APA Group Wins the Battle of Hastings

By David Dittman • August 24, 2012 • Pacific Digest

APA Group (ASX: APA, OTC: APAJF), Australia’s largest owner/operator of natural gas infrastructure assets, has emerged from its nearly nine-month struggle for ownership of Hastings Diversified Utilities Fund (ASX: HDF) with a victory.

Last Friday, Aug. 17, APA raised its offer for the energy infrastructure investment firm for a second time, to AUD1.39 billion, or about AUD2.63 per share, comprised of AUD0.80 in cash and 0.39 of an APA share per Hastings share.

A consortium including Canadian fund manager Caisse de depot et placement du Quebec and Utilities Trust of Australia, a fund managed by Hastings’ manager Hastings Funds Management, had offered AUD2.43 per share, or about AUD1.28 billion. This consortium, Pipeline Partners Australia, declined to make a counteroffer.

On Tuesday, Aug. 21, Hastings’ board of directors recommended acceptance of the APA bid. Hastings will now pay Pipeline Partners a AUD12.3 million breakup fee.

APA’s initial bid in December 2011 was valued at about AUD2 per share, or AUD1.06 billion, AUD0.50 in cash and 0.326 of its shares for each of the 79.3 percent of outstanding shares of Hastings it didn’t already own.

Hastings owns 100 percent of Epic Energy, the owner/operator of two key pipelines that run from Australia’s main onshore gas hub at Moomba, South Australia, to Adelaide, South Australia, and Queensland, New South Wales.

APA’s willingness to boost its bid by more than 30 percent in response to the competition offered by Pipeline Partners demonstrates the value, or perceived value, of the Epic Energy assets amid a continuing gas boom in Australia.

The deal enhances APA’s already strong position in a domestic economy that’s now subject to one of the toughest carbon regulation schemes in the world. Clean-burning natural gas is very likely to assume a lead role in the race to replace coal as the primary feedstock for electricity generation Down Under.

According to a December 2011 white paper published by the Australian government’s Department of Resources, Energy and Tourism, Strengthening the Foundations for Australia’s Energy Future, Australia requires about AUD240 billion of investment in its gas and electricity industries alone over the next 20 years to ensure the country has reliable power supply.

That’s on top of the billions already committed to liquefied natural gas (LNG) projects.

Plenty of gas both onshore and offshore–and a massive pipeline of developments underway–most of that gas is planned for export as LNG. Australia, in fact, is home to almost half of the projects in some stage of development around the world.

Green-lighted projects worth USD150 billion would generate about 60 million tons of clean-burning gas over the next decade and push Australia past current No. 1 Qatar and make it the top LNG producer in the world.

Over the next several decades, even assuming a rapid and substantial increase in renewable energy sources, natural gas will be needed during the transition from coal-fired power generation–which now accounts for about 75 percent of Australian power generation–and later as the back-up fuel for renewable energy when the sun isn’t shining and/or the wind isn’t blowing.

The white paper concludes that that natural gas will grow to account for about 44 percent of power generation over this period.

Hastings’ AUD460 million, 15-year contract with Santos Ltd (ASX: STO, OTC: STOSF, ADR: SSLTY) to move natural gas from Moomba to Queensland on the South West Queensland Pipeline is a key element of the deal from an APA perspective.

South West Queensland will carry feedstock to Santos’ Gladstone LNG project. Hastings is in the process of upgrading South West Queensland, which ships gas east to west but will be capable of moving it both ways by 2014-15. That’s when AUD50 billion worth of liquefied natural gas (LNG) plants at Gladstone are scheduled to begin exports.

South West Queensland also connects to three APA pipelines: the Roma-Brisbane Pipeline, the Carpentaria Pipeline to Mount Isa and the Moomba Sydney Pipeline. The Santos contract, in the words of one analyst, is likely to be “highly accretive,” as it involves zero capital outlay by Hastings.

The Australian Competition and Consumer Commission in July cleared APA to bid for Hastings on the condition that APA agreed to sell the Moomba-to-Adelaide pipeline, known as MAPS, in the event its bid was accepted by Hastings.

On Wednesday, Aug. 22, APA reported that full-year 2012 (ended Jun. 30) earnings before interest, taxation depreciation and amortization (EBITA) pre-items was up 9.4 percent over the prior corresponding period to AUD535 million, in line with management guidance, as acquisitions and expansion of existing assets drove growth.

EBITDA including the sale of APA’s Allgas assets and related transaction costs was AUD526 million, up 6.9 percent from fiscal 2011. Operating cash flow rose 15.7 percent to AUD336 million. Net profit after tax (NPAT), meanwhile, was up 20.4 percent to AUD131 million.

APA reiterated its intention to pay AUD0.18 “final” distribution on Sept. 14 to shareholders of record as of Jun. 29. The full-year distribution of AUD0.35 per share, including the AUD0.17 interim distribution paid Mar. 15, represents 66.7 percent of the AUD0.525 cash flow per share figure and is 1.7 percent higher than the fiscal 2011 full-year distribution.

Cash flow per share was off by 0.1 percent due to the lag between investments in growth assets and those assets generating revenue as well as the fact that APA issued AUD300 million in new shares during the year.

The company spent AUD271 million on growth initiatives, focused primarily on pipeline capacity expansion in Queensland, New South Wales, Victoria and Western Australia and the expansion of the Mondarra Gas Storage Facility. Growth CAPEX is underpinned by long-term commercial agreements or regulatory arrangements.

During the year APA entered into new bank debt facilities totaling AUD1.9 billion and also issued AUD416 million in medium-term notes. These facilities were used to repay debt maturing during the year and provide funding for APA’s growth infrastructure projects, including the acquisition of Hastings.

More recently APA registered a prospectus for the issue of AUD475 million of subordinated notes, an effort directly tied to its stepped-up pursuit of the Hastings assets.

As of Jun. 30, 2012, APA had a “gearing” ratio–debt as a percentage of assets-65 percent, down from 66.2 percent as of Jun. 30, 2011. At the end of fiscal 2012 APA had more than AUD1.1 billion and committed undrawn facilities available to meet capital growth needs and to fund the Hastings deal. APA subsequently agreed a further AUD600 million in bank facilities with a group of local banks to support the Hastings offer.

APA’s interest cover ratio for the year increased to 2.48 times from 2.03 times last year, well in excess of its debt covenant default ratio of 1.1 times and distribution lock-up ratio of 1.3 times.

As for the fiscal 2013, APA expects EBITDA to be in the range of AUD540 million to AUD550 million, an increase of approximately 6.5 percent over the previous year. This guidance doesn’t account for the contribution of the Hastings assets. Total distributions for the year to Jun. 30, 2013, are expected to be “at least at the level” of fiscal 2012 distributions, though this guidance won’t change with the addition of Hastings.

APA Group has generated a total return in US dollar terms of 38.41 percent from the Sept. 26, 2011, debut of Australian Edge through the close of trading on the Australian Securities Exchange (ASX) on Friday, Aug. 24, 2012. It was one of our original Portfolio Holdings and remains a favorite.

The stock is well off its 2012 high of AUD5.27 (USD5.47) on the ASX, established Apr. 13, and currently yields 7.3 percent.

The Roundup

A number of AE Portfolio Holdings in addition to APA Group (ASX: APA, OTC: APAJF), including Conservative Holdings AGL Energy Ltd (ASX: AGK, OTC: AGLNF, ADR: AGLNY), CSL Ltd (ASX: CSL, OTC: CMXHF, ADR: CMXHY) and Envestra Ltd (ASX: ENV, OTC: EVSRF) and Aggressive Holdings BHP Billiton Ltd (ASX: BHP, NYSE: BHP), Mineral Resources Ltd (ASX: MIN, OTC: MALRF) and Origin Energy Ltd (ASX: ORG, OTC: OGFGF, ADR: OGFGY), have reported earnings since the August issue of Australian Edge was published last Friday, Aug. 17.

We’ll provide a complete summary of these results in a Flash Alert for subscribers on Monday.

APA Group, meanwhile, has rebounded from the seven-month low it hit on Aug. 20 on the Australian Securities Exchange (ASX) of AUD4.62 (USD4.83) on news of its successful effort to acquire Hastings Diversified Utilities Fund (ASX: HDF) as well as its solid fiscal 2012 report. APA is a strong buy up to USD5.50.

Following are dates (confirmed, tentative or estimated) for AE Portfolio earnings announcements. Where companies have reported recently, we’ve included a link to our discussion and analysis of results.

Conservative Holdings

  • AGL Energy Ltd (ASX: AGK, OTC: AGLNF, ADR: AGLNY)–Aug. 22, 2012 (confirmed, FY 2012, end Jun. 30, 2012)
  • APA Group (ASX: APA, OTC: APAJF)–Aug. 24 Down Under Digest
  • Australand Property Group Ltd (ASX: ALZ, OTC: AUAOF)–Jul. 26, 2012 (confirmed, CY/FY 2012 1H, end Jun. 30, 2012)
  • Australia & New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY)–May 2 Down Under Digest (FY 2012 first half, ended Mar. 30, 2012), Nov. 5, 2012 (estimate, FY 2012, end Sept. 30, 2012)
  • Cardno Ltd (ASX: CDD, OTC: COLDF)–Aug. 14, 2012 (confirmed, FY 2012, end Jun. 30, 2012)
  • CSL Ltd (ASX: CSL, OTC: CMXHF, ADR: CMXHY)–Aug. 21, 2012 (confirmed, FY 2012, end Jun. 30, 2012)
  • Envestra Ltd (ASX: ENV, OTC: EVSRF)–Aug. 23, 2012 (confirmed, FY 2012, end Jun. 30, 2012)
  • M2 Telecommunications Group Ltd (ASX: MTU, OTC: MTCZF)–Aug. 27, 2012 (confirmed, FY 2012, end Jun. 30, 2012)
  • Telstra Corp Ltd (ASX: TLS, OTC: TTRAF, ADR: TLSYY)–Aug. 10 Down Under Digest
  • Transurban Group (ASX: TCL, OTC: TRAUF)–Aug. 10 Down Under Digest

Aggressive Holdings

  • BHP Billiton Ltd (ASX: BHP, NYSE: BHP)–Aug. 22, 2012 (confirmed, FY 2012, end Jun. 30, 2012)
  • GrainCorp Ltd (ASX: GNC, OTC: GRCLF)–May 23 Down Under Digest (FY 2012 first half, ended Mar. 30, 2012), Nov. 14, 2012 (estimated, FY 2012, end Sept. 30, 2012)
  • Grange Resources Ltd (ASX: GRR, OTC: GRLLF)–Aug. 30, 2012 (confirmed, FY 2012 1H, end Jun. 30, 2012)
  • Mineral Resources Ltd (ASX: MIN, OTC: MALRF)–Aug. 20, 2012 (estimate, FY 2012, end Jun. 30, 2012)
  • Newcrest Mining Ltd (ASX: NCM, OTC: NCMGF, ADR: NCMGY)–Aug. 13, 2012 (confirmed, FY 2012, end Jun. 30, 2012)
  • New Hope Corp Ltd (ASX: NHC, OTC: NHPEF)–Sept. 20, 2012 (estimate, FY 2012, end Jul. 31, 2012)
  • Oil Search Ltd (ASX: OSH, OTC: OISHF, ADR: OISHY)–Jul. 24, 2012 (confirmed, FY 2012 1H, end Jun. 30, 2012)
  • Origin Energy Ltd (ASX: ORG, OTC: OGFGF, ADR: OGFGY)–Aug. 23, 2012 (confirmed, FY 2012, end Jun. 30, 2012)
  • Rio Tinto Ltd (ASX: RIO, NYSE: RIO)–Aug. 10 Down Under Digest
  • WorleyParsons Ltd (ASX: WOR, OTC: WYGPF, ADR: WYGPY)–Aug. 29, 2012 (confirmed, FY 2012, end Jun. 30, 2012)

Stock Talk

Comments Guidelines
Guest One

Burlin Coleman

How much does Australia withhold from dividends for income taxes?

I am concerned about the future value of the U.S. Dollar after all the stimulus. How can I invest in Australian securities and secure the advantage of the stability of the Australian Dollar?

David Dittman

David Dittman

Hi Mr. Coleman,

Thanks for reading AE, and thanks for writing.

The withholding rate on dividends paid by Australian companies to US-based investors is 15 percent.

If your broker provides such services, the best way to buy Australian stocks is on the Australian Securities Exchange. This is the most liquid market for the securities we recommend. You can also buy on the US over-the-counter (OTC) market, using five-letter symbols ending in “F,” which denotes a foreign security, or with five-letter symbols ending in “Y,” which denotes an American Depositary Receipt. F-shares are basically the same thing as the ASX-listed ordinary shares. Y-shares are shares held on deposit in the US. Sometimes, as in the case with Telstra Corp Ltd (ASX: TLS, OTC: TTRAF, ADR: TLSYY), the Y-share represents more than one ordinary share; in Telstra’s case TLSYY represents five ordinary shares. Regardless of which way you buy–ASX, OTC F-shares or Y-shares, or as with Rio Tinto Ltd (ASX: RIO, NYSE: RIO) and BHP Billiton Ltd (ASX: BHP, NYSE: BHP) New York Stock Exchange-listed ADRs, you’re getting exposure to the Australian dollar.

Thanks again for reading, and thanks for your question.

Guest One

I am a shareholder in Telestra and have followed your comments in your reports and responses to my e-mail. I understand there is no rush on Telestra's part but I would like your best answer from your contacts with the company on: When and How Long and Wha

I have previously asked but have not seen your answer to…
How long will it take Telestra to map out and begin to pursue its future course of primary business and where does it stand on the future of cloud?
Thank you for some insight to this great solvent company’s getting back to working…Leonard Wolf

David Dittman

David Dittman

Hi Mr. Wolf,

Telstra this month announced it was boosting the amount of money it will spend upgrading and expanding its 4G wireless network to AUD1.2 billion from AUD700 million to AUD800 million it had been spending on CAPEX over the past several fiscal years. The company aims to cover about 66% percent of the Australian population by mid-2013, up from about 40% at present. Management, during a series of presentations to retail investors over the past week, also alluded to expansion plans in Asia to compete with Vodafone and Singapore Telecom. Telstra added about 475,000 customers at its Hong Kong-based CSL wireless business and also owns significant telecom infrastructure connecting Australia to Asian countries and fixed lines interconnecting Asia as well.

The cloud–or network services–was Telstra’s fastest-growing revenue segment in fiscal 2012. The company continues to leverage existing relationships with large Australia-based enterprises and government entities, and part of its Asian expansion is based on “following” Australian businesses as their operations expand into greater Asia. Telstra has completed a couple relatively small acquisitions in recent months that will allow it to develop applications and solutions in-house for its growing roster of network services clients. Telstra’s ability to invest in its infrastructure on a scale domestic competitors simply can’t match will help it win business of large enterprises that want a solution that includes hosted networks and applications. And more and more companies–as they attempt to cut costs–will follow this route.

As Australia continues to roll out the National Broadband Network Telstra’s considerable suite of media content will also continue to generate solid growth. In this segment Telstra doesn’t care how the customer accesses the network because the customer will be accessing Telstra content. At the same time, its 4G network will make the user experience much better for customers demanding more and more services, accessing networks in more and more ways. 4G is all about spped and reliability, and Telstra is the king in Australia.

One area management continues to focus on is customer service. Part of their efforts–the major part, in fact–is on providing the fastest, most reliable network in Australia. Another part is streamlining the actual customer contact experience so users stick with Telstra and actually become advocates on its behalf. This is a big leap. But customer attraction and retention is probably the most important factor for a 21st century telecom. Telstra has added 3.3 million customers over the past two fiscal years, in a population of 28 million “sim cards.” (Australia’s actual population is 22 million, but some people have more than one mobile device connected to a network.) This is impressive growth. Better performance at the customer service level, in management’s view, will also drive better performance at the financial level…and that will translate, eventually, into dividend growth.

Thanks for reading AE, and thanks for writing.

Best regards,

David

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