Organic growth in the pipeline

FOR the last year, APA Group has been determinedly chipping away at the projects in its pipeline.
Comprising the Australian Pipeline Trust (APT) and the APT Investment Trust, APA is a major ASX-listed gas transportation company. Based in Sydney, it owns and operates about $9 billion worth of infrastructure assets including more than 12,800km of natural gas pipelines, gas storage facilities and a wind farm. It also has a power station under construction.
APA’s earnings before interest, taxes, depreciation and amortisation (EBITDA) increased by 14 per cent in the first half of this year.
Involved mainly in the provision of gas transmission and distribution services to power generation, industrial and commercial customers, APA is Australia’s largest transporter of natural gas; as of June, 50 per cent of the country’s natural gas supply flowed through it pipelines: 25 per cent more than 10 years ago.
According to the Australian Energy Resource Assessment in July 2010, gas usage is expected to nearly double to 2565 petajoules by 2030.
As such, APA is expanding and enhancing its portfolio to meet the rising demand for gas. APA’s newest acquisitions and projects mark an interesting future for the company, with plans to harness growth opportunities during the next decade through energy infrastructure, developments and investments.
APA has created an extensive gas network of mature and recent developments across Australia, so that its infrastructure in each state and territory connects major gas fields with market opportunities.
Queensland
Across Queensland, APA owns and manages three gas transmission pipelines and maintains ownership and operational interests in the gas distribution networks of natural gas companies Envestra and Allgas.
The 438km Roma Brisbane Pipeline (RBP) transports gas from its hub near Roma to Brisbane markets and all regional centres along its length.
APA is building the Dalby compressor station on the RBP, which will increase the capacity of the pipeline by 10 per cent.
The Berwyndale Wallumbilla pipeline (BWP), built in 2009, connects Berwyndale to Wallumbilla in the Surat Basin, linking CSG reserves with the RBP.
The Carpentaria gas pipeline (CGP) is APA’s longest in Queensland: its main line runs for 840km. The CGP was commissioned in 1998 to transport gas from Ballera in the south of the state to Mount Isa and the surrounding Carpentaria mineral province.
The pipeline also includes the Cannington lateral, the Mica Creek metering facility and the Mount Isa lateral.
APA’s most recent project is a joint venture with AGL Energy to develop the 242 megawatt gas-fired Diamantina power station in Mount Isa.
New South Wales
Currently undergoing a five-year expansion plan to increase its supply capacity by 20 per cent, the Moomba Sydney Pipeline (MSP) links the Cooper Basin gas fields in Moomba to distribution networks in Sydney and regional NSW.
Already completed as part of the expansion, the Young to Wagga Wagga looping project, lateral to the MSP, now provides additional pipeline capacity.
The MSP also connects to the Victorian Transmission System, which transports gas between NSW and Victoria, and to two additional pipelines: the Central West Pipeline (CWP) and the Central Ranges Pipeline (CRP).
The CWP transports gas to regional towns in western NSW and ends at Dubbo, while the CRP runs from Dubbo to the Central Ranges region of NSW.
Acquired by APA in 2008, the Central Ranges Network comprises 180km of gas distribution pipelines in Tamworth, with gas supplied via the MSP, CWP and CRP.
Victoria
APA owns just two energy investments in Victoria: the Victorian Transmission System (VTS) and the Dandenong LNG Storage Facility.
The VTS serves about 1.4 million residential customers and 43,000 industrial and commercial users.
Annually, it averages an output of about 220PJ. The system’s main function is to transport gas from Esso’s Longford gas treatment plant in southeastern Victoria, the Otway Basin gas fields and underground storage in the southwest.
APA’s Dandenong LNG storage facility provides security of supply while easing peak pressure on the VTS and the wholesale trade of LNG used for vehicle fuel.
Capable of storing 12,000t of LNG, the facility feeds gas into the VTS in peak winter periods and has a loading station for tankers.
An upgrade to the VTS is expected to be completed by late 2012.
Stage one of the upgrade, the Sunbury Pipeline Project, aimed to deliver an uninterrupted gas supply between Sunbury and Ballarat during peak periods; stage two, the Northern Zone
augmentation project, will deliver a new compressor station at Euroa.
South Australia
APA owns one pipeline in SA and shares an interest in another.
The 50 per cent APA-owned South East Australia Gas pipeline (SEA Gas) transports natural gas from Port Campbell and Iona in Victoria to Adelaide and regional areas of SA and Victoria.
SEA Gas is an unregulated, 680km pipeline that began commercial operation in 2004.
More than half of Adelaide’s natural gas demand is met by SEA Gas, and is sourced from Origin Energy, International Power and TRUenergy.
Western Australia
The Goldfields gas pipeline (GGP), currently under expansion, runs from Yarraloola to Kalgoorlie and transports gas from the Carnarvon Basin and Northwest Shelf to mining clients in the Pilbara, Murchison and Goldfields mining regions of WA for industrial use and power generation.
APA owns 88.2 per cent of the 1380km-long main line and 100 per cent of the smaller (lateral) lines linked to mining sites in Newman, Wiluna, Murrin Murrin, Mount Keith and Leinster, and also to the Kalgoorlie power station.
Gas is also transported through the APA-owned Kalgoorlie Kambalda pipeline, from the Kalgoorlie south outlet of the GGP to Kambalda.
The 100 per cent APA-owned Parmelia Gas Pipeline (PGP) transports gas from the Dongara and Carnarvon gas fields through to the Dampier to Bunbury Pipeline (DBP) to supply industrial markets in Perth.
The Mondarra commercial underground gas storage facility near Dongara is close to the PGP and is part of the Parmelia gas business.
The underground gas storage facility is connected to the PGP and DBP. It is the only such facility in WA and is being upgraded to meet increasing demand for gas storage from the downstream WA market, and predicted demand from users for temporary storage to alleviate pressure during peak periods or interruptions.
APA also holds a 50 per cent stake in the 353km-long Midwest pipeline that transports Carnarvon Basin gas from the DBP near Geraldton to generators for mining processes in the Windimurra and Mount Magnet regions.
The Emu Downs wind farm and Badgingarra wind development project were acquired last year and complete APA’s infrastructure holding in WA.
The Northern Territory
APA’s only asset in the Northern Territory is the 1629km-long Amadeus gas pipeline and laterals.
Before acquiring the pipeline in June 2011, APA held a 96 per cent interest in the Amadeus Gas Trust that leased the pipeline.
The pipeline transports gas from the offshore Blacktip gas field to Darwin, Alice Springs and regional centres for power generation.
Gas is delivered to Amadeus through the Bonaparte gas pipeline, with an emergency supply on hand via theWickham Point pipeline. Both are managed and operated by APA, and owned by Energy Infrastructure Investments and Envestra.
Emu Downs
The Emu Downs wind farm, 200km north of Perth, was a joint venture between Ric Stowe’s Griffin Energy and the Queensland Government-owned Stanwell Corporation.
Following the collapse of Griffin, the 80MW wind farm generated great interest from a number of potential buyers including GE Finance and the Infrastructure Capital Group.
Commissioned in 2006, Emu Downs was purchased by APA for $172 million at the end of the 2010-2011 financial year.
Directly following the purchase, APA managing director Mick McCormack told online investor communications platform Open Briefing that Emu Downs would benefit APA.
Mr McCormack said that it was a “much more value-adding proposition” if APA could offer a “one-stop-shop” involving wind and gas.
“The combination of our gas assets in the Perth Basin region (the Parmelia gas pipeline and the Mondarra gas storage facility), together with the Emu Downs operating wind farm and adjacent development site, provides APA with unique and profitable options,” he said.
“APA has options to develop wind generation and facilitate gas generation to deliver the energy solutions needed in Western Australia: a win-win solution forAPA and its customers.”
Emu Downs was purchased at an estimated 8.5 EBITDA multiple to 2012 earnings, with a long-term contract for the electricity and renewable energy certificates generated from the farm.
“In addition to the revenue contract we have extensive wind farm data – about 15 years’ worth, of which almost five years’ worth is operating wind data – that provides us with a high level of certainty of its generating and operating performance,” Mr McCormack said.
Mr McCormack stated that APA acquired the wind farm in accordance with its focus on getting the best value from its gas infrastructure footprint by increasing revenue from assets.
“It is also the reason we have not been interested in some other wind farms that have been offered for sale in recent times,” he said.
“In my view, the purchase of the Emu Downs wind farm is entirely consistent with the strategy that we have been executing for many years.”
Opposite Emu Downs is the Badgingarra site, which has the development rights to build a wind farm capable of generating 130MW of power.
APA has recorded data from the area that will be used to aid the design of the wind farm.
According to early studies by Griffin and Stanwell, the wind farm could have the ability to power 80,000 homes and prevent about 455,000t of greenhouse gas emissions per year.
Diamantina power station
APA signed a long-term agreement last October to develop the 242MW Diamantina power station to provide electricity for Xstrata Mount Isa Mines (XMIM), Ergon Energy and new users in the surrounding regions from 2013 to 2030.
At present, the region of Mount Isa receives all of its electricity from the Mica Creek power station, which uses gas flowing through APA’s CGP.
The development application for the new power station was approved by Mount Isa City Council in February, and construction is underway.
APA reported that earthworks would continue throughout the next three months.
It also stated that construction of foundations for cooling towers and gas turbines would begin, with work continuing through the wet season to ensure the project stayed on schedule.
According to AGL Energy, major pieces of equipment, including gas turbines and generators, are expected to arrive from November onwards, and installation will begin shortly after.
The combined-cycle gas turbine power station will aim for more than 53 per cent efficiency, compared to the state’s coal-fired power stations’ 35 per cent efficiency.
For the first 10 years of the arrangement, APA’s CGP will supply gas to the power station.
In the remaining seven years until 2030, XMIM will be responsible for sourcing its own gas under a tolling arrangement with the power station.
Mr McCormack said that the power station would be modern, efficient and reliable.
“Working together with AGL has harnessed the expertise of both our companies to deliver a total energy solution that will supply the current and future energy needs of the region in a timely and cost-efficient manner without the need for government subsidies or cross subsidies,” he said.
The project was described by APA in a presentation at the UBS Utilities Conference in June as a “low-risk investment”.
Hastings Diversified Utilities Fund
Hastings Diversified Utilities Fund (HDF) has an investment portfolio that includes ownership of Epic, an Australian gas transmission company with three natural gas pipelines: Pilbara, Moomba to Adelaide and South West Queensland.
Despite already owning 20.7 per cent of HDF in December 2011, APA issued an initial takeover offer of $2.13 per HDF share. HDF rejected the offer, citing a belief that it severely undervalued its portfolio.
Pipeline Partners Australia consequently offered $2.35 per security in May this year, before APA increased its bid to $2.525 per security at the end of July. Negotiations are ongoing between the parties.
Looking ahead
Recent prosperity for APA has paved the way for an optimistic outlook: its funding for growth totalled $498 million in 2011, 47 per cent more than the previous year.
Its 2011 annual report stated that the company was focussed on growth, security and value while keeping pace with market demand.
In its UBS presentation, APA stated that it was “well positioned in a growing market” and that plans to “expand and enhance…[its] energy infrastructure portfolio across Australia in line with increasing demand for gas and energy” were well under way.
“Our strength lies in our scale and skills in managing, operating and developing these assets, and our strategy is to enhance the value of these assets and grow the business profitably,” Mr McCormack said.
In the presentation, APA revealed four major growth opportunities expected during the coming decade.
First, pipeline infrastructure for power generation and mining projects would be required as demand for gas continually rose.
Second, improving its energy infrastructure would provide a stable and secure base for the company.
Third, the company was considering energy developments that could be leveraged off its existing infrastructure, expertise and relationships in addition to investments that influenced operating and management capability.
Finally, by co-investing in secure, low-growth energy infrastructure assets and businesses, and providing a mix of asset management, operations and maintenance, APA had its sights set on developing its energy investment business to create “value for the long term”. Mr McCormack said he was optimistic about APA’s future.
“Over the years, APA has assembled a portfolio of assets that have generated the organic growth opportunities that, in turn, have seen EBITDA growth. So given my belief that the demand for gas will continue to grow, and the fact that APA has a national asset footprint which continues to toss up a pipeline of organic growth opportunities, I’m approaching the
future with some confidence.”

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