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Company Profile - Australian Pipeline Ltd is an Australia-based natural gas infrastructure company. It owns and operates energy infrastructure assets across Australia, such as 14,000 kilometers of natural gas pipelines, gas storage facilities and a wind farm. It also has investments in other energy infrastructure through its minority interest in companies, including the Ethane Pipeline Income Fund, Energy Infrastructure Investments, EII2 and GDI (EII), which owns the Allgas Gas Network. It also provides commercial, accounting, corporate operations and maintenance services. The Company has three segments: Energy Infrastructure, which includes all of its pipelines, gas storage assets and the Emu Downs Wind Farm; Asset Management, which provides commercial, operating services and asset maintenance services; and Energy Investments, which includes its strategic stakes in investment vehicles that house energy infrastructure assets.

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• Improved Fiscal Year 2015 Performance driven by organic and acquisitions growth: APA Group (ASX: APA) reported a revenue surge of  12.8% yoy to  $1,119.2 million for the fiscal year of 2015, and accordingly the firm’s normalized EBITDA rose 10% yoy to $822.3 million during the period. This improved earnings was partly contributed by the extra earnings on the back of South West Queensland Pipeline and the Goldfields Gas Pipeline expansion, organic growth from the group’s existing pipeline as well as contribution from the recently acquired Wallumbilla Gladstone Pipeline. Consequently, APA reported a statutory net profit after tax (including significant (items) surge of 62.9% yoy to $559.9 million, partly driven by the $356.0 million from the after tax profit on sale of APA’s shareholding in Australian Gas Networks Limited (earlier known as Envestra Limited). Meanwhile, APA’s net profit after tax and non-controlling interests before significant items improved by 2.1% yoy to $203.9 million in the fiscal year of 2015. APA reported a final distribution of 20.5 cents per security, leading to a total distributions to 38.0 cents per security during the period, which is higher by 4.8% yoy during the period.
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       Fiscal year of 2015 EBITDA (Source: Company Reports)

• Energy segment performance highlights: APA’s Energy Infrastructure segment accounted over 90.2% of its overall revenue (for continuing businesses, excluding passthrough) while EBITDA (for continuing businesses, before corporate costs) comprised over 92%. Meanwhile the segment delivered a revenue increase by 19.8% yoy to $987.1 million in FY15, from $824.1 million in pcp. EBITDA (for continuing businesses, before corporate costs) surged 20.4% yoy to $823.6 million during the period. APA’s East Coast Grid improved by 16.1% yoy (before the WGP inclusion). Moomba and Wallumbilla compression projects were finished during the period while the Victoria – NSW Interconnect 145% capacity expansion was also over. Flexible short term services revenue contributed over $21.4 million during the period. As per the Western Australia highlights, GGP expansion project was finished in FY15 beginning and accordingly delivered a 12.5% yoy rise in West Coast Grid EBITDA. EGP construction is ongoing and the group estimates to generate first gas by second half of 2016.
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      EBITDA Pipeline (Source: Company Reports)

 

• Strong interconnected footprint delivering growth prospects: APA group has been continuously improving as well as adding pipelines, by developing new Eastern Goldfields Pipeline in Western Australia as well as the fourth expansion project for the Victoria, New South Wales Interconnect. The group has built a solid interconnected asset footprint with wide service offerings and accordingly connected more gas resources to more gas markets.  As a result, the group spent over $396.3 million in capital expenditure with $343.1 million incurred for the growth projects like gas infrastructure development in New South Wales, Victoria, Queensland and Western Australia during the year. Moreover, the group estimates to maintain its annual growth project expenditure in the range of $300 to $400 million for the next two to three years. As per the East Coast Grid, – Australia’s gas superhighway highlights, APA group is positioning itself to leverage heavy east coast demand. Accordingly, the clients using the Australia’s gas superhighway has the potential to move between ~30 receipt points and around 100 delivery points (including Gladstone). The group is delivering several services like multi-asset services, bi-directional transportation, capacity trading and gas storage and parking facilities. With regards to the Victoria – New South Wales Interconnect expansion highlights, the projects expansion generated more than doubled the VNI capacity from 2013, while the further ongoing projects would treble to 148 TJ/d. Accordingly the group is heavily expanding on the alternate route to Sydney and north for multiple gas basins in offshore Victoria (Otway, Bass, Gippsland), wherein  the VNI Expansions and bi-directional capabilities would allow gas to flow freely from Victoria to NSW/Qld and vice versa
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      Ongoing growth projects expansion (Source: Company Reports)

• Wallumbilla Gladstone Pipeline acquisition highlights:  The group finished the acquisition of the Wallumbilla Gladstone Pipeline) for USD 4.6 billion, which enables connection to the group’s present interconnected East Coast Grid, to link with the LNG export market at Gladstone. The Pipeline would extends over 7,500 kilometers across eastern Australia, connecting APA’s infrastructure to Gladstone and is also working with two new global customers. The pipeline has 20-year take-or-pay contracts with BG Group and China National Offshore Oil Corporation. To fund the acquisition, the group raised over $1.8 billion of equity in a one for three pro rata accelerated renounceable entitlement offer and USD 3.7 billion of debt in three international debt capital markets. The Wallumbilla Gladstone Pipeline delivered over $35 million of EBITDA during the financial year (for four weeks). As per the NT Link to East Coast Grid highlights, the group started feasibility study in Feb 2014, and has possible reserves of over 240 TCF across 6 basins. The link allows seamless transport between Timor Sea, Bass Strait, Sydney, Brisbane, Melbourne and Gladstone.

 
 
       
 
      Wallumbilla Gladstone Pipeline connection to Queensland Curtis island LNG facility (Source: Company Reports)

• Balance Sheet Highlights: APA has a Cash and committed undrawn facilities of about $1.6 billion for the fiscal year of 2015. The group had a new $830 million syndicated bank facility, and replaced the existing $1.1 billion syndicated facility, leading to the cash and committed undrawn facilities to over $1.3 billion. Accordingly, APA’s gearing decreased to 63.4% in FY15 from 64.2% in the corresponding period of last year. Interest cover ratio increased to 2.59x during the period from 2.31x in pcp, while the average interest rate applying to drawn debt decreased to 6.76% from 7.12% in FY14. Interest rate exposure fixed or hedged surged to 94% in FY15 against 72.8% in pcp. Meanwhile, APA got a stable outlook for its credit ratings from both S&P and Moody’s.
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       Diverse funding sources and spread of maturities (Source: Company Reports)

• Positive guidance estimates: The group continues to focus on growth projects and continuously build its infrastructure portfolio. APA estimates a statutory EBITDA of $1,275 million to $1,310 million during full year to June 2016, while the normalized EBITDA might increase over 55% to 60% against the financial year of 2015. Wallumbilla Gladstone is estimated to contribute over US$355 million, while the rest of the APA portfolio growth might be in the range of 3% to 7%. Meanwhile, the group entered into forward exchange contracts for the fiscal year of 2016, for the net USD cash flow from the gas transportation agreements for the Wallumbilla Gladstone Pipeline. APA estimates its Net interest cost in the range of $500 million to $510 million, while the distributions per security might be over 38.0 cents per security.

      
      Australian Pipeline Daily Chart (Source - Thomson Reuters)

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• Stock Performance: APA stock delivered a solid performance during the year, and delivered a year to date returns of 12.5%. The stock had been relatively stable over the last four weeks, falling over 3.2% despite the challenging market conditions. We believe that APA’s aggressive development efforts on its growth projects and enhanced performance on the back of its acquisitions contributions would drive the group’s growth in the coming months. Moreover, APA is trading at a relatively cheaper valuation with a P/E of 14.97x and has a decent dividend yield of 4.51%. Based on the foregoing, we are now bullish on the stock and had accordingly upgraded our view on the stock from “Expensive” to “BUY” at the current price of $8.31

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