Energy infrastructure firm APA Group (ASX: APA, OTC: APAJF) commands a dominant share of Australia’s domestic natural gas market, and it continues to expand by pursuing accretive acquisitions that flow through to its ample payout.

The company reported earnings for fiscal-year 2013 (ended June 30) that narrowly beat analysts’ expectations by 0.7 percent on its top line, but cruised past the consensus estimate for earnings per share by 18.7 percent. That’s the second fiscal year in a row in which APA surpassed analysts’ forecasts on earnings per share and the fourth consecutive fiscal year in which it exceeded revenue estimates.

The current mix of analyst sentiment stands at two “buys,” nine “holds,” and three “sells.” Credit Suisse raised its rating to “neutral,” which is equivalent to “hold,” from “underperform,” or “sell.” However, it also lowered its 12-month target price to AUD6.10 from AUD6.25. The consensus 12-month target price among the 11 analysts for which we have such data is AUD6.17, which is 3 percent above the current share price.

After a strong year, in which earnings per share (EPS) grew 89.7 percent versus a year ago, analysts forecast full-year 2014 EPS to fall closer to 2012 levels, to AUD0.219, or a decline of about 43.4 percent year over year. However, similar to master limited partnerships (MLP), EPS is a less relevant measure of profits than, in APA’s case, operating cash flow. Beyond that, sales are projected to rise 8.3 percent next year, to AUD1.3 billion.

APA generates 85 percent of EBITDA (earnings before interest, taxation, depreciation and amortization), from its energy infrastructure assets, with 7 percent of EBITDA derived from asset management and 8 percent from energy investments. In terms of EBITDA, the company’s infrastructure assets are fairly evenly distributed across four major states/regions: 23 percent in Western Australia and the Northern Territory, 20 percent in Victoria and South Australia, 17 percent in New South Wales, and 25 percent in Queensland.

The company exercises direct control over the operation of its infrastructure assets. About half of these assets are regulated, with returns reset every five years. The company has staggered these resets over a number of years so that they’re not subject to resets all at once. The balance of its assets are unregulated and generally operate under long-term contracts with energy and other resource companies.

APA achieved full-year EBITDA of AUD769 million, which was within the range of management’s earlier guidance of AUD755 million to AUD770 million. Normalized (i.e., excluding one-time items) net profit after tax (NPAT) grew 27 percent to AUD179 million, while statutory NPAT jumped 129 percent to AUD299 million.

For the year ended June 30, APA generated AUD432.6 million in normalized operating cash flow, up 29 percent year over year, from which it disbursed AUD295.3 million in distributions, for a payout ratio of 68.2 percent, up 1.2 percentage points from a year ago. Meanwhile, operating cash flow per security increased 6.8 percent, to AUD0.56.

The Energy Infrastructure segment produced EBITDA of AUD549.9 million from continuing operations, up 24.5 percent year over year, largely thanks to last year’s AUD2.6 billion acquisition of Hastings Diversified Utilities Fund (HDF). Absent the contribution from HDF, EBITDA from existing assets grew 3.1 percent.

One of management’s long-term strategic goals has been to take its array of individual infrastructure assets and combine them into an interconnected gas transportation grid. And to that end, APA’s aforementioned acquisition of HDF has been transformational. HDF’s integration with APA’s existing assets has created a seamless grid along Australia’s East Coast, where the company now boasts 7,000 kilometers of pipelines across five states and territories.

In the past, pipelines were unidirectional between supply and customer, but now the company can match supply sources to demand across the grid. Management expects this network to provide the scale and flexibility to create additional revenue-generating opportunities.

The Asset Management division, which manages and operates energy infrastructure assets for the firms in which APA invests as well as other parties, grew EBITDA by 42 percent to AUD45.4 million. And the Energy Investments segment’s EBITDA rose 23 percent, to AUD51.2 million, due to greater profitability at Adelaide-based natural gas distributor Envestra Ltd (ASX: ENV, OTC: EVSRF), in which the firm owns a 33 percent stake (See below for more on APA’s bid to acquire the remaining shares of Envestra).

As a result of the HDF acquisition and the subsequent repayment of that company’s debt facilities, APA’s long-term debt increased by a significant 46 percent from a year ago, to AUD4.2 billion, which is not that far away from the firm’s AUD5 billion market cap. That’s caused net debt to rise from 5.4 times EBITDA to 7.4 times.

However, the EBITDA to interest expense ratio of 1.77 is actually slightly below the company’s trailing five-year average of 1.83. Similarly, total debt to total assets currently stands at 56 percent, which is slightly below the five-year average of 56.9 percent. Years with significant maturities of outstanding debt include 2019, when AUD608 million comes due, and 2022, when AUD1.1 billion comes due.

In early May, APA completed the sale of its Moomba Adelaide Pipeline System (MAPS) to QIC Global Infrastructure for AUD400.5 million. The divestiture had been one of the conditions necessary to garner regulatory approval for last year’s acquisition of HDF.

Among its investments, APA owns a 33 percent stake in Envestra, for which it manages and operates its pipeline assets and distribution networks under a long-term contract. In mid-July, the firm made a bid to acquire the rest of Envestra’s shares by offering its shareholders 0.1678 shares of APA for each share of Envestra. The value of the deal was contingent on the share price, but at one point it was worth AUD1.3 billion, or about AUD1.10 per share.

However, at the time of the initial bid, the deal offered a premium that was a mere 6.3 percent above Envestra’s average price over the preceding 20-day period, roughly 10 percentage points less than the average deal in this space over the past five years, according to data compiled by Bloomberg. As a result, on Aug. 5, Envestra’s management announced they had decided to reject the offer. Since then, APA’s management has said it will need access to Envestra’s internal financials to decide whether to sweeten its offer.

Over the past decade, APA has acquired 18 firms in deals totaling AUD3.8 billion, a growth strategy that has given it a commanding share of the Australian market, where its pipelines deliver more than half of the country’s natural gas. According to a report from Australia’s Bureau of Resources and Energy Economics, the country’s natural gas demand is projected to more than double over the period from 2010 to 2035, and APA is keen to further expand its share of this market. Envestra’s network currently encompasses 14,000 miles of pipelines that deliver natural gas to 1.2 million customers, and its profits are forecast to jump 66 percent year over year in 2014.

For fiscal-year 2014, management forecasts EBITDA to range between AUD715 million and AUD730 million, the mid-point of which would mean a 6 percent decline from this year’s result. However, when adjusted for continuing operations, which offsets the loss of earnings from the company’s MAPS divestiture, the range represents an 11 percent to 13 percent increase. The full-year payout will be at least level with this year’s distribution.

In the year ahead as well as beyond, management’s four strategic goals include the following:

• Take advantage of the flexibility of its East Coast grid to produce additional revenue.
• Expand the capacity of its existing assets. The company already has AUD1.5 billion in such projects underway.
• Develop new gas pipelines.
• Pursue bolt-on acquisitions.

Just as MLPs routinely make secondary offerings of equity to help finance acquisitions, APA has done the same. Over the past five years, its total shares outstanding have risen 67.6 percent, to 835.8 million. A substantial percentage of that increase came over the past year, with the share count increasing by 29.7 percent, or 191.2 million shares. Of the latter amount, 15.5 million shares were created under the company’s distribution reinvestment plan, which the company has since suspended until further notice.

Despite potential dilution from these equity issuances, the company has still managed to grow both its operating cash flow per unit, which climbed 16.2 percent over that same period, and its full-year payout, which increased 11.8 percent during that time.

APA’s shares actually trade as a “stapled” security, a relatively unique structure that combines two or more separate entities, such as debt and equity, into one security. In Australia, these types of securities are especially prevalent in the infrastructure and real estate investment trust (REIT) arenas. These securities are generally uncommon in other markets.

In APA’s case, its stapled security is comprised of two trusts bound together into one security: Australian Pipeline Trust (APT) and APT Investment Trust (APTIT). The component of the payout sourced from the former is taxed as if it were a company, while the latter is taxed as a pass-through trust.

The company pays an interim distribution each March and a final distribution each September. The upcoming September payout is AUD0.185 per share, which together with the March distribution sums to a full-year payout of AUD0.355, up 1.4 percent year over year, for a current yield just shy of 6 percent. The forthcoming payout is comprised of an unfranked dividend of AUD0.1601855 from APT and an unfranked distribution of interest income of AUD0.24812 from APTIT.

For US investors, the Australian government withholds a maximum of 15 percent of the dividend portion of the payout and a maximum of 10 percent of the interest income portion of the payout. These withholdings can be recaptured at tax time by filing Form 1116 with the US Internal Revenue Service.

On a price basis, APA is down about 14.1tra percent since hitting a 52-week high of AUD6.95 in late May. Nevertheless, over the past year, APA has gained 24.5 percent on a price basis and 32.4 percent on a dividend-reinvested basis. By comparison, over the past year, the S&P/ASX 200 Index is up 19 percent on a price basis and 26.1 percent on a dividend-reinvested basis.

APA Group remains a buy below USD6.50 in the Conservative Holdings Portfolio.

The Roundup

Here’s when AE Portfolio Holdings will report their next sets of financial and operating numbers. Some have “confirmed” dates, while for others we’ve provided an “estimate.”

For most, this will cover the full fiscal year ending June 30, 2013. We’ve noted for others that report on a different schedule the period to which the announcement pertains.

Conservative Holdings

• Aberdeen Asia-Pacific Income Fund (NYSE: FAX)–N/A (fund, reports holdings on a quarterly basis)
• AGL Energy Ltd (ASX: AGK, OTC: AGLNF, ADR: AGLNY)–Aug. 28, 2013 (confirmed)
• APA Group (ASX: APA, OTC: APAJF)–Aug. 30 Down Under Digest
• Australand Property Group Ltd (ASX: ALZ, OTC: AUAOF)–Aug. 15 Down Under Digest
• Australia & New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY)–August “In Focus”
• Cardno Ltd (ASX: CDD, OTC: COLDF)–Aug. 20, 2013 (confirmed)
• CSL Ltd (ASX: CSL, OTC: CMXHF, ADR: CMXHY)–August Portfolio Update
• Envestra Ltd (ASX: ENV, OTC: EVSRF)–Aug. 22, 2013 (estimate)
• GPT Group (ASX: GPT, OTC: GPTGF)–August Portfolio Update
• M2 Telecommunications Group Ltd (ASX: MTU, OTC: MTCZF)–Aug. 26, 2013 (estimate)
• Ramsay Health Care Ltd (ASX: RHC, OTC: RMSUF)–Aug. 29, 2013 (estimate)
• SMS Management & Technology Ltd (ASX: SMX, OTC: SMSUF)–Aug. 15, 2013 (estimate)
• Telstra Corp Ltd (ASX: TLS, OTC: TTRAF, ADR: TLSYY)–August Portfolio Update
• Transurban Group (ASX: TCL, OTC: TRAUF)–August “Sector Spotlight”
• Wesfarmers Ltd (ASX: WES, OTC: WFAFF, ADR: WFAFY)–August Portfolio Update

Aggressive Holdings

• Amalgamated Holdings Ltd (ASX: AHD, OTC: None)–Aug. 23, 2013 (estimate)
• Ausdrill Ltd (ASX: ASL, OTC: AUSDF)–Aug. 28, 2013 (confirmed)
• BHP Billiton Ltd (ASX: BHP, NYSE: BHP)–Aug. 20, 2013 (confirmed)
• GrainCorp Ltd (ASX: GNC, OTC: GRCLF)–Nov.15, 2013 (estimated)
• Mineral Resources Ltd (ASX: MIN, OTC: MALRF)–August Portfolio Update
• Newcrest Mining Ltd (ASX: NCM, OTC: NCMGF, ADR: NCMGY)–Aug. 12, 2013 (confirmed)
• Oil Search Ltd (ASX: OSH, OTC: OISHF, ADR: OISHY)–Aug. 20, 2013 (2013 H1, confirmed)
• Origin Energy Ltd (ASX: ORG, OTC: OGFGF, ADR: OGFGY)–Aug. 22, 2013 (confirmed)
• Rio Tinto Ltd (ASX: RIO, NYSE: RIO)–August Portfolio Update
• Spark Infrastructure Group (ASX: SKI, OTC: SFDPF)–Aug. 26, 2013 (2013 H1, confirmed)
• Woodside Petroleum Ltd (ASX: WPL, OTC: WOPEF, ADR: WOPEY)–Aug. 21, 2013 (2013 H1, confirmed)
• WorleyParsons Ltd (ASX: WOR, OTC: WYGPF, ADR: WYGPY)–August Portfolio Update