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APA - APA Group

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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.
 

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.
 
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?
 

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.
 
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.

-------------------------
 
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.
Click to expand...

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.
 

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.
 

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:

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.
 


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

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.
 
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.
 

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.
 

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.
 

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?
 
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.
 

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.
 

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.
 

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.
 

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.
 

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
Click to expand...
.

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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