# APA - APA Group



## Dutchy3 (3 June 2007)

Hardly be it for me to suggest yet anothery that I now consider a buy .... Bit of good news and it's had its rest 5.10 + this time?


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## Dutchy3 (22 June 2007)

*Re: APA - Australian Pipeline*

I'm still long and taking some pain ... anyone suggest why this stock is bounce along against lows again ... It broke out! I saw it!!!


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## Nicks (30 July 2007)

*Re: APA - Australian Pipeline*

Ive been watching the trades a bit this morning and there seems to be a Sell spread being done, probably an Institutional. 

Someone seems to be offloading perhaps. 

Think there may be a change in substantial shareholiding notice to follow.


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## Nicks (9 August 2007)

*Re: APA - Australian Pipeline*

I just bought into this when I thought the price was right.

As an ex Gasnet holder (prev asx GAS) I was disappointed to lose such a solid high yielding stock. Since APA bought them and have a similar yield and business I got in (gas - cant go wrong, fuel always required and this is set to expand as oil and coal become expensive and environmentally unfriendly).


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## doogie_goes_off (9 August 2007)

*Re: APA - Australian Pipeline*

My partner has held APA since $3 days, not a bad one, pretty conservative though, strong steady growth for the long term. This is one for the back pocket not one for the watch list.


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## Tysonboss1 (2 April 2008)

*Re: APA - Australian Pipeline*

Current Price for this stock seems very cheap,.... especially considering.

I have these as an accumulate below $3.00


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## doogie_goes_off (2 April 2008)

*Re: APA - Australian Pipeline*

APA have a high level of debt, although alot of it is hedged, I would say that once they refinance the worst of the credit crisis will be gone, so all good for a rebound in SP given it's near year lows.


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## Gunlom (2 April 2008)

*Re: APA - Australian Pipeline*

I understand this is generally accepted as a good defensive stock, with a great yield. Am looking to pick up a few myself...

however one questions is with there eps vs there dps


Year to date                  2007             2006                  2005
Earnings  (cents)       17.00   	20.88   	      17.81  
Dividends (cents)	28.00   	30.00    	      22.50  

how do they consistently pay out more in dividends than they earn??
is this through borrowing??
and is this sustainable??

just some things I haven't quite figured out yet


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## Tysonboss1 (2 April 2008)

*Re: APA - Australian Pipeline*



doogie_goes_off said:


> APA have a high level of debt, although alot of it is hedged, I would say that once they refinance the worst of the credit crisis will be gone, so all good for a rebound in SP given it's near year lows.




Most of the debt doesn't mature for another 5 years,... and infrasture deals are not really having any trouble refinancing.


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## nioka (2 April 2008)

*Re: APA - Australian Pipeline*



Gunlom said:


> I understand this is generally accepted as a good defensive stock, with a great yield. Am looking to pick up a few myself...
> 
> however one questions is with there eps vs there dps
> 
> ...



 As I see it there are three ways they could be paying the dividend they have done
 1. By borrowing.
 2. From reserves.
 3. Sale of assets.(or a run down of assets)
 Since any of these will reduce the fundamental value of the Company, I can't work out how they are a good defensive stock as you suggest. If I kept paying out more than I was earning I know what the result would be.
 They may be writing down the value of pipelines for tax reasons faster than they are depreciating so that they may end up with little book value but still be great earners. Personally I prefer to judge earnings per share ahead of dividends per share.
 They don't even make a watch list for me. But then I'm often wrong.


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## reece55 (2 April 2008)

*Re: APA - Australian Pipeline*



Gunlom said:


> I understand this is generally accepted as a good defensive stock, with a great yield. Am looking to pick up a few myself...
> 
> however one questions is with there eps vs there dps
> 
> ...




Cause not all of the payments are dividends, some are capital distributions....

Their model is ok, plenty of free operating cash flow here so their distributions are supported by EBITDA. Investment in PP&E is 2X D&A, so they are reinvesting strongly. But yes, it's pretty clear that an increase in debt is the balancing item.... Gearing has gone up a fair bit, but that looks to be due to a recent acquisition.... Quick check on weighted average interest rate gives me about 7.5 - 8%, but maturity on debt is out a long way (only abut 500 mil maturing soon), so they don't have repricing exposure in the medium term to long term....

Just some quick observations...... I don't trade this entity and don't invest in it....

Cheers


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## reece55 (29 April 2008)

*Re: APA - Australian Pipeline*

Big move today on high volume, looks to be more than just bargain hunting, anyone got any ideas?

I have said it in the high yield thread, these guys have been looking fundamentally cheap... Price query here we come.........

Cheers


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## Nicks (29 April 2008)

*Re: APA - Australian Pipeline*

Well I dont think a takeover at APA's consitently undervalued and cheap Share Price is out of the question. 

Potential for an opportunistic move by a predator possibly.


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## Nicks (7 August 2008)

*Re: APA - Australian Pipeline*

APA is on the move this morning. Hardly any sellers with big gaps.... and its been on an uptrend for the last few days.

Something in the pipeline or just investors realising that its a secure regulated and well managed investment?


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## doogie_goes_off (7 August 2008)

*Re: APA - Australian Pipeline*

Have noticed this myself, holding a few for a steadier in my speccie biased portfolio. Quite pleasing.


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## Nicks (7 August 2008)

*Re: APA - Australian Pipeline*

Looks like there were 2 trades of 1,000,000 each in Australian Pipeline Trust this morning. Someone is interested.


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## Tysonboss1 (28 August 2008)

*Re: APA - Australian Pipeline*

Is this stock forming a double bottom and the price is recovering back towards $4 or do you think profit takers might bring the stock back down.

I am trying to decide whether I should sell of some of my holding at around $3.60 to put into another stock that hasn't made as much of a recovery yet or hold on hoping we hit $4 before I sell some.


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## Nicks (1 October 2008)

*Re: APA - Australian Pipeline*

Interestingly APA was one of the solids whom held up very well yesterday. I guess its the safety of regulated incom. A safe stock for the portfolio at the moment (and it even seems to be rising).


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## doogie_goes_off (5 December 2008)

*Re: APA - Australian Pipeline*

APA is now languishing at lows around the $2.50 mark after the SPP closed at the end of last month. Is there a debt refinancing problem or are they just getting punished due to the general market downturn and percieved lack of demand. I would have thought the fundamentals of APA were still soild, any theories?


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## persistentone (28 July 2009)

*Re: APA - Australian Pipeline*

How large are APA's asset management fees?

Can anyone tell me if they are having any liquidity issues or refinancing problems, looking out for the next two years of debt coming due?


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## persistentone (28 July 2009)

*Re: APA - Australian Pipeline*

Does anyone have any comments on Envestra (ENV), which APA owns a 30.6% interest in?   The ENV chart looks like they have a serious liquidity problem.

The ENV cash flow statement to me suggests that they pay out dividends in excess of operating cash flows, and they take on debt to do it.   They have a LOT of debt already so that is not a sustainable practice.


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## So_Cynical (28 July 2009)

*Re: APA - Australian Pipeline*



persistentone said:


> Does anyone have any comments on Envestra (ENV), which APA owns a 30.6% interest in?   The ENV chart looks like they have a serious liquidity problem.
> 
> The ENV cash flow statement to me suggests that they pay out dividends in excess of operating cash flows, and they take on debt to do it.   They have a LOT of debt already so that is not a sustainable practice.




I watch both but don't hold either...ENV as u suggest, has serious money issues, from memory they have quite a few tranches of debt to refinance over the next few years, however on the up side they have a great gas distribution network, i came to the conclusion a while back that APA will at some stage take over ENV as its business is a natural extension to APA;s core business...perhaps when ENV's balance sheet is a little healthier.


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## awg (28 July 2009)

*Re: APA - Australian Pipeline*



persistentone said:


> How large are APA's asset management fees?
> 
> Can anyone tell me if they are having any liquidity issues or refinancing problems, looking out for the next two years of debt coming due?





I considered this as a dividend stock recently, but it has gone ex-div now.

Probably dropped off most watchlists lately, technicals a bit weak

but with gas network consolidation possible

it would be good for some serious fundamental analysis to look at its financials

would be interesting to hear your thoughts on those, persistentone


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## persistentone (29 July 2009)

*Re: APA - Australian Pipeline*



So_Cynical said:


> I watch both but don't hold either...ENV as u suggest, has serious money issues, from memory they have quite a few tranches of debt to refinance over the next few years, however on the up side they have a great gas distribution network, i came to the conclusion a while back that APA will at some stage take over ENV as its business is a natural extension to APA;s core business...perhaps when ENV's balance sheet is a little healthier.




Why have you avoided APA?   

ENV looks toxic to me because of both too much gearing and also because of bad management practices of overpaying the dividend.   APA looks very solid to me so far.


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## persistentone (29 July 2009)

*Re: APA - Australian Pipeline*



awg said:


> I considered this as a dividend stock recently, but it has gone ex-div now.
> 
> Probably dropped off most watchlists lately, technicals a bit weak
> 
> ...




Do you realize that this is not a standard distribution that APA is paying?   Some of the distribution is being classified as a "return of capital" and as such you do not pay tax on it, but simply adjust your cost basis on the stock.   Assuming the other fundamentals check out, it looks like it would be the kind of stock you might hold for 15 years frankly, paying ever-increasing dividends highly tax-efficiently.

I haven't studied them in detail yet, but the management presentation impressed me.   They are very very conscious about their gearing levels and how much they can push that given their ultra-stable revenues.   

I don't like the cash flow because they are constantly borrowing and the capex seems to exceed the operating cash flow.   But at least one place in their presentation they make the point that they have very low maintenance capex expenses.  So most of what they are showing as capex must be growth capex.   That makes it very hard to quickly understand the financials since you need to know what kinds of cash flows will those capex expenditures bring in when the building is done.

Does anyone know if ABN Amro covers this one?   Any good analyst research out there?


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## So_Cynical (29 July 2009)

*Re: APA - Australian Pipeline*



persistentone said:


> Why have you avoided APA?




Haven't avoided it...sorry if i gave that impression, APA has been a very frustrating stock for me since i first tried to buy it (low ball) in March...ive lost count of the number of times ive had unfilled buy orders in for APA, every time it dips i miss out by 1 or 2 cents...or im fully invested.

Perhaps ill get aboard in the next down leg (next couple of weeks) before the breakout....cos if i miss the breakout ill be very annoyed.


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## Tysonboss1 (29 July 2009)

*Re: APA - Australian Pipeline*



persistentone said:


> Do you realize that this is not a standard distribution that APA is paying?   Some of the distribution is being classified as a "return of capital" and as such you do not pay tax on it, but simply adjust your cost basis on the stock.   Assuming the other fundamentals check out, it looks like it would be the kind of stock you might hold for 15 years frankly, paying ever-increasing dividends highly tax-efficiently.
> 
> I haven't studied them in detail yet, but the management presentation impressed me.   They are very very conscious about their gearing levels and how much they can push that given their ultra-stable revenues.
> 
> ...




I like APA, They have some fantastic assets that service australias biggest cities. They are a good set and forget type investment. At todays prices it's a dividend yield of more than 10%.

They are spending alot of money adding capacity on the moomba to sydney pipeline and other pipelines. Australia is set to have high growth in the usage of natural gas over the next 10 years due to several factors and APA is making investments that will allow them to transport this gas.


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## persistentone (30 July 2009)

*Re: APA - Australian Pipeline*



So_Cynical said:


> Haven't avoided it...sorry if i gave that impression, APA has been a very frustrating stock for me since i first tried to buy it (low ball) in March...ive lost count of the number of times ive had unfilled buy orders in for APA, every time it dips i miss out by 1 or 2 cents...or im fully invested.
> 
> Perhaps ill get aboard in the next down leg (next couple of weeks) before the breakout....cos if i miss the breakout ill be very annoyed.




Is there a specific time driven event for the next three months you are watching?  

I guess they had a lot of debt in 2010 that needs to be reset?   Has there been any progress on that?


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## persistentone (30 July 2009)

*Re: APA - Australian Pipeline*

A very small and poorly detailed graph of the 90 day BBSW can be found in the bottom left hand corner of this site:

https://www.termdeposit.com/

You will notice that the crash in BBSW rates from September through December 2008 seems to very closely match the movement of NFNG in this period.    What is interesting to me is why NFNG started to recover in April from low 60s to low 70s.

The reaction of NFNG to the Sinochem announcements is clear.


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## persistentone (31 July 2009)

*Re: APA - Australian Pipeline*



persistentone said:


> A very small and poorly detailed graph of the 90 day BBSW can be found in the bottom left hand corner of this site:
> 
> https://www.termdeposit.com/
> 
> ...




I posted this to the wrong forum!   Sorry about that. 

If someone knows of a way to delete such posts let me know.


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## Tysonboss1 (21 November 2009)

*Re: APA - Australian Pipeline*

Well It's been a good run up off late, 

Apa seems to be stalling around $3.2, probally because at that price it is a dividend yield of 10%.

I hope they south for a while I was hoping to pick some more up a sub $3


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## brianwh (2 March 2010)

*Re: APA - Australian Pipeline*

Just wondered what people thought of the "2010 Security Purchase Plan" being offered to current securityholders. I am less than enthusiastic about a paltry offer of 2.5% discount on an unknown price with money up-front and no certainty of getting what you ask for. I am generally positive about the company although debt levels are high.

The money seems to be for growth projects so may not be dilutive for current shareholders.

Any thoughts?


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## gerg (4 March 2010)

*Re: APA - Australian Pipeline*



brianwh said:


> Just wondered what people thought of the "2010 Security Purchase Plan" being offered to current securityholders. I am less than enthusiastic about a paltry offer of 2.5% discount on an unknown price with money up-front and no certainty of getting what you ask for. I am generally positive about the company although debt levels are high.
> 
> The money seems to be for growth projects so may not be dilutive for current shareholders.
> 
> Any thoughts?




Hi
thinking of taking up my entitlement either $10K or 15K. However over the last 2 weeks the price has jumped to between $3.40 and 3.45 whereas before that its was hovering around the $3.20 level. As you highlight you don't exactly know the final price and thus the exact number of units you get.

The company is well regarded and always seems to pay their dividends.

However I am thinking there may be some downward drift over the next month or so which would make a buying opportunity close to $3.25 or so. This would be cheaper than the SPP I feel. Note this is just my feeling and could be totally wrong.

If you look at the chart trend line over the last year it does appear a bit high at present.


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## Tysonboss1 (30 September 2010)

*Re: APA - Australian Pipeline*

Based on my analysis APA has a fair value of $4.16. it has had so strong gains recently and is currently trading at $4.02.

$4.16 is the tipping point where if you purchase this stock at levels higher than this then the likely return will be average at best heading towards poor or mediocre the higher you pay.

So I am guessing that the price should stall just short of $4.16.


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## matty77 (17 December 2010)

*Re: APA - Australian Pipeline*



Tysonboss1 said:


> Based on my analysis APA has a fair value of $4.16. it has had so strong gains recently and is currently trading at $4.02.
> 
> $4.16 is the tipping point where if you purchase this stock at levels higher than this then the likely return will be average at best heading towards poor or mediocre the higher you pay.
> 
> So I am guessing that the price should stall just short of $4.16.




you seem to be pretty much correct on that one at the moment, I have added to my watch list.

Any thoughts on long term hold for this sort of stock? (I am not a short term buyer - no I dont hold)


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## awg (17 December 2010)

*Re: APA - Australian Pipeline*

Have been holding this stock as a high reliable dividend payer with good prospect of capital gain exceeding inflation.

I agree with Tyson about the price and value, has traded in a channel, and could be reliably traded imo.

The good thing is that they have pricing pretty much sewn up, and imo, it is almost certain that growth will occur in the market they supply.

Their debt and capex figures are a bit of a negative


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## Tysonboss1 (17 December 2010)

*Re: APA - Australian Pipeline*



matty77 said:


> you seem to be pretty much correct on that one at the moment, I have added to my watch list.
> 
> Any thoughts on long term hold for this sort of stock? (I am not a short term buyer - no I dont hold)




this stock is a great longterm hold provided you don't overpay for it.

Why?

It pays a great dividend from free cashflow @ about 8% atcurrent prices.

the companies stated goal is increase these dividends by 5% per year, it's free cashflow pershare is over 50c and the dividend is 32c, so that extra 18c will be invested into further assets which will assure they can continue raising the dividend.

Their assets all have contracted income that takes inflation into account, and the regulated assets also have clauses to increase charges if interest rates rise.

Also Apart from the factors mentioned above, natural gas usage is going to grow significantly over time and the best way to transport the stuff is through the piplines controled by apa, so the organice growth in their businesses will be strong.


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## Tysonboss1 (17 December 2010)

*Re: APA - Australian Pipeline*



awg said:


> Their debt and capex figures are a bit of a negative




maintaince capex is very low, most of the large capex is for increased expansion and further invesments which are generally contracted prior to construction.

The debt is not a big concern since it is maintained through contracted revenue, and comes from a good mix of sources and expire dates, and as I said they can raises prices with inflation, it's a pretty sweet deal where the profit they can make in percentage terms is always 2% above the interest rates.


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## PinguPingu (15 December 2014)

*Re: APA - Australian Pipeline*

I'm long on this via CFD's and have been allocated APA Group Nil-Paid rights...what on earth can I actually do with this?


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## So_Cynical (15 December 2014)

*Re: APA - Australian Pipeline*



PinguPingu said:


> I'm long on this via CFD's




Long in a gas pipeline company with the oil price in near complete collapse, like one thing has nothing to do with the other.


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## PinguPingu (15 December 2014)

*Re: APA - Australian Pipeline*



So_Cynical said:


> Long in a gas pipeline company with the oil price in near complete collapse, like one thing has nothing to do with the other.




Long on a dividend momentum strategy, no fundamentals involved


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## VSntchr (15 December 2014)

*Re: APA - Australian Pipeline*

Reaper, I too have some LONG APA. I managed to get out on the open this morning for a cheeky price. But I am still awaiting the response from my broker  as to what is happening with the entitlements. I hope they give me the institutional bookbuild price...the retail will take until late January to get paid out as far as I understand.


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## skc (15 December 2014)

*Re: APA - Australian Pipeline*



VSntchr said:


> Reaper, I too have some LONG APA. I managed to get out on the open this morning for a cheeky price.




You are lucky! I got so distracted by all the Martin Place events and forgot to look at it. Would have bene a no brainer short on open.



VSntchr said:


> But I am still awaiting the response from my broker  as to what is happening with the entitlements. I hope they give me the institutional bookbuild price...the retail will take until late January to get paid out as far as I understand.




There's early acceptance on 19 Dec for retail holders...


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## skc (15 December 2014)

*Re: APA - Australian Pipeline*



So_Cynical said:


> Long in a gas pipeline company with the oil price in near complete collapse, like one thing has nothing to do with the other.




Largely non-correlated until the $hit really hits the fan... like customers going bankrupt.



PinguPingu said:


> I'm long on this via CFD's and have been allocated APA Group Nil-Paid rights...what on earth can I actually do with this?




Call your CFD provider and ask about the process and deadline for exercising your rights. The rights are not tradable in the market, but are renounceable. So if you do nothing make sure your provider pays you the clearing bookbuild price.

Best read the APA annoucement yourself.


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## VSntchr (16 December 2014)

*Re: APA - Australian Pipeline*



skc said:


> Call your CFD provider and ask about the process and deadline for exercising your rights. The rights are not tradable in the market, but are renounceable. So if you do nothing make sure your provider pays you the clearing bookbuild price.




So apparently the deadline was the 11th and now they are refusing to either allocate any additional units or to pay out the entitlement bookbuild price.
Pretty sh!tty about this and haven't given up....this is what I was told:
"In the event of entitlement offers our prime broker will assign a deadline for us to respond to the offers and if no actions are taken before the notification deadline, that means we're giving up the offer hence we wouldn't receive any cash or shares"

Nice to know that they didn't inform me of this deadline which is in advance to any deadline provided by the APA announcement. I figured taking no action would result in the bookbuild price....hmmmmmm. Another headache to deal with. Maybe its time to change broker!


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## PinguPingu (16 December 2014)

*Re: APA - Australian Pipeline*



VSntchr said:


> So apparently the deadline was the 11th and now they are refusing to either allocate any additional units or to pay out the entitlement bookbuild price.
> Pretty sh!tty about this and haven't given up....this is what I was told:
> "In the event of entitlement offers our prime broker will assign a deadline for us to respond to the offers and if no actions are taken before the notification deadline, that means we're giving up the offer hence we wouldn't receive any cash or shares"
> 
> Nice to know that they didn't inform me of this deadline which is in advance to any deadline provided by the APA announcement. I figured taking no action would result in the bookbuild price....hmmmmmm. Another headache to deal with. Maybe its time to change broker!




Who are you with VS? I'm going to try and ring IG at lunch today and see what they say


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## VSntchr (16 December 2014)

*Re: APA - Australian Pipeline*



PinguPingu said:


> Who are you with VS? I'm going to try and ring IG at lunch today and see what they say




Have a few brokers, but this one is FPmarkets. They are cheap...but client money is a concern so I keep the balance low. 
I fail to see how they can't pay the bookbuild when the announcement states that taking no action will result in the bookbuild price being payable. If I/we are not receiving the cash, somebody is!


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## skyQuake (16 December 2014)

*Re: APA - Australian Pipeline*

Pretty sure they mean 11th Jan. If not you can prob sue/complain to ombudsman.

A deadline of 11th Dec would be ridiculously onerous. 1 day after announcement, stock hasnt even settled yet!


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## VSntchr (16 December 2014)

*Re: APA - Australian Pipeline*



skyQuake said:


> Pretty sure they mean 11th Jan. If not you can prob sue/complain to ombudsman.
> 
> A deadline of 11th Dec would be ridiculously onerous. 1 day after announcement, stock hasnt even settled yet!




Yeah, Ive got an email stating 9am on 11th December was the cutoff so no participation past this point. My fury is growing!


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## PinguPingu (16 December 2014)

*Re: APA - Australian Pipeline*

Just got an email from IG, you can apply to take up the rights, deadline 12/01/15, or do nothing and receive some value depending on the retail book build.


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## bonkerrs (17 December 2014)

*Re: APA - Australian Pipeline*



PinguPingu said:


> Just got an email from IG, you can apply to take up the rights, deadline 12/01/15, or do nothing and receive some value depending on the retail book build.




I assume you have the positions according to Nick Radge's Dividend Momentum strategy. I'm also holding long positions. I called Comsec CFD today and am now entitled to my allocation at $6.60 each but cannot exercise until after 9am 11th Jan.

Now for the newbie questions...

1. What is book build?
2. What are some likely scenarios based on similar entitlement offerings? Would the share price drop to around $6.60 on the 11th Jan because of the offering?


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## ROE (18 December 2014)

*Re: APA - Australian Pipeline*

book build is the process people bid to buy shares companies issue.

it is a discovery process for company to gage demand and supply for the shares
and how much people willing to pay for it.

Higher demand likely to lead to higher book build price and vice versa

The case of selling them to institution, the higher price the better for retail holder
as you are dilute a bit less and the book build price usually a reasonable floor price
for the stock as well so you unlikely to see it dropped too far from it.


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## luutzu (1 February 2016)

*Re: APA - Australian Pipeline*

This company is a complete Ponzi Scheme.

I hope I am wrong, well not really... but can someone tell me I am wrong?

I've looked at its past four years, compared it a similarly capital intensive business, and this APA is one big massive pile of Ponzi.

Will make my case soon.


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## Smurf1976 (1 February 2016)

*Re: APA - Australian Pipeline*

I don't know if you are wrong or right but a ponzi scheme is illegal in Australia.

Personally, I'd be a bit cautious about suggesting a company is engaging in illegal activity on a public forum unless I had _very_ firm evidence to that effect.

Just my thoughts.


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## luutzu (1 February 2016)

*Re: APA - Australian Pipeline*



Smurf1976 said:


> I don't know if you are wrong or right but a ponzi scheme is illegal in Australia.
> 
> Personally, I'd be a bit cautious about suggesting a company is engaging in illegal activity on a public forum unless I had _very_ firm evidence to that effect.
> 
> Just my thoughts.




Alright, I'll take that back. It would be hard to prove, and there is no need to name what APA is doing... But the effect is the same. Not a ponzi, management are honest, but the company itself cannot operate the way it is without borrowing more and more money AND raising new capital from shareholders.

Its current operating cash flow just cannot support both its dividends and its debt obligations. Dividends will have to go and slight less debt or equity will be needed - or sale of assets. To keep doing what it's doing, while may not be illegal, will send in the administrators.


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## Value Collector (3 February 2016)

*Re: APA - Australian Pipeline*



luutzu said:


> This company is a complete Ponzi Scheme.
> 
> I hope I am wrong, well not really... but can someone tell me I am wrong?
> 
> ...






luutzu said:


> Alright, I'll take that back. It would be hard to prove, and there is no need to name what APA is doing... But the effect is the same. Not a ponzi, management are honest, but the company itself cannot operate the way it is without borrowing more and more money AND raising new capital from shareholders.
> 
> Its current operating cash flow just cannot support both its dividends and its debt obligations. Dividends will have to go and slight less debt or equity will be needed - or sale of assets. To keep doing what it's doing, while may not be illegal, will send in the administrators.




It's operating cash flow is higher than dividends, I can't see where the Ponzi is.

Also, it's capital ex, is mostly growth, only a small amount of its cap ex is stay in business cap ex, so its not as cap ex heavy as you might think.


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## luutzu (3 February 2016)

*Re: APA - Australian Pipeline*



Value Collector said:


> It's operating cash flow is higher than dividends, I can't see where the Ponzi is.
> 
> Also, it's capital ex, is mostly growth, only a small amount of its cap ex is stay in business cap ex, so its not as cap ex heavy as you might think.




Stay in business capex was $50M, with new pipeline in Gladstone, may bring it to $70M.

Around $210M committed to growth capex (expanding its assets etc.). Its own report state it expects this to be $300 to $400M, but that's planned and so committed mean they can't get out of it is $210.

Dividends if at their "at least" 38cents is $423M.

Interests I guestimate at $484M, APA itself advise it'd be $500 to 510.

From its own EBITDA estimate of $1275 to $1310 (p.16 2015AR), excluding the stay in biz capex of $70 its cash position will be $52 to -$23M.

Add on top the $977M (there about) loan repayment [8.8 year average maturity on $8.6B loan]... and it will need to raise or borrow about $1100M or sell assets or cut divi and borrow less.



So if it can't convince lenders, it'll be a lot of pain.

That and having compare its past 4 years against Buffett's Burlington Northern rails... APA kinda suck.


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## Value Collector (3 February 2016)

*Re: APA - Australian Pipeline*



luutzu said:


> Dividends if at their "at least" 38cents is $423M.
> 
> .




I have it at less than $270Million, and some of that will be retained due to the dividend reinvestment plan. (where are you getting $423M from?)



> Interests I guestimate at $484M, APA itself advise it'd be $500 to 510.




The Interest that they pay is already deducted, it doesn't come out of the $550M of free cash flow.





> Add on top the $977M (there about) loan repayment [8.8 year average maturity on $8.6B loan]... and it will need to raise or borrow about $1100M or sell assets or cut divi and borrow less.




They have undrawn debt facilities, to cover that any given years debt payment, and they will probably just keep rolling over debt.

I think debt will be a permanent part of the capital structure at apa, its one of those businesses that are really well suited to having bond holders as part of its capital base.



> That and having compare its past 4 years against Buffett's Burlington Northern rails... APA kinda suck




Well I own Burlington Northern also, through my Berkshire holding.

But Buffet likes Gas piplines too , mid American and Berkshire hathaway energy own a few.

I don't see the suck, I don't mind holding gas pipelines.


----------



## luutzu (3 February 2016)

*Re: APA - Australian Pipeline*



Value Collector said:


> I have it at less than $270Million, and some of that will be retained due to the dividend reinvestment plan. (where are you getting $423M from?)




They have 1,114,307,369 shares outstanding. At the 38 cents it works out to $423M
I think DRP has been cancelled.

See p.3 of latest dividend notice from them. Page 2 said they have DRP, but p.3 said it does not apply to this March divvy.

But true that they could simply switch it back and retain some cash. But also true that doing that simply mean they need to retain cash... 

Personally I think they ought to switch it on but my guess is they want to keep up appearances.




Value Collector said:


> The Interest that they pay is already deducted, it doesn't come out of the $550M of free cash flow.




I think your $550 refers to the Net Operating Cash flow. Which is true. APA adjusted/"normalised" it to $544M from memory... but yes that takes out the Interests and leave the DA and Taxes - it does not seem to be paying tax either, which I guess is a good thing ?


Add the $435M (at AUD/US of $0.77) EBITDA from the new WGP in Gladstone, add 5% organic growth and I had the old NetOp cash at $553M, and so totals $988M net cash in FY 2016. [could be slightly higher due to WGP linked to US rate and the AUD has been lower than the 77 cents.

Take away interests of $500M, dividends of $423, growth capex comitted of $210; stay in biz capex of around $70 and APA is in trouble.




Value Collector said:


> They have undrawn debt facilities, to cover that any given years debt payment, and they will probably just keep rolling over debt.
> 
> I think debt will be a permanent part of the capital structure at apa, its one of those businesses that are really well suited to having bond holders as part of its capital base.




If APA could keep borrowing and keep raising capital and do some minor selling of certain "non-core" assets... yea it could keep up this business for a few more years longer. But given its size, monopoly and compeitive regulations will make it difficult to keep "expanding".

So I asked a simple question: Could APA survive as is if it can no longer borrow and raise cash?

No it cannot.





Value Collector said:


> Well I own Burlington Northern also, through my Berkshire holding.
> 
> But Buffet likes Gas piplines too , mid American and Berkshire hathaway energy own a few.
> 
> I don't see the suck, I don't mind holding gas pipelines.




BNSF did borrow money, and is capital intensive, and yes it roll over its debt year on year. 

But I've looked at its operations and BNSF does the borrowing and the operating in a way you'd expect a normal, profitable, well managed company does. APA isn't it.

For example, and maybe by the weekend I'll make a more detailed comparison... BNSF's net operating cash more than pay off its interests and its capex and its dividends. APA couldn't do it with theirs.

BNSF borrowed but does it to expand and to buy back their stock. It rarely need to sell its major assets - only does it once in the 12 years to 2009 prior to Buffett's takeover. APA on the other hand does not buy back its stock and borrow just to survive, and almost every year it has to either sell or forced to sell part of its assets. 

Its latest purchase of WGP for AUD$5.8B led it to borrowed some $5.2B and raised another $1.8B. Note too its cap raising ended in late January while finalisation was 3rd June... It does that, and here I am guessing, to pay for its cash flow problem.

A good business does not need to raise cash to meet its obligations. Yes it shouldn't have a lazy balance sheet, and yes it should roll over its debt and use other people's money when the return on investment is higher etc. But look at WGP's purchase price and its EBITDA... works out about 7.7% return BEFORE interests and depreciation and taxes. Interests APA managed to bring down to 5.6% in its latest round...

That 2.1% above costs of borrowing is barely meeting inflation. Add to that depreciation expenses and some tax and that purchase is already under water. Add the loan repayment and it's just taking on a lot of risks for very little if any return.

---

Its recent failed bid to take over Iona... QIC overbid it by some crazy amount right?
Just show APA is desperate to keep buying and growing so it could raise more money. Also show how desperate some of these operators are too. 

---

Haven't looked at other pipelines or Buffett's ones. But they're not all the same though. A business is only good if its operations could fund itself and have some left to pay dividends and some for expansion and organic growth. If APA stops borrowing, its organic growth will stop and it couldn't pay its bills - that's even after cancelling dividends. 

But then if APA could manage to keep rolling over its debt and finding new opportunities - sure it'll work out fine. But all Ponzi works out fine until no more new investors or lender forking up the cash.


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## Value Collector (3 February 2016)

luutzu said:


> They have 1,114,307,369 shares outstanding. At the 38 cents it works out to $423M
> I think DRP has been cancelled.
> 
> See p.3 of latest dividend notice from them. Page 2 said they have DRP, but p.3 said it does not apply to this March divvy.
> ...




Oh yeah, I looked at the wrong thing, But either way, 38cents distribution is covered by operating cash flow of 55cents. So I can't see how is a problem.






> I think your $550 refers to the Net Operating Cash flow. Which is true. APA adjusted/"normalised" it to $544M from memory... but yes that takes out the Interests and leave the DA and Taxes - it does not seem to be paying tax either, which I guess is a good thing ?









> Take away interests of $500M, dividends of $423, growth capex comitted of $210; stay in biz capex of around $70 and APA is in trouble.




How are they in trouble, worst comes to worst they can finance their growth projects, they will earn above the cost of capital and deliver more operating cash flow.

The growth capex will only be a problem if the capital they deploy earns less than the interest on the loans, but the cost of capital is a factor regulators take into consideration when deciding how much apa can charge, also over time the fees will increase with inflation, the face value of the debt won't, so you have assets with very long lives, generating cash flow above the cost of the capital, cash flow that will increase with inflation over time, and that has good tax incentives.




> If APA could keep borrowing and keep raising capital and do some minor selling of certain "non-core" assets... yea it could keep up this business for a few more years longer. But given its size, monopoly and compeitive regulations will make it difficult to keep "expanding".




I don't think it needs to sell anything, and growth projects in various fields will always pop up, I can't see a society that no longer needs infrastructure popping up.



> So I asked a simple question: Could APA survive as is if it can no longer borrow and raise cash?
> 
> No it cannot



.

Yeah in can survive, it would just have to cut it's divvy, and use all the cash flow to pay off its debts, eg building share holders equity.

But I don't think that would happen, there's people that want to own bonds in senior positions and others that want to own equity, regulated infrastructure companies such as APA are good places for them to get together. 

I don't see companies like APA the same as a company like Capilano where debt is a short term thing to be paid off rapidly, I see the bond etc as a permanent part of the capital structure.





> BNSF did borrow money, and is capital intensive, and yes it roll over its debt year on year.
> 
> But I've looked at its operations and BNSF does the borrowing and the operating in a way you'd expect a normal, profitable, well managed company does. APA isn't it.









> For example, and maybe by the weekend I'll make a more detailed comparison... BNSF's net operating cash more than pay off its interests and its capex and its dividends. APA couldn't do it with theirs.




Does BNSF pay a dividend? I haven't looked deeply at it, I assumed they would be like mid American and retain earnings.

But APA is in exactly the same position except they are spending a lot of growth and also paying a dividend. if over time their growth funding was 30% from retained and 70% from borrowed, I wouldn't have a problem with that. 



> BNSF borrowed but does it to expand and to buy back their stock. It rarely need to sell its major assets - only does it once in the 12 years to 2009 prior to Buffett's takeover. APA on the other hand does not buy back its stock and borrow just to survive, and almost every year it has to either sell or forced to sell part of its assets.




How are they borrowing to survive, they are borrowing to grow, take away the growth capex and they wouldn't need to borrow at all.



> Its latest purchase of WGP for AUD$5.8B led it to borrowed some $5.2B and raised another $1.8B. Note too its cap raising ended in late January while finalisation was 3rd June... It does that, and here I am guessing, to pay for its cash flow problem.





> A good business does not need to raise cash to meet its obligations. Yes it shouldn't have a lazy balance sheet, and yes it should roll over its debt and use other people's money when the return on investment is higher etc. But look at WGP's purchase price and its EBITDA... works out about 7.7% return BEFORE interests and depreciation and taxes. Interests APA managed to bring down to 5.6% in its latest round...
> .




Yeah I wasn't impressed with the price, but I think it's part of a longer term plan to bring in cash from the timor sea via the NT, but as I said earlier, a 2.1% margin is not to bad, and it will improve over time as inflation increases their fees and cash flow. 



> That 2.1% above costs of borrowing is barely meeting inflation. Add to that depreciation expenses and some tax and that purchase is already under water. Add the loan repayment and it's just taking on a lot of risks for very little if any return




Inflation works in their favour, the face value of the debt will stay they same, but the earnings will rise with inflation, eg. in year 40 of the pipeline the earnings which have been increasing over the years along with inflation will be very large compared to the face value of the debt.

so in year one the share holders will be earning 7.7% on the equity they put into the deal + 2.1% on the funds the bond holders put into the deal, and both the 7.7% and 2.1% will rise over time, meaning it will be pretty good return on equity for the share holders.

---



> Its recent failed bid to take over Iona... QIC overbid it by some crazy amount right?
> Just show APA is desperate to keep buying and growing so it could raise more money. Also show how desperate some of these operators are too.




Can you show that these growth assets aren't generating cash?
---



> A business is only good if its operations could fund itself and have some left to pay dividends and some for expansion and organic growth.




Yes, but you haven't shown that APA can't fund itself, your main concern seems to be that you think their dividends should be less, and they should be retaining cash to fund growth rather than borrowing


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## luutzu (3 February 2016)

Value Collector said:


> ...
> 
> Yes, but you haven't shown that APA can't fund itself, your main concern seems to be that you think their dividends should be less, and they should be retaining cash to fund growth rather than borrowing




Thought I have.

Guestimate for FY 2016:

$435M   EBITDA from new WGP piplines
$553M   EBITDA from old assets with 5% organic growth from those expansions (APA gave estimates of 3 to 7%)

Total EBITDA = $988M

Takes away following:
- $500M   Interests
- $423M   Dividends (this would be higher by 5% given APA's tendency to increase it and its HY divi up by    around that too)
- $70M   Stay in Biz capex
- $210M  committed growth capex (this assumes it would cancel non-committed amount, else increased this to $300 or $400M)

It does not have much of a current asset to speak of. Its cash at bank of $412M would have seen some $210M being used to pay the final dividend in September last year. 

From memory its receivables couldn't pay its payables... But let say it has enough to fund the committed growth capex.

So we have cash income of $988M, minus $923M (interests n divi), minus $70M to send some people out to kick some tyres and paint some rust... That alone put it under water by $5M.

It might be OK this year since the Aussie dollar is lower and it pegs its WGP to US etc. May be OK by paying final dividend in Sept... 

BUt thing is, if we assume and bring these obligations back to its financial year, APA could barely pay its minimum obligations.

--

But that's not all.

You have to repay both interests and principle. With $8.6B owing over 8.8 years, that's some $977M repayment on average per year.


If it cut dividends, its operation still leave a $550M hole in debt repayment. If it cut or cancel its growth capex with the cancelled dividends, even S&P will start to wake up and re-rate this sucker.

Being under mean APA will need to borrow or raise or sell assets. Since it cannot pay its obligations from its own operations but requiring additional funding... well the only difference between APA and a jewellery ponzi is APA's pipelines can fetch a fairly good price if it's sold.

But as I've said, and I agree with you, that if APA could managed to, as it has managed to, keep on borrowing and raising capital... then it'll be fine for another few years.

Its assets is currently 70% financed by debt. I'm pretty sure not a lot of people would want to lend to it at normal rates. 

---

Will try to detail comparison between APA and BNSF later in the week... but BNSF is a far more superior business with generally less debt ratio but slightly higher margins and returns. 

If we then see that a railway business require more capex, more complicated operations and management than a few pipelines secured under ground - it just show how bad APA is.  And the CEO got a 25% pay rise last year.


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## Value Collector (3 February 2016)

luutzu said:


> Thought I have.
> 
> Guestimate for FY 2016:
> 
> ...






luutzu said:


> Thought I have.
> 
> Guestimate for FY 2016:
> 
> ...




I think you are missing some key points here.

but firstly, let's break it down a bit (let me know which point you start to disagree)

If Apa owned all the same assets it did now, but it didn't have any debt, didn't pay a dividend, and didn't have any growth/expansion plans, would you say they couldn't fund them selves? Probably not, because they do own great assets and they would be generating lots of cash, which they could just keep at the bank piling up.

So then if instead of allowing that cash to just keep piling up earning 2% interest and losing value to inflation, would you be against them using those funds to purchase or build more assets earning a regulated 8% -12% return, that is also inflation hedged? Probably not, because you would see that owning more assets is better than piling up cash, so the growth investments are a good thing.

Now that we have realised we can invest in these assets earning 8% - 12% inflation hedged, and we realise that we can bring in bond holders happy to earn 5.6%, should we replace some of our equity interest in the projects with the bond holders, pay them the 5.6% they want and keep the remainder of the 8% - 12% their funds are earning? I think that would be smart.

Then, now that we own a big portfolio funded buy both our equity and bond holders, would it be bad to start paying ourselves a dividend, I mean we could not pay a dividend and save the cash to clear the bond holders, but we realise having bond holders if beneficial to us, we could save the cash and just use it to fund all future expansion projects with cash, but again we realise having bond holders is beneficial so we may as well fund a chunk of the future projects with bonds, and pay out any unneeded cash out as a distribution, and just keep rolling over debt and funding new assets 70/30 bonds to equity.

If you are with me this far, I think your only problem with them is the level of bond holders to equity holders eg 70% - 30%, now this isn't really a problem as it would be for other companies, because their assets produce extremely reliable earnings and the regulators take prevailing interest rates into consideration when deciding prices.

Or purchase you want them to only use debt on a temporary basis, and focus on clearing debt before dividends are paid, I see the bonds and bank bills as a permanent feature rather than short tem thing, I am fine with the rolling the bonds and paying out excess cash as dividends, if in the future the cash markets tighten, well I would be fine with them reducing of cutting dividends to clear debt, and then when cash market free up, they can bring in more bonds and distribute excess cash to bring it back up to 70/30 ratio


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## luutzu (3 February 2016)

Value Collector said:


> I think you are missing some key points here.
> 
> but firstly, let's break it down a bit (let me know which point you start to disagree)
> 
> ...




If all the premise assumed there are true, then APA is a great business. But they're not true.

First, if we assume there are no debt and there is no need to pay dividends, or taxes [who pays tax nowadays ] then APA's return is $988M.

Its assets of some $15B are all equity so its return is then 988/1500 = 6.59% return on asset/capital/equity

So that's the return APA's owner is getting.

But equity has a cost. We can now argue that the cost is 2% if that 15B is left at the bank.. but no it won't be. We could lend it to another APA, say, and get at least 5.6% - risk free [?]

But for all the trouble, and risks, APA shareholders takes on, it returns 6.59%, or 1% higher than just lending it.

either way, APA's return is not 12% or anything near that.  Fact is its latest purchase returns 7.7% before depreciation maintenance costs and taxes.

-----

But say I agree that 6.6% is a good, stable, risk free return and in this environment we're happy to have it. 

Then we convince others to lend us some so we can leverage up and get even better return for ourselves... Well that's what APA has done and it's in trouble if it can't get more people to convince.

Being leveraged, the $988M it now takes home (and not pay maintenance or the taxman)... some of that will now go to the lender: to a tune of some $1200M by this coming June 2016 (interests + principle; maybe p16 in 2015AR).

So already it's in a hole $210M deep.

Mgt being what they are, they want to expand and have committed another $210M with possibly up to $400M to bring the plan to completion.

$420M hole.

Then it wants to pay dividends to the tune of some $423M... 

In other words, APA is in a hole and it just keep digging.

----

Maybe I miss a few crucial details that will clear it all up and we, I, will just laugh it off. But yea, so far I haven't seen it.

---------

CHARTS

Note how BNSF Net Cash Flow works as you'd expect?
That is - Net operating cash is positive and could more than pay for its Net negative Investing and Financing cash outflows [dividends, share buy backs].

Compare to APA and see also ABS where their net operating cash is tiny compare to their appetite for raising cash and "investing" for growth.

Note also the net Op. cash and vital expenses chart to the right.

See how BNSF's net operating cash is multiple times its dividend payout? 8.44 times dividends compare to APA's 1.86 times and ABS' 2.6 times (dividend paid in cash lower than actual due to DRP).














---
btw, to clarify... I don't hold or short APA. Have no financial interests whatsoever. Just doing a public service


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## luutzu (3 February 2016)

> Being leveraged, the $988M it now takes home (and not pay maintenance or the taxman)... some of that will now go to the lender: to a tune of some $1200M by this coming June 2016 (interests + principle; maybe p16 in 2015AR).
> 
> So already it's in a hole $210M deep.
> 
> ...




Correction for above:

$988M estimate was after interests while the $1200M includes interests. Interest was estimated by APA to be $500 to $510M... so principle would be $700M. Deduct this from the EBITDA leaves $288M above water.

The hole then starts when we take away $70M in biz capex, further $210 to $400M growth capex. 

Note the EBITDA of $988M assumes 5% gain on pre-WGP assets from the growth capex planned into it. So we can't take away the growth capex amount.

Hence, $288 - 70 - 400 = -$182M

the $412M cash at bank will be some $200M after it pays off last year's final dividend last sept2015. So maybe that would cover it.

But will mean no 38cents, or $423M, dividends... and APA will run out of cash to do much of anything.

With no dividends and little cash entering Fy2017, it won't last into 2018. 

Hence it needs to borrow and roll over the debt. Keep up the dividends and "grow" its empire at other people's expense.

Not a stable business model.

Note that if we follow through with above assumptions, APA's assets will need over a year to sell/settled if cash is needed. So it won't sell much but raise or borrow. 

But then again it had managed to pull it off for 15 years so maybe no one will be the wiser.


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## coolcup (3 February 2016)

Great discussion guys. Having analysed capital intensive businesses a fair bit, I have to agree with Value Collector here on the debt being a permanent part of the capital structure. The key question is whether the 70% debt / assets ratio is too high - it's a tad high for my liking but APA has a track record of being able to refinance it and find debt capital that is willing to be "perpetual like" with repricing windows at each maturity date.

It was also mentioned that the return on the assets is <7%. This is correct but is not a total return and can't be compared against the return the bondholders get. The bondholders get 5.6% but that doesn't change or grow. The asset returns, in theory, should grow in line with volumes transported and / or CPI. So you are really comparing a ~9-10% IRR as the asset level return, which is actually not bad when considered against the risk profile of the underlying unlevered cash flows.

Using the logic applied by Luutzu, all the asset intensive sectors out there (REITs, toll roads, airports etc) are in the same boat and are not investible - a proposition I don't think is that correct. It is correct to be cautious though, as those business models generally don't fair well when there is a significant liquidity crunch particularly when it coincides with when their debt is due to expire.

Great discussion between the both of you, just adding my two cents.


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## luutzu (4 February 2016)

coolcup said:


> Great discussion guys. Having analysed capital intensive businesses a fair bit, I have to agree with Value Collector here on the debt being a permanent part of the capital structure. The key question is whether the 70% debt / assets ratio is too high - it's a tad high for my liking but APA has a track record of being able to refinance it and find debt capital that is willing to be "perpetual like" with repricing windows at each maturity date.
> 
> It was also mentioned that the return on the assets is <7%. This is correct but is not a total return and can't be compared against the return the bondholders get. The bondholders get 5.6% but that doesn't change or grow. The asset returns, in theory, should grow in line with volumes transported and / or CPI. So you are really comparing a ~9-10% IRR as the asset level return, which is actually not bad when considered against the risk profile of the underlying unlevered cash flows.
> 
> ...




BNSF is a capital intensive business and it managed to have net operating cash more than meeting both its dividends, interests and growth/maintenance capex.

It also borrow year on year. But those borrowings are not critical for it to meet its debt obligations.

APA just managed to refinance its debt down to 5.6% interests from around 7.7% average. If interest rate tick up a bit, and chances are it will from the current lows, its borrowing costs will change.

I do agree that if APA managed to keep finding new opportunities and can refinance as it has, it's a great business.

Being in the top 50 ASX helps with funding since managers tend to just buy into anything in top 100; that and it has a great story. But yea, people might one day ask why some one else is making money from a business mainly funded by them.


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## Value Collector (4 February 2016)

luutzu said:


> Its assets of some $15B are all equity so its return is then 988/1500 = 6.59% return on asset/capital/equity
> 
> So that's the return APA's owner is getting.




I think you have made a big error here.

You are using $15B total assets for the calculation of return on assets, however this figure includes nearly over $6 billion of assets which only appeared on the balance sheet 8 days before the end of the financial year.

They entered the financial year with about $8 billion and at the half year had about $9 billion but a $1billion of that was in cash waiting for the big transaction.

So the real return on assets is much higher than the 6.59% you calculated, also the cash that's been spent on the expansion projects won't be earning anything till the expansions are Completed, so the return on "operating assets" which is what really matters, is much much higher than your 6.59%.


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## luutzu (4 February 2016)

Value Collector said:


> I think you have made a big error here.
> 
> You are using $15B total assets for the calculation of return on assets, however this figure includes nearly over $6 billion of assets which only appeared on the balance sheet 8 days before the end of the financial year.
> 
> ...




Nope 

The $988M EBITDA includes both old, organic growth, as well as the new contribution from WGP.

From APA's own estimate, they did this:

$544M "normalised" earning for 2015
+ their 3 to 7% on top from growth capex they said in the guidance (p.16 of 2015AR I think).

From a presentation before the latest one, they say they managed $12B's worth of assets (excludes the $5.8B WGP)... but say it's only $9B in assets.

($544 * 1.05)/9000 = 6.35%.


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## Value Collector (4 February 2016)

luutzu said:


> Nope
> 
> The $988M EBITDA includes both old, organic growth, as well as the new contribution from WGP.
> 
> ...




Dude, you are moving the goal posts here.

You said APA only earns around 6.59% return on assets, but this is not true.

In 2015, they had $822Million on EBITDA, and that was earned on around $8 Billion of capital under management, the return on their portfolio prior to the recent purchase is much better than the 6.59%, it's closer to 10%, and as I said some of that $8Billion has been sunk into projects that weren't completed in that year so the return on the operating assets would have been a little better.

Now the recent purchase seemed expensive, 7.7% return is less than I would have liked, but it is a very good asset, and because it is largely funded by debt at less than 6% it will generate operating cashflow, and over time the operating cashflow will increase, I also think strategically it will add value to the rest of the portfolio adding throughput on other pipes owned by apa, and help link the HUGE gas resources in the timor sea to the liquefaction plants, once the proposed NT connection is made.

------------------

However, lets forget about return on assets for a bit and focus on return on shareholders funds.

Net assets are around $2.5Billion, and they are producing around $550Million in operating cashflow, that's over a 20% return on the equity holders funds.



> From a presentation before the latest one, they say they managed $12B's worth of assets (excludes the $5.8B WGP)... but say it's only $9B in assets.




there are probably including the assets which they manage/operate under contract.



> ($544 * 1.05)/9000 = 6.35%




Why are you using the $544M in this calculation, $544 is the operating cash flow, if you want to find out the return on assets on the $9Billion, you have to include the interest paid to the bond holders etc, other wise whats the point of that calculation.


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## luutzu (4 February 2016)

Value Collector said:


> Dude, you are moving the goal posts here.
> 
> You said APA only earns around 6.59% return on assets, but this is not true.
> 
> ...




Opps. Yea I put down $435M EBITDA for new WGP asset but EBTDA of $544M (after interests).

Let's then remove the estimated $320M to $350M estimated interests on WGP will leave EBTDA (net operating cash) of $435 - 320 = $115.   Add 5% to the old $544 and we have 115 + (1.05*544) = $686M net operating cash after interests payment.

$686/15B in assets = 4.6%.

It's after interests return. Which makes sense because they have to pay interests. To add the interests back into will of course give a higher return, but then you'd need to take away the 5.6% interest to work out what the shareholders get anyway.





Value Collector said:


> However, lets forget about return on assets for a bit and focus on return on shareholders funds.
> 
> Net assets are around $2.5Billion, and they are producing around $550Million in operating cashflow, that's over a 20% return on the equity holders funds.




Yes. True. 
Their operatingROE 2014 [2015 didn't include contribution from new WGP so ignore that] was 24%.
Chart to right show operating return on average capital employed 2014 was around 7 to 8%.





So leverage does make it better for APA shareholders as you said.

But compare this to BNSF.

Operating return still average higher than APA by about 10%; Net return (profit) on equity also very similar or slightly higher compare to APA (didn't enter enough back data to for APA to see avg).




Compare also the net return as well as operating return on average capital (R chart)... BNSF did slightly better with slightly less debt too.

That might be negligible, say, but if we consider it's a railway business with many moving parts while APA are practically just a series of pipes. APA isn't managed well at all.





Value Collector said:


> there are probably including the assets which they manage/operate under contract.




Yea I think they did.




Value Collector said:


> Why are you using the $544M in this calculation, $544 is the operating cash flow, if you want to find out the return on assets on the $9Billion, you have to include the interest paid to the bond holders etc, other wise whats the point of that calculation.




Point was to look at return to shareholder for taking on all the risks, as well ask return on capital employed.

But let's assume any return above cost is good. Which it is. 

But. It's not the return that kills you, it's your inability to pay your debt when they're due.

APA could not meet its loan repayment at all without further borrowing. I think we all agree with that right?

You are assuming it could just borrow because that's part of its business model. I would agree and if it could just keep borrowing, it will keep doing as somewhat OK like it has.

But if it could not. Then what?

Using its capital-intensive model is not an excuse either. As have shown, BNSF is highly intensive, probably more so than APA... yet BNSF managed to more than adequately cover both interests and loan repayment and dividends and capex with its operating income. APA couldn't.

If answer is it could just keep borrowing, well that's the definition of a ponzi.


----------



## Value Collector (4 February 2016)

luutzu said:


> $686/15B in assets = 4.6%.
> 
> It's after interests return. Which makes sense because they have to pay interests. To add the interests back into will of course give a higher return, but then you'd need to take away the 5.6% interest to work out what the shareholders get anyway.
> 
> .




I still don't get why you are comparing $686 to the $15B

I can't see how that figure is useful, if you want to judge how productive the assets them selves are, compare their earnings prior to the financing costs to the capital employed. eg EBITDA / $15B

If you want to judge the earnings on share holders funds, then compare the operating cash flow to the shareholders equity.

working it our your way would mean Cba only earns 1%, But really they have a return on equity of like 18%



> But compare this to BNSF.




BNSF is a railway company, why would I compare APA to it?

And as I said I own BNSF in the Berkshire portfolio already.




> That might be negligible, say, but if we consider it's a railway business with many moving parts while APA are practically just a series of pipes.




BNSF is an old railway, their original cost of construction on most of their networks would have been long since written off or lost through bankruptcies and reorganisations, So yes earnings will seem larger when you are working with a heavily depreciated asset compared to one which is relatively new.

How much would it cost to build the BNSF system today? Lots, no one would every build it, it would be to expensive probably 100Billion dollars, now what would its earnings look like if you compared it to the capital of a new build rail system with a capital cost of over $100Billion? 

Now I am not saying that makes BNSF a bad investment, It actually makes it a great investment, I am just pointing out that you are comparing the return on assets of new assets to old assets that are sitting on the balance sheet, at depreciated levels that have been through multiple rail road reorganisations, bankruptcies and bond defaults over history of the line.  









> APA could not meet its loan repayment at all without further borrowing. I think we all agree with that right?
> 
> You are assuming it could just borrow because that's part of its business model. I would agree and if it could just keep borrowing, it will keep doing as somewhat OK like it has.




That's the same with a lot of companies out there, but Infrastructure companies find it a lot easy to get bonds than most companies, especially companies that have regulated income from assets that are almost recession proof. APA didn't have a problem refinancing during the GFC for example, and never cut its dividend, in fact it increased its dividend, 

What you are really asking is, "What happens if the bond and debt markets shut down for years", well apart from the fact that this is not really a risk I find likely, after all lenders have to lend, and bondholders want to hold bonds, but they would just have to cut the dividend, accept what ever penalty rates etc apply to the bonds and set up a cash sweep.

as I said I really don't think 70/30 is a problem.






> If answer is it could just keep borrowing, well that's the definition of a ponzi




That's not what a Ponzi scheme is, a Ponzi scheme is where you use the capital from one investor to pay the phony interest to current investors, and the underlying assets aren't producing anything.

Just because a business model involves bonds as a permanent feature doesn't make it a Ponzi scheme, Bonds are a valid part of the capital structure in large companies, As I said a lot of pension funds etc want to hold bonds, and infrastructure companies are a good source of those bonds.


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## luutzu (4 February 2016)

Value Collector said:


> That's not what a Ponzi scheme is, a Ponzi scheme is where you use the capital from one investor to pay the phony interest to current investors, and the underlying assets aren't producing anything.
> 
> Just because a business model involves bonds as a permanent feature doesn't make it a Ponzi scheme, Bonds are a valid part of the capital structure in large companies, As I said a lot of pension funds etc want to hold bonds, and infrastructure companies are a good source of those bonds.






> A Ponzi scheme is a fraudulent investment operation where the operator, an individual or organization, *pays returns to its investors from new capital paid to the operators by new investors,* rather than from profit earned by the operator. Operators of Ponzi schemes usually entice new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent.
> 
> Ponzi schemes occasionally begin as legitimate businesses, until the business fails to achieve the returns expected. The business becomes a Ponzi scheme if it then continues under fraudulent terms. Whatever the initial situation, the perpetuation of the high returns requires an ever-increasing flow of money from new investors to sustain the scheme. -- Wikipedia




From APA's guidance:

$1,275M  EBITDA
($500M)  Net interests
($70M)    Stay in biz capex  [last year was $50M, new assets doubled total assets but assume it's new so $20M extra to watch and stuff)
($977M)  average annual loan's principle repayment [get $8.6B owed, divided by avg 8.8 years)

Net Operating income = negative $272M

How will it pay for the shortfall?

Borrow more money. Or sell its long-term assets. Or raise capital.

So it is a business that cannot sustain itself from its own/normal operations.

But like we both agree, if it could keep borrowing to fund the shortfall, then sure it's a good business.
But then, if I managed to use people's money to fund my business and they will always keep lending it to me, I'd be onto a good business too.

We can't compare APA, at least to me we couldn't, compare this borrowing to the deposits or the premiums a bank and insurance company can use as floats.

Those floats have risk too... people can just not deposit or payout may be higher than the floats... But generally they're almost free for a financial business and people tend to keep it there on average.

But difference is, a bank and insurer don't go broke if the float is less or taken away - they just can't do as well and can't use free money; but they do not owe people their deposit or their premium if no deposit or premium were paid.

APA on the other hand, the principle repayment and the interests are required to be paid, and paid on time. 
Since operations cannot return enough cash to pay for it, if APA could not find more lenders, it will go broke. If not, it will have to sell its long-term assets and so earn less money etc.

A bank is like, say, me going about my business as usual and if people give me more money at 2% and I lend it out at 4% and keep the difference, and the more I have it the better; if if I don't have it I could still be fine.

APA is like a guy that if people decided not to lend any more money, Tony Sopranos will pay a visit and take a few stuff and will be back again next year with higher interests and a hammer or two at the ready.


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## Ves (4 February 2016)

APA doesn't need to make principal payments on its debt each year.  Bond debt is completely different to a Principal and interest loan.

You seem to be confusing actual maturity with the quoted average maturity.

The debt is structured so that the entire amount (8.6bil) is staggered across different tranches with completely different maturity dates.    As it currently stands no more than 1.4bil matures in any given year.  In fact some of it doesn't mature for 12+ years, and as much as nearly 20 years.

There's a lot of different advantages to doing it this way. I'll let you research them.

The biggest risk that any tranche won't be refinanced is if the unforseen earnings risk (or actual earnings deterioration) appears and bond / debt holders lose confidence.


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## Smurf1976 (4 February 2016)

In terms of its physical operations (as distinct from company finances) APA is in the "too big to fail" category most certainly.

Even if the company goes broke, the physical operations will continue no matter what. Worst case = government will step in (having no choice really given it's critical infrastructure).

It is also the case that no matter what happens to the company's finances overall, they are to a considerable extent backed by physical assets which have a _very_ long lifespan that doesn't simply disappear overnight.

That aspect would be worth something I'd assume?


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## luutzu (4 February 2016)

Value Collector said:


> I still don't get why you are comparing $686 to the $15B
> 
> I can't see how that figure is useful, if you want to judge how productive the assets them selves are, compare their earnings prior to the financing costs to the capital employed. eg EBITDA / $15B
> 
> ...




If we take EBITDA of $1275, then 1275/15000 = 8.5% return on capital employed.

So yes, I did say I agreed with you that being leveraged like APA has its return on equity is pretty decent. No argument there.

But it's not the return, low or high, that will send it bankrupt... it's its ability to repay its obligations.

So after interests of some $500M, APA also need to repay its principle (around $977M).

Can't do $1377 repayment from a $1275M income. So will be broke.

But it won't be because it can borrow or raise money - hence a ponzi.






Value Collector said:


> BNSF is a railway company, why would I compare APA to it?
> 
> And as I said I own BNSF in the Berkshire portfolio already.




Comparable because a capital intensive business like BNSF could actually pay all its obligations (interests and principles, and then some) with its operating cash.







Value Collector said:


> BNSF is an old railway, their original cost of construction on most of their networks would have been long since written off or lost through bankruptcies and reorganisations, So yes earnings will seem larger when you are working with a heavily depreciated asset compared to one which is relatively new.
> 
> How much would it cost to build the BNSF system today? Lots, no one would every build it, it would be to expensive probably 100Billion dollars, now what would its earnings look like if you compared it to the capital of a new build rail system with a capital cost of over $100Billion?
> 
> Now I am not saying that makes BNSF a bad investment, It actually makes it a great investment, I am just pointing out that you are comparing the return on assets of new assets to old assets that are sitting on the balance sheet, at depreciated levels that have been through multiple rail road reorganisations, bankruptcies and bond defaults over history of the line.




Chart below show BNSF total COSTs of all its PPE+capital work in progress (CWIP) for 2008 at around $41B. This is the costs before D/A etc. After depreciation/amt, this PPE+CWIP is around $32B. Net op. cash was $3.977B. Ratio are:

NOPcash/PPE costs     = 3.977/41B = 9.7%
NOPcash/PPE post DA = 3.977/32B = 12.4%




Compares APA  total COSTs of all its PPE+capital work in progress (CWIP) 2014: ~$7B; book value after DA ~$6.16B. Its NOPcash for 2014 was $431.5M.
NOPcash/PPE costs     = 0.4315/7B = 6.2%
NOPcash/PPE post DA = 0.4315/6.16B = 7%






I know it's one year so can't be taken seriously... but APA's latest EBITDA return was 7.7%?  Somewhat in line with historical performance.




Value Collector said:


> That's the same with a lot of companies out there, but Infrastructure companies find it a lot easy to get bonds than most companies, especially companies that have regulated income from assets that are almost recession proof. APA didn't have a problem refinancing during the GFC for example, and never cut its dividend, in fact it increased its dividend,
> 
> What you are really asking is, "What happens if the bond and debt markets shut down for years", well apart from the fact that this is not really a risk I find likely, after all lenders have to lend, and bondholders want to hold bonds, but they would just have to cut the dividend, accept what ever penalty rates etc apply to the bonds and set up a cash sweep.
> 
> as I said I really don't think 70/30 is a problem.



ABC Learning Centre increases its dividends too before it collapses. So were the returns to Maddoff's investors right?  Not saying APA is exactly like that, but we can't just look at its dividends and growth story as genuine performance of its underlying business.

The market for debt/bonds can still be around, just it might not want to lend to APA... or not lent at low rates. 

I agree that yes, companies should not have a lazy balance sheet... but at the same time, shuld not be dependent on borrowings to survive either. 

I could be missing something because it seem the market is pretty happy with APA and lenders are happy to keep on lending.


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## luutzu (4 February 2016)

Ves said:


> APA doesn't need to make principal payments on its debt each year.  Bond debt is completely different to a Principal and interest loan.
> 
> You seem to be confusing actual maturity with the quoted average maturity.
> 
> ...




Aware of term and maturity profile. Average for simplicity and as far as I'm concern, paying at maturity is just kicking the debt down the road.

But yea, like VC said too... there are lenders and APA have managed to get their debt rollover so might work out as it has.


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## luutzu (4 February 2016)

Smurf1976 said:


> In terms of its physical operations (as distinct from company finances) APA is in the "too big to fail" category most certainly.
> 
> Even if the company goes broke, the physical operations will continue no matter what. Worst case = government will step in (having no choice really given it's critical infrastructure).
> 
> ...




True. That put it in perspective. Free gov't insurance policy. Though if it does hit the crunch, share price will at least halved before gov't decide how much to bail it out... opportunity at that time then, maybe?


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## Value Collector (4 February 2016)

So I think we have nailed it down to your main problem is that you don't like the amount of bonds they have, and I think this is down to the fact you have a wrong view of how companies like apa use the bond Market, and how the types of assets they own mean bonds are very suitable sources of long term capital.

I think the chances the bond market drying up for 8years for a company like apa is next to zero. 

I can't remember whether it was in the intelligent investor or security analysis, but Ben graham spoke about this exact topic, and he said it made sense for utility monopolies to use bonds in exactly the way apa is using them.

But yeah if the "what if" scenario you are worried about is that a monopoly, with regulated income linked to interest rates won't be able to rollover it's bonds, I honestly don't know how you can invest in any equity, because every other company you look at will have real business risks that far out weigh apa's debt risks. 

Any way, I have said my piece, I think you really should take back the "ponzu scheme" comment, because it clearly is not.


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## luutzu (4 February 2016)

Value Collector said:


> So I think we have nailed it down to your main problem is that you don't like the amount of bonds they have, and I think this is down to the fact you have a wrong view of how companies like apa use the bond Market, and how the types of assets they own mean bonds are very suitable sources of long term capital.
> 
> I think the chances the bond market drying up for 8years for a company like apa is next to zero.
> 
> ...





Nope. Bonds or any debt instruments where a company can cut and slice so the coupon and income streams and new rollover and maturity etc. mean it managed to survived.. that's way too much financial engineering.

Maybe old-fashion but I don't like business that relies on the kindness of lenders. Prefer that margin from its own operations to finance its divvy and also its financing.

APA couldn't do that. So no backsy on the ponzi.

But tell you what, I'll think about it taking it back after I see how Buffett's utility was doing before he bought it.

What's the pipeline again?


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## Value Collector (4 February 2016)

luutzu said:


> What's the pipeline again?




Look up Berkshire Hathaway energy, he owns a few companies in there that own pipelines and electrical transmission lines etc, I think the holdings are broken up into a few subsidiary companies.

https://www.berkshirehathawayenergyco.com


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## Ves (5 February 2016)

The thing that bothers me most about the discussion above is that I have a _completely different understanding_ of what Buffett is doing with Burlington North Santa Fe (BNSF).

Checking the cash flow statements and balance sheets on the BNSF website  (as they are still filed separately from Berkshire as a consolidated entity) it seems to me that Berkshire is sucking cash _out of_ BNSF and replacing / funding the difference with debt and also using additional debt to Fund expansionary capex.

He is effectively _increasing the leverage_ of the asset,  like he has done with other utilities,  by using Berkshire's immense financial pedigree to extract cheap capital out of the debt markets.

In fact,  he is doing exactly what APA is doing,  with his approach to his monopolized utility based assets. the big difference is that Berkshire can get cheaper rates from the debt market than APA  (currently the difference is about 1.5%).

It's not unusual for Buffett,  leveraging low-beta with cheap capital.


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## luutzu (5 February 2016)

Ves said:


> The thing that bothers me most about the discussion above is that I have a _completely different understanding_ of what Buffett is doing with Burlington North Santa Fe (BNSF).
> 
> Checking the cash flow statements and balance sheets on the BNSF website  (as they are still filed separately from Berkshire as a consolidated entity) it seems to me that Berkshire is sucking cash _out of_ BNSF and replacing / funding the difference with debt and also using additional debt to Fund expansionary capex.
> 
> ...




I haven't looked at BNSF post-Buffett acquisition so don't know, but I doubt he would be leveraging it the way you're saying though - doing what APA is doing.

BNSF has always been borrowing and issuing debt, so that kind of financing is not an issue. Issue is BNSF has always managed to meet those obligations (interests and principle repayment, and other operating expenses) from net operating cash. Once a business could do that, then borrowing is safe and should be encouraged. 

APA couldn't survive if it could not borrow. If it could then of course no issue.

Another interesting thing about BNSF is that despite all his expansion and acquisition it rarely have to sell off its assets. Only once in the 12 years to 2009. APA, either forced by the ACCC or other reasons, sell whole or part of its assets pretty much once per year past four years.

That show two things: One more benign reason is ACCC forced its hand; rid of non-core assets. The first meant APA is reaching its domestic limit and as Smurf was saying, getting to be "too big to fail". This will mean it will either have to move offshore or get into business it is not yet familiar with - both carry big risks with it. But more conspiratorially, it will either have to pay up for "growth" and expansion or risk missing out a reason to raise and borrow and couldn't pay its dividends and obligations as income can't cover them all.

The getting rid of non-core assets scenario... well shouldn't buy stuff that they'd be non-core. Transaction costs money and maybe taxes.

But yea, if there's a debt market with people willing to lend... sure I guess. I just don't really feel comfortable with this kind of business.


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## Ves (5 February 2016)

I don't think APA is a prolific seller of assets as you seem to be implying.  The financial statements and announcements don't seem to back you up.

APA had an agreement with the ACCC as part of the acquisition of Hastings that it would sell one of Hastings assets and be able to keep the rest. This isn't a circumstance unique to APA, it happens in industries with dominant players.

It's not like,  as you seem to be implying, that ACCC just turned up willy-nilly and told them to sell a core asset after years of owning it.

Re BNSF,  last I checked BNSF had $20bil of debt  (out of $58bil total for Berkshire's utilities segment).  Which,  from memory, is roughly double what it was when they purchased it.

In fact,  in the 2014 and 2015 year they've spent 11bil on capex commitments,  paid roughly 7.5-8bil in dividends,  which by far exceeds FCF.   

BNSF has paid dividends to Berkshire in excess of its cash flow for the last 4 years (and probably the two or three before) and topped the balance up with debt.  I suggest you go and have a look.  If he's not leveraging the balance sheet,  what else do you think he's doing?


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## luutzu (5 February 2016)

Ves said:


> I don't think APA is a prolific seller of assets as you seem to be implying.  The financial statements and announcements don't seem to back you up.
> 
> APA had an agreement with the ACCC as part of the acquisition of Hastings that it would sell one of Hastings assets and be able to keep the rest. This isn't a circumstance unique to APA, it happens in industries with dominant players.
> 
> ...




Will look into BNSF when have time. But really, once a business become BRK's wholly owned subsidiary, I can see many perfectly valid reasons to send more cash and get more cheaper debt onboard.

BNSF is now part of BRK, and Buffett would have had a higher cost of capital onto them. If mgt can get cheaper cash from others than from Buffett they should. Further, if BNSF could not pay its obligation, big daddy is there and so not much risk. 

With APA, only the taxpayer, if the gov't decided to a bailout, would step in if other lenders stop the music.

I've never said debt are all bad. They're good if you could afford to repay them and carry on business as usual (without taking on more debt or sell assets or cut dividend or raise more capital).

----

We can't really know why a business was sold or why it was bought. Maybe they're all legit. 

But yea, if the investor is comfortable with the idea that others will just keep on lending so APA and shareholders can profit.. .I mean, I'd love to own a business where there is guaranteed loans paying for my master plans and dividends even if the businesses I own have yet to break even. If you believe there are enough lenders like that out there, then you should definitely keep at it.

Me I just pretend there are lenders out there who look at APA's operations and wonder why should I be funding some 70% of these guys business and get less return for it than they are? I'm the one taking most of the risk here. At 70% of debt and 30% of book... that 30% could very quickly go to 15% if there aren't enough buyer.

But then people do a lot of dumb things so yea.


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## Value Collector (5 February 2016)

I just had a look at APA's debt maturity profile, and I don't know what you are talking about lutz, when you said they couldn't repay their debt even if they cut their dividend.

Their operating cash flow is over $500 Million per year, But there is no debt maturing that's more than $500 Million until 2022, (the chart show 1 year over $500 in 2018, but that's a 60year note and the 2018 is just the first call date)

there is some big lumps in 2022, 2025, 2027 and 2030 but there is plenty of time to smooth those out with other facilities as it gets closer.

-------------------------


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## Value Collector (5 February 2016)

luutzu said:


> I'm the one taking most of the risk here. At 70% of debt and 30% of book... that 30% could very quickly go to 15% if there aren't enough buyer.
> 
> But then people do a lot of dumb things so yea.




Bond holders aren't taking more risk, they have $4.5 Billion of share holders equity as a buffer that has to go before they lose a penny, That's why share holders are earning a higher rate, because they are taking risk off the bond holders, don't think of it as bond holders being ripped off, bond holders are being protected, and giving up some earnings for that protection.

If APA had no share holders, and all the capital was provided by bond holders, sure the bond holders would increase their return from 5.6% up to 9% or whatever it is, But then they really do have more risk,

Bond holders are generally very risk averse, so having a system where they have a 30% buffer is worth paying a few percent in earnings for.

That's the key to the deal, equity holders are earning a higher return on their cash, but they are also prepared to take the lumpiness in returns eg dividends might be cut and share prices will fluctuate aswell as putting their cash in the buffer zone to protect bond holders.


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## luutzu (5 February 2016)

Value Collector said:


> Bond holders aren't taking more risk, they have $4.5 Billion of share holders equity as a buffer that has to go before they lose a penny, That's why share holders are earning a higher rate, because they are taking risk off the bond holders, don't think of it as bond holders being ripped off, bond holders are being protected, and giving up some earnings for that protection.
> 
> If APA had no share holders, and all the capital was provided by bond holders, sure the bond holders would increase their return from 5.6% up to 9% or whatever it is, But then they really do have more risk,
> 
> ...




At 30June 2015, APA's equity was $4.38B, total debt/liabilities was $10.27B. Or Debt-to-Equity ratio of 2.34. That is, shareholders put in $1, lenders put in $1, then another $1.34.... and lender get to earn less return for the trouble.

You can say that all the debt/liabilities, only $8.6B are from bond holders the others are payables and employee. So at 8.6/4.38 = 1.96 times more capital from lenders than owners. This bring its 2015 debt ratio (debt to assets) of 0.7. That is, both lenders and suppliers/employees fund 70% of the operation, lenders alone fund 8.6/(8.6+4.38) = 66%.

Why would people want to fund most of the operations, but earn less for it; then risk that if APA goes broke they will only get back 4.38B of their 8.6B [pretty sure I understand capital structure properly].

But OK, there are fund managers and bankers out there willing to lend other people's money. Can't argue with that.


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## luutzu (5 February 2016)

Value Collector said:


> I just had a look at APA's debt maturity profile, and I don't know what you are talking about lutz, when you said they couldn't repay their debt even if they cut their dividend.
> 
> Their operating cash flow is over $500 Million per year, But there is no debt maturing that's more than $500 Million until 2022, (the chart show 1 year over $500 in 2018, but that's a 60year note and the 2018 is just the first call date)
> 
> ...




You mean this profile on p.14 2015AR?






They only refers to the maturity lump sum payment - or principle, right?
Does not include the interests/coupon on them.

E.g. The GREEN bars for FY2025 and FY2035 refers to this note on p.13:


> ——in March 2015, APA issued US$1.4 billion of senior guaranteed notes in the United States 144A debt capital market. The notes were issued in two tranches: US$1,100 million of 10-year notes at a fixed coupon of 4.2%; and US$300 million of 20-year notes at a fixed coupon of 5.0%.




So it does not chart the interests that's due.

That's why I just take the average of $8.6B and divide over average maturity of 8.8 years.

Yes, you are right that timing is everything and thing could smooth itself out - like APA saying they pay $432M in dividend this FY16 but would actually be paying only the first interim divvy in FY16 while kicking back the final til Sept. [That still won't do since they actually pay around the same dividend, just last year's final then this year's interim]

Maybe that might make all the difference. Maybe... but not really.

Look at APA's both principle and interests profile:




So by end of  FY16, its obligations will totals $1.08B.

We can take $92M out as that would be paid for by the receivables; but then add around $200M on top for the cash payment of the final dividend it paid in September 2015 just past.

But let say it's only due to pay 1.08B.

From our previous maths:

$1200M     EBITDA?
($1080M)   Principle n interests
($210M)     committed growth capex
(~$70M)    stay in biz capex


No more money for the dividend or the potential extra $200M (on top of the comitted $210M) for growth capex APA themselve estimate is needed for "growth" projects.

So will need to use those undrawn debt facility. Then come 2017 and roll over again because fundamentally, its operations just can't meet all these lenders and shareholders and the 25% annual increase in compensation to its executives.

Ponzu. 

Maybe I shouldn't joke about it. If I am right, some people might lose their savings in two years.


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## Value Collector (5 February 2016)

luutzu said:


> Why would people want to fund most of the operations, but earn less for it; then risk that if APA goes broke they will only get back 4.38B of their 8.6B [pretty sure I understand capital structure properly].
> 
> But OK, there are fund managers and bankers out there willing to lend other people's money. Can't argue with that.





I thought I just explained that in full, let me try a different way.

Let's say you and I have some money to invest, You want an investment with a high degree of safety and are happy to take a lower return, I am happy to take some of your risk to provide you with a safer return, but for that I want a higher return.

The vehicle we choose to use as own investment is a house and land package just outside Sydney, we find a good one for sale for $100,000.

To achieve our stated goals above, we break up the investment like this.

You put in $70,000 and take first claim on any sale proceeds to repay you $70,000 and a fixed rate bond of 5.6%

I put in only $30,000 but I have only a second claim, so I will get no sale proceeds until you get your full $70,000 back, but in return, I take any excess capital gains and excess income over and above your bond interest.

------------------

now in that example you have put in more funds, but the house can be sold at a 30% loss before you lose anything even those I have been wiped out, because my $30k is your buffer, income can also drop by 30% and my income wiped out before you lose a dime of income.

It's almost impossible that you would ever suffer a 100% loss and you are not likely to ever lose income, the equity holder can suffer a 100% loss and have income wiped out, so no the bond holders are not taking more risk.


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## Value Collector (5 February 2016)

> They only refers to the maturity lump sum payment - or principle, right?
> Does not include the interests/coupon on them.




Mate, you keep chopping and changing, the interest is not funded by the $550million of operating cashflow, (remember it makes up the "I" In EBITDA) and the already have over $1.5 billion of cash and undrawn facilities to cover the 2016 repayments.

So if you are trying to work out whether it would be possible for them repay their debt, you compare the debt maturity to what will be over $550Million of operating cashflow, Now I know if they chose to clear debt to zero, they would have to cut the dividend and stop expansion, but $550 million of cash flow would be enough to cover their debt, as I said the big lumps just need to be smoothed out, but there is heaps of time for that.

But as I said, that's not the plan, the plan is to keep bond holders as part of the capital structure.

Take a look at that maturity chart, and plot $550 million operating cashflow on it, every year has less than that due until 2022, (2018 is a 60year bond)

Then plot the remaining amount left over each year against 2022, it would clear it with stuff left over, and then the other years would have massive chunks taken out two.

And as they go along they just keep maintaince undrawn facilities a few years ahead to make sure they can smoothie things out, to say the bond market will dry up to the point where they can't borrow is crazy, even if they had to start clearing bonds, each bond they clear makes the others safer and increase credit rating and makes them more attactive.


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## Smurf1976 (5 February 2016)

In the past major infrastructure (roads, power, rail, water, gas, airports etc) was commonly owned by government agencies, either government as such or a Commission or other trading body operating semi-independently of government with government being effectively the sole "shareholder" of that organisation. 

In most cases, especially where a Commission or other semi-separate from government trading organisation was involved (eg the various State Electricity Commissions or in some states gas utilities) financing was most commonly via issuing debt. That debt was issued either in the name of the relevant government itself (eg roads), or in the name of the relevant Commission etc (eg electricity).

It was always expected that debt would be an effectively permanent part of the capital structure of those operations. Something gets built with, say, a 30 to 90 year expected lifespan and the intent was to repay the debt very slowly over the life of that asset. In the main, that's exactly how it worked. Bonds were issued with varying maturities and the debt rolled over (new bonds issued) in due course during the life of the asset.

APA is essentially a private owner of directly comparable assets, in this case gas pipelines, and is applying something very similar to the publicly owned business model with the exception of paying dividends to shareholders (the various government Commissions typically didn't aim to make a profit but to simply break even although some did aim for profit).

Assuming we aren't about to have a major financial collapse or start WW3 and that APA's assets remain in service and of value then logic tells me it's highly unlikely that they'd have trouble rolling over debt as long as the value of such debt doesn't exceed the value of the assets. The debt is backed by an actual asset of long term value so why wouldn't someone be willing to fund it?

Just my thoughts.


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## luutzu (5 February 2016)

Value Collector said:


> Mate, you keep chopping and changing, the interest is not funded by the $550million of operating cashflow, (remember it makes up the "I" In EBITDA) and the already have over $1.5 billion of cash and undrawn facilities to cover the 2016 repayments.
> 
> So if you are trying to work out whether it would be possible for them repay their debt, you compare the debt maturity to what will be over $550Million of operating cashflow, Now I know if they chose to clear debt to zero, they would have to cut the dividend and stop expansion, but $550 million of cash flow would be enough to cover their debt, as I said the big lumps just need to be smoothed out, but there is heaps of time for that.
> 
> ...




I didn't chop and change, I adapt the figures to suit. haha, alright that sounds bad. But read what I put up again. They're all honest figures.

The table about their liquidity risk show they will need to pay $1.08B during FY2016 true?
This $1.08 includes interests and principle and also the trade payables of $400M
It does not include the approx. $200M they need to pay in cash for the final dividend for FY2015 but paid in sept (FY216).

Since the $1.08B includes interests etc. We have to use the EBITDA earning, which I think we saw as $1.2B.
Anyway, I worked it out above. Pretty sure didn't make mistakes there.

----

But let's do the maths your way... 

True, they have $550M cash after interests. That is more than enough to pay the debt at maturity as in that sub-$500M profile. Still can't afford dividend of $423M after paying those lumps though.

So cut dividend? OK.

Then assuming no big acquisition so the operating cash remain relatively stable... in FY2018 when that ~$600M lump sum is due will the $550M (grow by 5%? to then $600M?) be able to pay the principle and dividend? What about all the stay in biz capex all through these years? Or wage increases for executives?

They just borrow because the market won't go away right?

Well the banks are always open but I doubt any manager would lend me a few million for a world tour. 

So APA would only be able to borrow and rollover if lenders deemed it safe... but at 70% of debt on the balance sheet, that's pretty close to not safe in most books.


If they cut dividends, it will raise alarm bells and forget about raising new capital too.

They might reintroduce the DRP to save some cash though.


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## luutzu (5 February 2016)

Smurf1976 said:


> In the past major infrastructure (roads, power, rail, water, gas, airports etc) was commonly owned by government agencies, either government as such or a Commission or other trading body operating semi-independently of government with government being effectively the sole "shareholder" of that organisation.
> 
> In most cases, especially where a Commission or other semi-separate from government trading organisation was involved (eg the various State Electricity Commissions or in some states gas utilities) financing was most commonly via issuing debt. That debt was issued either in the name of the relevant government itself (eg roads), or in the name of the relevant Commission etc (eg electricity).
> 
> ...




That makes a lot of sense. Yea, if the gov't guarantee the debt and these utilities pay no dividends, then its obligations to lenders could be met, with maybe a major injection of lending now and then. That and if its balance sheet is relatively well balanced (less debt) then yea.

Non-Current assets in 2015 was $13.9B, about $4.7B are intangibles so that leaves $9.2B in tangible assets. We could argue that the depreciation/amt. were overdone and for tax purposes; can add that these assets were built for cheap and are now more valuable etc... But let's go with the books and with $9.2B in assets but $8.6B in debt... Not too far off the tipping point.

----

I think these kind of business would make good investment sense - but only at the right time. When they owe very little debt and selling for under or close to book value.

Then hopefully mgt does not borrow to expand the empire, and hope interest rate remains low if they do... and also when you're in early... well in this kind of model it's best to be in early. 

Maybe an asset play where we do what capitalists do and pick the fruit when it's ripe. But not a sustainable model in the usual sense.

Maybe it's just not normal and could keep it up.

But yea, with book value about $4 a share but market price at $8.70... Anyway it's looked at, I personally don't think it's something to get into or hold. Definitely not when there are so many opportunities out there.


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## luutzu (5 February 2016)

Value Collector said:


> I thought I just explained that in full, let me try a different way.
> 
> Let's say you and I have some money to invest, You want an investment with a high degree of safety and are happy to take a lower return, I am happy to take some of your risk to provide you with a safer return, but for that I want a higher return.
> 
> ...




Why am I the one putting up $70K and you only $30K? Subconscious is telling you something 

Yea that's all good. Only thing is, when it all goes to heck and I turned up to collect there's another guy or two who's also there to collect another 10 to 15% on the same 100K.

Turns out you've been borrowing to renovate and expand and pay yourself an extra 5.6% on top of the 2.1% that was your cut. And being in Sydney, $100K could only buy a double garrage or an old granny flat and the market is now stuffed and I and those two guys must share 70% of what is now $70K asset.

true?


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## luutzu (5 February 2016)

Another misleading claim by APA:





Claimed 1304% total shareholder return, or 19.2% gain per year compounded.

Technically it is true if you were the first group of investors buying in at IPO for $2 and then only reinvest dividends - never ever buy more shares. But above claim is grossly false if you define shareholder as a group, an entire group of all APA's shareholders.

Why?

All shareholders did not just put in the initial $2, or $488M. Since IPO in 2000, over the years new shares were issue and so new equity were contributed. These new and original equity adds to ~$4.2B. That is, since IPO an additional $3.8B had been added.

For argument's sake let's take it at face value and forget about the discounting etc.  Now, the honest thing to do in calculating return would be to at least remove that $3.8B from the market capitalisation of $9.18B.

Why? Because the market would not value APA at $9.18B if there all it put in was just $0.488B plus the maybe $0.5B retained earnings on its book.

For simplicity, let's take straight out the additional $3.8B and forget about the wealth it further contribute towards APA's ability to borrow and operate. Then Market Cap would simply be $9.18 - $3.8 = $5.38B.

So from original capital of $0.488B APA is now market cap to $5.38B, or 11 times. Much less than the 18.8times gain it is taking credit for.

----

Put another way...

Say I put $100M into an account. Then it grow 10%.
Then I put in another $100M, it then grow total by 10% again.
Then I put in more and more each year and it grow all of it by 10%.

Then in 15 years time, the bank manager look at my account, saw that there's $1500M + 10% compounded at each year in total (say it adds to $2000M)... then he report to me that wow, from just $100M it is now $2000M. His bank did an amazing job compounding it at 20% a year instead of 10%.

Well, if it's the bank they will take the "excess" back and I'd need to hire a lawyer. But idea is, this APA claim is false.

Precisely how wrong, you can do the maths if you want but it is not as claimed.

that's just wrong man.


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## Value Collector (6 February 2016)

luutzu said:


> Why am I the one putting up $70K and you only $30K? Subconscious is telling you something
> 
> Yea that's all good. Only thing is, when it all goes to heck and I turned up to collect there's another guy or two who's also there to collect another 10 to 15% on the same 100K.
> 
> ...




Well you could put in 10% and I could put in 90%, but then your investment would be super, super safe, it would get a AAA rating, and you would only earn 1.5% instead of 5.6%. The more of my collateral there is protecting your position, the less you will earn.

Who is this other guy collecting the 10%? your 70% in this example represents all the bonds. 

If we do expand, say we buy the nieighbors house and take on more bonds, it doesn't affect your position, because that new investment will still be 70/30, 

Obviously I used $100k as a nice round number, I am not suggesting houses actually sell for $100k.


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## Value Collector (6 February 2016)

luutzu said:


> Another misleading claim by APA:
> 
> View attachment 65791
> 
> ...




Gee, nit picking much???

There is nothing wrong with them stating their shareholder return like that, because that's the return they have generated if you reinvested all dividends.

There is no difference between them saying they have generated 19% per year and Berkshire stating they have generated 22% (or whatever it is)

heaps of companies talk about the total shareholder return in this way, some have it in 1yr 5yr and 10yr tables.


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## Value Collector (6 February 2016)

luutzu said:


> I didn't chop and change, I adapt the figures to suit. haha, alright that sounds bad. But read what I put up again. They're all honest figures.
> 
> The table about their liquidity risk show they will need to pay $1.08B during FY2016 true?
> This $1.08 includes interests and principle and also the trade payables of $400M
> ...




I really don't think you are listening, are you actually trying to understand here.

Firstly, they already have credit facilities to cover the 2016 payment in full, so the dividend and expansion isn't question, secondly there is not 600Million payment in 2018, that's a 60year bond, 2018 is just the year apa can elect to pay it if they want.

Also, as long as they can keep rolling debt which is pretty much assured, then there is no reason to cut divvy, they can just pay out less dividend than the total operating cash flow, and continue to fund growth or clear debt with the left over op cashflow.

And as I have also said, if debt markets really got tight, they can just cut the divvy(that's the risk we take as shareholders) and focus all operating cash into clearing the debt, then even though we aren't getting a divvy, we are still building share holder value by clearing bond holders.

Also, the bonds wouldn't have to be cleared to zero, ever stack of bonds you clear improve the credit rating, making it more likely future maturities will be easily rolled.


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## luutzu (6 February 2016)

Value Collector said:


> Gee, nit picking much???
> 
> There is nothing wrong with them stating their shareholder return like that, because that's the return they have generated if you reinvested all dividends.
> 
> ...




Plenty wrong. It's misleading and they know it. That's why they put a note saying it's IRESS that works it out.

Example:




Obvious that the interest rate, or the compound growth rate, is all 10% a year.
At beginning of each year I put in $100, it all compounds at 10% rate.

A bank can't then tell me the growth rate is higher than 10% per year, right?

But if that Banker is APA's or IRESS, they work it out the other way.

They use the compound formula, get the initial deposit of $100, the final balance of $3495, time period of 15 years and work out the compound to be 26.7% per year.

That would be wrong right?

That's not how you work growth rate when you add in new deposits.

Buffett and Berkshire could do it because, I'm guessing here since I can't exactly remember if he ever raise significant new additional equity. That and he uses BookValue to measure his performance.

APA starts off with, say $500M in equity... then over 15 years raised some $3.8B in additional equity. But then through IRESS make it appear as though the new $3.8B were not new capital put up by investors but additional wealth the business (and management) managed to build themselves.

Misleading.


---

It's not easy to work out proper growth rate, or proper performance, when new capital are added all the time. The way it's done, I'm pretty sure I read it right, they only include the dividend reinvestment and ignore the very significant contribution made by the $3.8B new capital.

So that claim is only true for the first group of investors who buy it for $2 a share, reinvest all dividends... and bugger all the new capital old/new investors coughed up over the years. 

Like a Ponzi where the first guys in always do very well.


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## Value Collector (6 February 2016)

luutzu said:


> Plenty wrong. It's misleading and they know it. That's why they put a note saying it's IRESS that works it out.
> 
> Example:
> 
> ...




All they are saying is that over their life as a listed company, their share price and dividend return has been a compounded rate of just under 20%, that's a completely fair thing to say, because its true, obviously if you bought your shares later at a higher or lower price, your return will vary, but either way, APA's performance has been solid for any long term holder do you expect them to do the calculation for each investors personal position.

and yes Berkshire has raised capital, but I can't see how that matters.



> Like a Ponzi where the first guys in always do very well



.

Except its not a Ponzi scheme a Ponzi scheme is "a form of fraud in which belief in the success of a non-existent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors"

that's not what is happening at APA, all returns both Interest to bond holders and distributions to equity holders is being paid for by operating cashflow, rolling maturing bonds into longer dated bonds or borrowing to fund expansion doesn't make a Ponzi scheme,


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## luutzu (6 February 2016)

Value Collector said:


> All they are saying is that over their life as a listed company, their share price and dividend return has been a compounded rate of just under 20%, that's a completely fair thing to say, because its true, obviously if you bought your shares later at a higher or lower price, your return will vary, but either way, APA's performance has been solid for any long term holder do you expect them to do the calculation for each investors personal position.
> 
> and yes Berkshire has raised capital, but I can't see how that matters.
> 
> ...




I did say it could be, to a very small exception, "technically" right. But the way it's use is misleading. What they are saying is if you put money into APA, over the long term it averages 19.2% a year. That's wrong.

How does the market value APA? Part of their valuation parameters would include the equity contributed right?

How would lenders look into whether or not to lend APA more money? Based in part on its balance sheet - how much equity is in there, how much debt etc.? 

That mean the market value of APA is where it is has a lot to thank to the additional equity shareholders put in on top of the initial purchase at IPO.

To take the beginning, then the end, then the years and the dividend only is misleading. They should have also taken in the new equity that was contributed above the dividend reinvestment plan.

So no, don't need to work out for each individual investor, just start each year, say, with the capital that's been retained and contributed - see how it goes at the end of the year; then start the new year with the new position (growth + capital raised from DRP and rights etc.) then see how much gain was made on that new capital at the end.. repeat.

That's how it ought to be done, at least. You can really fine tune it down to the day, or at least monthly or quarterly; or at least each time new capital was injected... but you cannot honestly do it when you take the beginning equity and the end.


If I'm a lawyer, I would be looking into all the performance claims of all the funds. See how they measure performance - and hence take their cut - and maybe start a few class actions. If fund managers based their performance measure on the way IRESS measure their performance, it really bring into question how well they really did and whether the fees they charged were accurate.

E.g. As with my bank account... If I had $100 at the beginning, then during the year I put in another $50. You can't say interest rate on my account is 50%. The way IRESS and hence APA measure their performance. It's very misleading, and since they're being paid or attract investors through it, I'd take a lawyer to see if it's legal.


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## Value Collector (6 February 2016)

luutzu said:


> I did say it could be, to a very small exception, "technically" right. But the way it's use is misleading. What they are saying is if you put money into APA, over the long term it averages 19.2% a year. That's wrong.
> 
> How does the market value APA? Part of their valuation parameters would include the equity contributed right?
> 
> ...




The total shareholder return is calculated no different to how any other company does it, your bank account example is bogus, whenever new equity has been injected, new shares have been issued, so it doesn't effect the calculation, and you could have bought in multiple times throughout the last 16years and earned more than 19% compounded.

The total share holder return is a simple calculation to show what your return would have been if you held your shares over a certain time period, companies often include figures showing 1yr 3yr 5yr 10yr etc all in one table.

It's not new equity being injected into existing shares, capital raisings issue new shares.


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## luutzu (6 February 2016)

Value Collector said:


> Well you could put in 10% and I could put in 90%, but then your investment would be super, super safe, it would get a AAA rating, and you would only earn 1.5% instead of 5.6%. The more of my collateral there is protecting your position, the less you will earn.
> 
> Who is this other guy collecting the 10%? your 70% in this example represents all the bonds.
> 
> ...




Yes I know the $100K is for illustrative purposes. I do have a sense of humour 

Serious face now.

So I put in $3 billion, you put in $7Billion to buy a house in Sydney [in twenty years time, haha].

Interest rate we agreed is you get 5.6%, and I get the rest. Yes?

So at end of the year, the house earns 7.7% before tax and depreciation/amtz. So I pay you 5.6% and take the 2.1% that is left. So you get $560M and I get $210M.

Right off the bat, APA doesn't play by that rule. First, it said interests is around $500M to $510M for FY2016. By that 70:30 ratio, if interest is 500M then dividends to APA would have to be $(500/70)*30 = $214M.

But APA estimate its dividend will be "at least" 38cents a share, or $423M (twice the rate they ought be be getting)... and this is before we take away the stay in biz capex (around $70M) and income taxes to the ATO.

But for argument's sake, we assume that this house where I put in 30 n you 70 earn enough to pay your 5.6% cut earn plenty enough to pay your interests.... What about the principle repayment?

You are assuming that APA is like a partnership between lenders and shareholders. Lenders are lenders, they loan the money with interests and demand both be paid back - the principle may be later, but interests are periodic and will make up the delay in principle repayment.

So you are lending me $7B for 5.6% per year. my $10B house can only earn $770M per year, of which I only have $210M after paying you your interests. With that $210, I pay myself $423M in dividends?  Say dividend is only $210M... When it's time to also repay your principle, where do I get the money from?

Either sell part of the house; borrow from your cousin; borrow from my parents; or work two jobs right? Not from the income.

Point is, I could roll the debt over and over and meet the requirements... but up to that nth year, I'm still one lender behind my obligations.


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## luutzu (6 February 2016)

Value Collector said:


> The total shareholder return is calculated no different to how any other company does it, your bank account example is bogus, whenever new equity has been injected, new shares have been issued, so it doesn't effect the calculation, and you could have bought in multiple times throughout the last 16years and earned more than 19% compounded.
> 
> The total share holder return is a simple calculation to show what your return would have been if you held your shares over a certain time period, companies often include figures showing 1yr 3yr 5yr 10yr etc all in one table.
> 
> It's not new equity being injected into existing shares, capital raisings issue new shares.




My example wasn't bogus. How?
I put in $100 a year into an account that pays 10% a year.

Yes I know that that's what shareholder returns are. But it's misleading.

Example. I set up a company that does nothing at all. It makes no money, it spend no money. You the shareholder give me $500M and I just send it off for safe keeping (no charge either way). 

Next year you bring in $50M. I send it off again. Then next year you bring in $450M and again I send it off.

But then I tell you... ey VC, you know how all these years I just sit on my behind and did jack all with your $500M? Guess what? The neighbours are now offering to take it off you for $1Billion. That mean I just double your money over two years man. Aren't I cool?

---

APA is of course more complicated, but same principle. But its use of total shareholder returns, and you are right that this is the usual practice... well it's misleading and ought to be sued for false advertising.


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## Smurf1976 (7 February 2016)

luutzu said:


> APA is of course more complicated, but same principle. But its use of total shareholder returns, and you are right that this is the usual practice... well it's misleading and ought to be sued for false advertising.




So why single out APA if it's a usual practice that others are also doing?


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## luutzu (7 February 2016)

Smurf1976 said:


> So why single out APA if it's a usual practice that others are also doing?




Because we are discussing APA.

I also recommend that some lawyer ought to take a close look and see if there's a potential class action if fund managers or others whose pay are linked to financial market performance, but whose performance were not measured correctly.

If they measure it in ways IRESS/APA did up there, they're taking credit and money from people through funny maths.


I have no financial interests in APA whatsoever. Maybe even risking making a complete idiot of myself calling it like I have - no one else seem to agree and APA, by its own claims and other believer, return 19.2% to shareholders per year past 15 years.

Only companies whose capital raising are negligible can honestly make such claim using such maths. APA's current market cap is around $9B, around $4.2B real money has been contributed to the business over the years ($3.8B of which were contributed in the past 15 years after the IPO). APA management cannot honestly tell me that those $3.8B play no role at all in the $9B market cap or the performance of the companies.

---

When I read 19.2% compounded return, I thought wow... Buffett is the greatest investor and he only managed around 22% p.a. These guys with a few pipelines in little Australia almost match his record. No not really when you look into it.

But if it's just for marketing purposes, then alright... either a dishonest management and board or a very incompetent one who can't measure performance properly. But if pay are linked to it, which I am pretty sure they do... well it's a recipe for disaster.


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## Value Collector (7 February 2016)

luutzu said:


> My example wasn't bogus. How?
> I put in $100 a year into an account that pays 10% a year.
> 
> Yes I know that that's what shareholder returns are. But it's misleading.
> ...




You are acting like the apa share price has been inflated by capital raisings, but do you understand that new shares are issued at capital raisings? The calculation has nothing to do with market cap, it's the performance of individual shares. So the fact that market cap was increased by capital raising means nothing to the calculation.

Also, you find it hard to believe that apa's return is 19% compounded, however back a few posts you admited apa is earning more than 20% return on share holders funds, it seems that fact alone makes it very likely that over time the total shareholder return should follow that.

I am not sure why you think their dividend should be limited to $210M, operating cash flow is over $500M, and if we Want to related that back to the example of our house investment overation, apa equity holders have their own funds earning a bit over 8% plus they are taking the return in excess of the bond holders interest rate, so their return will be a lot higher than the 8%.

But anyway, there is to many flaws in your logic on this one, and I am a bit over it, so I will leave it to you.


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## Smurf1976 (7 February 2016)

luutzu said:


> Because we are discussing APA.




You are saying that APA is doing something that isn't good but that this is a "usual" practice that many others are also doing.

I'm just not seeing the logic in targeting APA specifically if the issue relates to Australian companies in general and is widespread as has been suggested. 

I see it as more of an "Australian companies are doing this" rather than an "APA is doing this (implying that it's unique to the company)" issue if it is indeed a "usual" practice.


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## luutzu (7 February 2016)

Smurf1976 said:


> You are saying that APA is doing something that isn't good but that this is a "usual" practice that many others are also doing.
> 
> I'm just not seeing the logic in targeting APA specifically if the issue relates to Australian companies in general and is widespread as has been suggested.
> 
> I see it as more of an "Australian companies are doing this" rather than an "APA is doing this (implying that it's unique to the company)" issue if it is indeed a "usual" practice.




Usual in that I've seen many companies use it.  MorningStar on Commsec have this Total Shraeholder Return for all companies. So in that sense it is common practice.

That does not mean it is all wrong or all misleading; does not make it right or an accurate reflection of the company's performance and management ability either.

Whether this measure's use is fair and honest or not depends on what has been done with the business, what has been put into the business, whether the market is valuing it fairly or "accurately" or overpricing the stock etc. etc.

I just scan through APA's 2008 and 2009 AR... no such total return measure were used to show how the company was doing. Why not report it then, why report it now? Promotional material or wanting to inform shareholders and potential investors?

If they really believe such total return measure reflect the company's (and hence their pay and bonuses), then use it consistently - that would be the honest thing to do. But in all honesty, who in their right mind use the market's judgment as a true reflection of the company's value. But if you use it, useit consistently, not when it make you look good only.


Look at Berkshire... that is an example of honest management reporting. The guy show one measure of his, and the company's, performance year in year out. He even tell us using BookValue as he report it may not reflect accurately the value of the busineses BRK owns... but you do not want management who move goal posts.


Why am I picking this out on APA? Besides we're discussing APA and I haven't looked at many where this stands out as outrageous lies.

First, we all want honest management who don't BS and promote themselves and their performance dishonestly.

Second, APA's management's honesty, more than most, are critical to determining the company's financial position and its ability to meet obligations and continue operating.

For instance, the depreciation and amortization charges APA send to the ATO are much higher than what they tell the shareholders - for 2015 they report some $208M dep/amtz expense to reduce profit and hence tax payable; then in a presentation or hidden in some note say it really only costs us $50M, not $208M, to fix and keep the pipes and systems going so all is good and only the taxpayers lose out.

$50M over $8.4B in property, plant and equipment is 6% costs to maintain about half of Australia's pipelines and a few power stations and a wind farm or two, all over Australia?

It costs me, if I take it to a proper mechanic, around $500 to change oil and coolant fluid and a checkup on my $10K Suzuki Swift. APA is telling us that it costs the equivalent of my Swift's annual oil change and checkup to keep their PPE in business?

But we ought to take their best judgment on it right? Because if we don't and we do what the ATO does and believe that on average its assets will need what is reported to fix, APA is making massive losses.


----
Anyway, as I said above, only companies that has *not *significantly raise additional capital over the initial amount should be using this total shareholder return measure to promote their performance. To use it when $4.2B of the $4.4B in the company's equity are contributed by the shareholders is just misleading.

It is almost as bad as VC giving me $2B over two years then I told him I just doubled his initial $500M in two years.


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## luutzu (7 February 2016)

Value Collector said:


> You are acting like the apa share price has been inflated by capital raisings, but do you understand that new shares are issued at capital raisings? The calculation has nothing to do with market cap, it's the performance of individual shares. So the fact that market cap was increased by capital raising means nothing to the calculation.
> 
> Also, you find it hard to believe that apa's return is 19% compounded, however back a few posts you admited apa is earning more than 20% return on share holders funds, it seems that fact alone makes it very likely that over time the total shareholder return should follow that.
> 
> ...




My logic is never flawed. I'm very good at Critical Thinking because I've done the course twice at uni 

Better word would be "supported". APA's share price was supported by its equity raising. It simply could not borrow as it does, could not expand and "grow" as it has, and its share price would not be where it is, without raising the additional $3.8B in equity since the IPO of $0.5B.





Operating Return on avg cap employed last two years (2013-2014) was 10.5 and 8%.



> Excluding significant items, net finance costs increased by $25.5 million, or 8.5%, to $325.1 million (2013: $299.6 million).The average interest rate (including credit margins) applying to drawn debt was *7.12 %* for the financial year (*2013: 7.35%*). - 2014AR, p.6





BUT, let say you and I like APA and we thought that instead of spending $10B on one house in Sydney we could do better buying APA and so take it over for $10B and assumes all its debt and assets etc.

Because the bankers do not like you so won't be lending anymore, I don't like debt so won't be borrowing. What's going to happen to our APA? Either going into administration or we better cough up more dough to repay principles, or cut dividends to zero and maybe only add one coat of paint instead of two to any pipes that have to go in.

----

But since APA can always kick that principle repayment down the road with more new debt... and since we like that kind of business model, it is logical to then only get into it after it almost collapse and raised new capital or sold lots of assets to bring that balance sheet down... that way this legalised ponzi scheme can start afresh with us at the top instead of the bottom of the pyramid


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## luutzu (13 June 2018)

Woah. Is this another example of the market hitting the tops or just the beginning of getting to the tippy top?

$11 cash offer a share. With some 1.18B shares outstanding, that's about $12.98B.

With some $9.7B in total debt, offer put enterprise value at close to $23B?

Earnings last year was $236m.... let say averages $300M over next few years

That's 300/23000 = 1.3% yield?

From memory, APA's average cost of its $9.5B debt was 5%+.... 

It's a big purchase for a tax writeoff. 

Well, good thing I don't short stocks. Phew.


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## So_Cynical (14 June 2018)

CK Asset Holdings - Hong Kong.
https://en.wikipedia.org/wiki/CK_Asset_Holdings

Power Assets Holdings - Hong Kong Electric company.
https://en.wikipedia.org/wiki/Power_Assets_Holdings

No way would the FIRB let this go through..


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## luutzu (8 November 2018)

TO being knocked back in a preliminary assessment by the Treasurer.

Unless the board of APA come to see his honorable MP to let the deal through as some idiot is actually willing to pay $20B+ for a company that's barely earning $500M on liabilities of some $900M with some $9B in debt in a rising interest rate environment... with size and scope large enough it'd be testing the ACCC on those monopoly games each time it fake a "growth and expansion" move to raise more equity and borrow more dole.

$5 says it's going to go under in 12 months.


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## kahuna1 (17 May 2019)

Ho hum ....

she loves me ... she loves me not.
Interesting times.
At Christmas no friends and under $9-. Not a bad company with a great track record and a bright future.
My view is that eventually dividend goes to 60 cents so at $9 - a steal.
Obviously if someone was willing to pay $11- to take the whole company over, even more a steal at sub $9 as the market spat its dummy.

Still possible someone eventually bites the bullet and takes them over. Not holding my breath for that mind you.

Pre election even and banks being smashed to yields of 7% with full franking credits verses others with less merit, NOT APA ... but  a whole bunch of ho hum companies being bid up whilst others shredded. APA if now back in favor and for me its getting into reduce territory here at $10.45 and above. Of course will hold some, since they were gifted to me by the idiotic visits to even below $8.50 as the market had a tantrum late 2018, and even I was checking if I missed the end of the world .... which did not occur ...

Up here .... 20% plus higher ... whilst I like the company ... like it a lot longer term ... reducing a bit into this* with still a decent core holding*.


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## Clansman (8 June 2019)

If you will excuse the pun, surely their must be another offer in the pipeline for this. There is no reason for it to be at an all time high of $10.80 at this time of the year. Looks set to go over $11 next week which is higher than the previous offer price. One of the best companies of the last 20 years.


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## rederob (8 June 2019)

Clansman said:


> If you will excuse the pun, surely their must be another offer in the pipeline for this. There is no reason for it to be at an all time high of $10.80 at this time of the year. Looks set to go over $11 next week which is higher than the previous offer price. One of the best companies of the last 20 years.



Lots of puns, but not that much punter interest, apparently!
What I really like about APA is that they have been making big investments, and that pipeline has not wholly matured.  So great potential for strong ongoing dividends.


kahuna1 said:


> ...gifted to me by the idiotic visits to even below $8.50...



I was not so lucky and *had to pay* $4.60 for my first tranche.


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## Clansman (21 August 2019)

All good with this one as per usual, situation normal = everything is awesome.
Looks set to strike through $11 again on a down day.
Now we just wait for Iuutzu to turn up and tell us that The Reject Shop have a better business model


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## Value Collector (26 June 2021)

luutzu said:


> Serious face now.
> 
> So I put in $3 billion, you put in $7Billion to buy a house in Sydney [in twenty years time, haha].
> 
> ...




No, you calculated that wrong.

If The "House" earned 7.7% on it's total value of $10 Billion, it is going to generate $770 Million of earnings that will distributed to between bond holders and share holders.

Me the the Bond holder will earn 5.6% on my $7 Billion I contributed, which is $392 Million (not $560 Million you stated)

The remainder of the $770 Million, which is $378 Million goes to you as the share holder.

Because you earned $378 Million on your investment if only $3 Billion your rate of return is 12.6% vs my return of 5.6%.

So yes in this situation the share holder earns an additional 7%, but that return is due to the higher risk they take of being wiped out or having income cut etc etc.

---------------------

This is basic investment theory 101.


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## Value Collector (26 June 2021)

luutzu said:


> $5 says it's going to go under in 12 months.



Well, its a few years on now and APA are still going strong, I just bought more.

I kinda wish you were still around because there is multiple bets you owe me for now hahaha.


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## Value Collector (3 September 2021)

APA in talks to acquire Bass link, if this deal goes through it should be a nice addition to their portfolio of assets.


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## sptrawler (3 September 2021)

Value Collector said:


> APA in talks to acquire Bass link, if this deal goes through it should be a nice addition to their portfolio of assets.



Just had a quick look at APA on the asx website, the P.E seems extremely high, so a quick question that may save me some time, if their price to earnings is  already at 2,932, how will they fund a takeover?


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## divs4ever (3 September 2021)

Fundamentals​
Market Capitalisation$10.69B
P/E Ratio27.53
EPS $0.340
PE Growth- 
Debt to Equity Ratio 457.2%
Price to Book 4.89
5 Year Beta 0.56
Margin Lending LVR 70%
 according to Commsec

 please note this data  might not be up-to-date ( at least not as current as you might wish )

 but the numbers haven't looked attractive to me , yet


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## sptrawler (3 September 2021)

divs4ever said:


> Fundamentals​
> Market Capitalisation$10.69B
> P/E Ratio27.53
> EPS $0.340
> ...



My appologies, I'm on a phone and the print is small and my eyesight isn't great, thanks for the post. Still looks all a bit toppy to me.


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## divs4ever (3 September 2021)

the data hasn't inspired me to buy 

 but no apology needed , sometimes  those trading platforms have  some outrageous figures   on some stock fundamentals ( and they can be slow to update them as well )

 surely some D/E ratios on other stocks  can't be correct 


Debt/Equity Ratio 768.60 for SYD 


Debt/Equity Ratio 1604.10 for QAN

as two eye-watering examples


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## divs4ever (3 September 2021)

even if the APA debt ratio is only 457%  , your question on how they will raise funding remains valid ( imo )

 i sure as heck won't be buying APA debt at less than 9% p.a. interest , and might resist even at 11% p.a.


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## Value Collector (3 September 2021)

sptrawler said:


> Just had a quick look at APA on the asx website, the P.E seems extremely high, so a quick question that may save me some time, if their price to earnings is  already at 2,932, how will they fund a takeover?



Their reported Earnings are always artificially low, due to the large accelerated depreciation charges they are allowed to write off against earnings.

Rather than use “earnings” to calculate PE, use free cash  flow.

the number they report as “free cashflow”, is closer to their true earnings, it’s their operating profit minus the stay in business cap ex.

last year free cashflow per share was $0.76 and the dividend was $0.51, their policy is to pay out 60%-70% of free cashflow as dividend, the rest can be used for growth investment.


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## Value Collector (3 September 2021)

divs4ever said:


> even if the APA debt ratio is only 457%  , your question on how they will raise funding remains valid ( imo )
> 
> i sure as heck won't be buying APA debt at less than 9% p.a. interest , and might resist even at 11% p.a.



They have $1.9 Billion of available liquidity on their balance sheet already, and given the high amounts of regulated income don’t have a problem in issuing long dated bonds, they even have a 60 year bond on their books.

Not to mention that regulated utilities have their interest costs built into the prices they are allowed to charge, so if their average interest rate did rise, so would their prices.


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## Value Collector (3 September 2021)

When using free cash in the PE instead of earnings, it comes out as a PE of 12, and based on the guidance of next dividend the yield is 5.8%.

That’s not to shabby for a portfolio of critical, nationally important regulated, and long term contracted energy assets.


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## sptrawler (3 September 2021)

Value Collector said:


> They have $1.9 Billion of available liquidity on their balance sheet already, and given the high amounts of regulated income don’t have a problem in issuing long dated bonds, they even have a 60 year bond on their books.
> 
> Not to mention that regulated utilities have their interest costs built into the prices they are allowed to charge, so if their average interest rate did rise, so would their prices.



I actually think the idea of buying into Basslink, is a good idea, it is forward thinking, I was just wondering how it would affect their balance sheet.
The gas pipelines will be used a lot during the transition from coal, then IMO there will be a huge capital cost to change the infrastructure to cope with H2, but that isn't insurmountable. So I'm very interested, just trying to get a handle on it.


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## Value Collector (3 September 2021)

sptrawler said:


> I actually think the idea of buying into Basslink, is a good idea, it is forward thinking, I was just wondering how it would affect their balance sheet.
> The gas pipelines will be used a lot during the transition from coal, then IMO there will be a huge capital cost to change the infrastructure to cope with H2, but that isn't insurmountable. So I'm very interested, just trying to get a handle on it.



Yep, They already own the Qld-Nsw interconnection and the SA-ViC, so it’s a business they understand.

As I mentioned above the have $1.9 Billion of available liquidity looking for a home, and Bass link is only a few $100 Millions.

modelling shows that natural gas demand will continue to grow as coal fired electricity is phased out, and we need to fill in the gaps between solar and wind.


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## So_Cynical (27 September 2021)

APA bidding for Ausnet Services, another 10 billion to add to the MC if successful, APA kind of looks cheap.


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## Smurf1976 (27 September 2021)

I'll simply say that if you own the gas network, and buy the electricity network, well then it would be rather hard to fail.

It's equivalent to owning every method of transport or owning every form of media. Regardless of which has the most success, as a company you win.

Even better when your revenue and profit is effectively guaranteed.


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## Value Collector (27 September 2021)

Smurf1976 said:


> I'll simply say that if you own the gas network, and buy the electricity network, well then it would be rather hard to fail.
> 
> It's equivalent to owning every method of transport or owning every form of media. Regardless of which has the most success, as a company you win.
> 
> Even better when your revenue and profit is effectively guaranteed.



Pretty much the only way to fail would be to pay to much.


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## Value Collector (22 November 2021)

APA have bought $99 Million worth of debt securities in Basslink.

Prior to this APA had made a take over offer that fell through, my thoughts are that this debt purchase is Apa’s way of securing a seat at the table during the bankruptcy proceedings, with the intent of taking the company over.


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## Value Collector (22 November 2021)

If you watch this video, at the 9 min mark they explain what I believe APA is doing, eg planning on converting the debt into equity during the bankruptcy.


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## divs4ever (15 December 2021)

Estimated interim distribution

For the six months ending 31 December 2021 APA Group (ASX:APA) today announced an estimated FY22 interim distribution of 25.0 cents per security for the six months ending 31 December 2021. 
This represents a 4.2% increase over the FY21 interim distribution of 24.0 cents per security. Total expected distributions for FY22 continues to be 53.0 cents per security, inclusive of the distribution of 25.0 cents per security for the six months ending 31 December 2021.
The actual amount of the interim distribution and its tax deferred status will be confirmed following finalisation of the half year results, which are due for release on 23 February 2022. APA will confirm allocable franking credits when finalising the final distribution with the release of the half year results on 23 February 2022.
The key dates for the interim distribution are: Securities trade ex-distribution 30 December 2021 Record Date 31 December 2021 Payment Date 17 March 2022 Distribution Reinvestment Plan (DRP) The DRP remains suspended for this interim distribution. 
All APA securityholders will receive their distributions in cash. Payment of Interim Distribution Distribution payments to securityholders with a registered address in Australia or New Zealand will be paid by direct credit to their nominated bank account. 
Securityholders are encouraged to check their payment details are up to date and, if a change is required, to promptly advise APA’s registry, Link Market Services, by phoning the registry on 1800 992 312 or on-line at www.linkmarketservices.com.au.

 DYOR

 i do not hold this share

 ( and last i heard APA is not longer the front-runner taking over AST ,  , so it is less likely i will get into APA that way )


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## Dona Ferentes (22 August 2022)

_APA deciding not to go the risky path / pursue the risky pipeline _:

The current MD is cutting links and leave in December as the Board has decided not to buy assets in the US market, instead "_preferring to focus on returns to investors" ._

It's an infrastructure business. Chairman Michael Fraser said of the US:


> "_Whilst there are clearly attractive aspects to that market, it also involves a number of risks and ongoing investment challenges_."


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## Value Collector (22 August 2022)

Dona Ferentes said:


> _APA deciding not to go the risky path / pursue the risky pipeline _:
> 
> The current MD is cutting links and leave in December as the Board has decided not to buy assets in the US market, instead "_preferring to focus on returns to investors" ._
> 
> It's an infrastructure business. Chairman Michael Fraser said of the US:



As an Apa shareholder, I feel a bit more comfortable with them sticking to the Australian Market, I wouldn’t have been against them going into the USA market, but I am kinda glad they have chosen not to.


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## sptrawler (22 August 2022)

Dona Ferentes said:


> _APA deciding not to go the risky path / pursue the risky pipeline _:
> 
> The current MD is cutting links and leave in December as the Board has decided not to buy assets in the US market, instead "_preferring to focus on returns to investors" ._
> 
> It's an infrastructure business. Chairman Michael Fraser said of the US:



It certainly would be interesting to find out what turned them off.


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## Value Collector (22 August 2022)

sptrawler said:


> It certainly would be interesting to find out what turned them off.



I think it was just a lack of suitable deals, they were looking for 3 years, but they did say several times that it was a competitive environment.

After 3 years of maintaining a state side office, and accommodating staff in serviced apartments they probably grew tired of the expenses and lack of deal flow.


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