APA’s $6 Billion Pipeline Deal

By Glenn Dyer | More Articles by Glenn Dyer

APA Group (APA) is asking shareholders and the market for a massive $A1.839 billion via a discounted renounceable rights issue to help fund the $US5 billion ($A6 billion) purchase of the recently built pipeline in BG Group’s liquefied natural gas project in Queensland.

The deal is seen as clearing the way for Santos (STO) to sell its Queensland coal seam gas pipelines – a sale the market expects to happen because of the rising sharemarket pressure on Santos from the falling oil price, followed by a similar deal from Origin Energy (ORG).

APA securities were halted from trading yesterday pending the institutional part of the one-for-three entitlement offer. A retail offer follows next week.

The move, which is certain to be confirmed by securityholders, will see APA move out of its domestic base and into the LNG export sector in eastern Australia.

APA’s issue will be done at $6.60 per security, 17% under the close on Tuesday of $7.97. It will be underwritten by Deutsche Bank, Macquarie Capital and Morgan Stanley.

APA’s securities have risen from around $7.30 in mid October when reports started appearing of its favouritism to win the deal.

APA had to fight off rivals including IFM Investors, QIC Limited, AMP Capital and China Investment Corporation. Media reports say Hong Kong infrastructure giant Cheung Kong Group dropped out of the process earlier on.

APA YTD – APA secures $6 billion pipeline

Under the deal, APA has an option to take over of the pipeline from BG’s QGC subsidiary after a year, allowing it to integrate it into its own extensive pipeline portfolio up and down the east Coast of Australia.

The balance of the funds for the deal will come from a $US4.1 billion syndicated bank bridge debt facility.

APA said that after discussions with ratings agencies it expects to maintain its credit rating.

BG, which has been under rising pressure from shareholders and analysts in the UK to sell down assets, said the asset has a current book value of $US1.6 billion, and that it would report a post-tax profit of about $US2.7 billion on the sale.

But BG said it would take a write-down of about $US2 billion on the rest of its Queensland Curtis LNG project, which is due to begin production later this month, and indicated that it was reviewing other assets on its books in the light of the recent slide in oil prices around the world.

APA managing director Mick McCormack said in the statement the deal “builds on APA’s strategy of expanding its revenue base and east coast grid”.

The 543-kilometre pipeline runs between coal seam gas fields in the Queensland’s Surat Basin to BG’s QCLNG plant on Curtis Island in Gladstone, the first of three large LNG export projects due to begin production over the next 12 months. LNG from the project will be mostly shipped to China.

APA also had $800 million of cash and undrawn debt funding at June 30. On top of that it raised $780 million from the recent sale of its 33% in gas distributor Envestra Ltd where APA failed to to do a deal.

This deal is expected to be completed by the June quarter of next year. Then investors will focus on possible pipeline sales by Santos from its $US18.5 billion GLNG venture in Queensland and Origin Energy’s huge Australia Pacific LNG project.

APA reconfirmed its guidance for 2014-15 earnings before interest, tax, depreciation and amortisation (EBITDA) excluding the acquisition, at $1.17 billion to $1.19 billion, including a gain on the sale of the stake in Envestra.

Excluding that one-off gain, the company sees earnings within the range of $740 million to $760 million.

The company’s distribution policy won’t be affected by the deal, with the payout remaining at 60-70% of operating cash flow.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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