 percent on the previous corresponding period. The distribution payout ratio for the six months ended Dec. 31, 2011, was 69.2 percent of operating cash flows.

Critical for long-term distribution sustainability and growth, APA continued the expansion and further development of its energy infrastructure portfolio. Along the east coast, expansion work commenced on the Roma-to-Brisbane Pipeline, while work continued on the five-year expansion of the Moomba-to-Sydney Pipeline and capacity upgrade of the Victorian Transmission System. In line with APA’s strategy, all these efforts are underpinned by long-term contracts with highly creditworthy counterparties or relevant approvals under regulatory arrangements.

APA continued development of the next stage of the Mondarra Gas Storage Facility expansion in Western Australia with commencement of surface-facility construction, which includes pipeline interconnects and treatment plants.

APA, along with fellow Conservative Holding AGL Energy Ltd (ASX: AGK, OTC: AGLNF, ADR: AGLNY), started work on the Diamantina Power Station at Mount Isa. The 242 megawatt gas-fired power station is underpinned by long-term energy-supply agreements. It will get gas via the Carpentaria Gas Pipeline under a new long-term transport contract.

In December 2011 APA completed the sale of its Queensland Gas Network business (Allgas) into a minority-owned joint venture, GDI (EII) Pty Limited. APA retains a 20 percent equity interest in GDI and will continue to operate and manage the network under a long-term contract.

APA recently announced two further expansions of the Goldfields Gas Pipeline to supply additional capacity for new gas fired power generation in the Pilbara. These expansions are underpinned by two long-term contracts with major mining companies and will increase capacity in the pipeline by 28 percent.

APA’s effort to acquire the 79.3 percent of Hastings Diversified Utilities Fund (ASX: HDF) it doesn’t already own continues, as management remains keen on realizing the potential of connecting its assets to “one or more” of APA’s assets, completing what it sees is a “natural fit” in its effort “to provide more flexible and tailored services” for its existing customers.

In mid-December 2011 APA offered AUD0.50 in cash and 0.326 of its shares for each of the shares of Hastings it doesn’t own. That put Hastings’ overall market value at approximately AUD1.06 billion at the time of the original offer, but the AUD2 per share quoted by APA was disputed by Hastings. The target claims that, taking account of interim distributions by both companies, the per-share value put on Hastings by APA is closer to AUD1.92.

Hastings shareholders hopeful of a bigger bid may be left wanting. The Australian Competition and Consumer Commission (ACCC) acknowledged in Mar. 30 “Statement of Issues” that APA has offered to divest its 50 percent holding in the SEA Gas pipeline that runs between South Australia and Victoria, among other concessions, including some price caps, to win approval.

In its Mar. 30 Statement of Issues the ACCC cautioned, “However, based on the competition concerns arising from its inquiries to date, the ACCC’s preliminary view is that the remedy being put forward by APA would not address the competition concerns outlined in this statement of issues.”

Among its concerns, the ACCC said there is a risk the deal will increase barriers to entry for rival pipeline operators: “Market participants have raised concerns that post acquisition the greater aggregation of pipelines owned by APA and their ability to service all major geographic points will reduce APA’s incentive to facilitate cost-effective connections into its existing network for new, and potentially competing, pipelines.”

The deadline for public submissions on the Statement of Issues was Apr. 13, but on Apr. 16 the ACCC extended the timeline for a decision at the request of APA. The suitor is in the process of putting together another submission that will presumably include further concessions.

APA, combined with Hastings Diversified, would either own or operate more than 15,000 kilometers of gas transmission pipelines in Australia.

APA has said repeatedly that it would “continue to work closely” with the ACCC.  Mr. McCormack, in response to the Statement of Issues, said again that APA “had worked constructively with the ACCC to identify potential issues and had submitted an undertakings proposal which sought to address those issues.”

APA seems determined to get the Hastings assets, whose pipelines can all be connected to one or more of the suitor’s. As of midday trading on the Australian Securities Exchange May 10 the current value of the offer is AUD2.12 per share, but fluctuations are a matter of changes in APA’s share price. It hasn’t changed its offer terms, focusing instead on gaining ACCC approval. This is good discipline.

APA’s offer to Hastings shareholders, which includes other conditions the target’s management has found objectionable, has been extended again, to May 24, 2012. The ACCC timeline is now noted as “suspended,” with the former proposed decision date of Apr. 26 well in the rearview mirror. A new proposed decision date will be announced pending receipt of further information from APA.

In mid-April APA announced changes to its organizational and reporting structure that “better reflect its discrete core businesses and significant infrastructure development activities.” Practically speaking, APA has replaced its two functional divisions, Commercial and Operations, with three new units “aligned with its core businesses.”

The new Strategy and Development division will handle the development and operation of complementary and new energy assets. Transmission will operate natural gas pipelines and associated storage facilities and also manage related commercial sales functions. Networks, meanwhile, will oversee APA’s investments in natural gas distribution assets.

Two new divisions have been established to oversee APA’s significant capital works. Infrastructure Development is now responsible for engineering services and managing infrastructure expansion projects, while Strategic Projects will manage major capital projects, including the Mondarra Gas Storage Facility expansion and the Diamantina Power Station development. APA’s corporate services units are unchanged, and there will be no change to statutory segment reporting as a result of this reorganization.

According to Mr. McCormack the new structure “prepares APA for the next phase of [its] growth.”

Since listing on the Australian Securities Exchange (ASX) in June 2000 APA Group has generated a total shareholder return of more than 600 percent, a compound annual growth rate of 18 percent.

APA Group, a solid asset-growth story now yielding more than 7 percent, is a buy under USD5.50 on the ASX using the symbol APA or on the US over-the-counter (OTC) market using the symbol APAJF.

APA’s fiscal year runs from Jul. 1 to Jun. 30. The company reports full financial and operating results twice a year; it typically posts first-half results during the third week of February, with full fiscal year numbers out in late August.

Interim dividends are usually declared in mid-December and confirmed with first-half results. Final dividends are usually declared during the third week of June, ahead of reporting of full fiscal year results. The most recent interim dividend of AUD0.17 per share was declared Dec. 14, 2011; it was paid Mar. 15, 2012, to shareholders of record as of Dec. 30, 2011. Shares traded “ex-dividend” on this declaration as of Dec. 22, 2011.

The final dividend of AUD0.179 in respect of fiscal 2011 second-half results was declared Jun. 20, 2011. It was paid Sept. 15, 2011, to shareholders of record on Jun. 30, 2011. It traded “ex-dividend” as of Jun. 24, 2011.

Dividends paid by APA are “qualified” for US tax purposes. The Australian government withholds 15 percent, based on the US-Australia tax treaty on double taxation. The two countries have not taken the step of eliminating withholding from dividends paid in respect of shares held in a US IRA, as have the US and Canada.

Among the analysts who cover the stock one rates it a “buy” according to Bloomberg’s standardization of brokerage house recommendation terminology, while six rate the stock a “hold” and two say “sell.” The average target price is AUD4.99, with a high of AUD5.45 and a low of AUD4.85.